American Airlines Competitive Strategy

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Evaluate American's 1992 announcement of a new rate structure:

a. What changes did American make?
American Airlines (American) made four fundamental changes to its rates. First, it moved to a four-tier rate structure; American offered first-class rates and three tiers of coach: full-fare, 21-day advance purchase and 7-day advance purchase. Overall, it expected to reduce coach fares by 38% and first-class fares by 20% to 50%. Though full fare coach prices dropped by about 38%, advance-purchase fares dropped by 6% when compared to the advance purchase tickets already being offered. Through this fare structure, American also eliminated deep discount tickets. Second, American eliminated the negotiated discount contracts of many large companies. Though it intended to fulfill any outstanding contracts, it did not intend to renew any of these contracts. Third, American realigned its pricing with its costs. Under the new structure, American fares were more distance based (therefore cost-based) than they had been in the past. Finally, American changed its non-refundable policy. Advance purchase tickets could now be rescheduled for a $25 processing fee.

b. Which customers benefited most from the move? Were any customers made worse off? There are five groups of customers that are affected by the rate changes. Travel agents are affected financially by reduced fares that will result in reduced commissions. On the other hand, American's four-tier structure substantially reduced the number of fares in the database by 86%. This simplification will enable travel agents to better service their customers. Travel agents therefore are both positively and negatively impacted. Small business customers are positively impacted by the fare changes. Previously, the higher full fare prices discouraged small business travel; small businesses would either decide against travel or incur the cost of a Saturday night stay and purchase a reduced fare ticket. By reducing...
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