American Airlines Pricing Strategy

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The U.S. Airline Industry in 1995
2.
a) American Airlines’ 1992 air fare strategies resembled its early to mid-80s SuperSavers program. It offered discounts of up to 45% on round-trip flights of at least 7 days, purchased 30 days in advance. Previously, air fare pricing was a simple structure of first class/coach and peak/off-peak categories. Robert Crandall, of American Airlines, introduced a new air fare system known as yield management. The simple price structure was unbundled to unleash multiple levels of passenger fares. The consumer groups were all bundled under one pricing, even though different consumers had different WTPs. By unbundling these groups and charging them different prices (price discrimination), AA was able to increase its yield. It was essentially trying to charge different consumers different prices, according to their WTPs. b) The leisure travelers benefited the most because they saw prices fall across the board. Previously, AA was losing some of its consumers with low WTPs when the same price was being charged across the board for seats to all consumers. By identifying leisure travelers vs. business travelers it was able to charge them specific prices. Leisure travelers generally have more flexibility and may book their flights in advance to take advantage of the super savings. Business travelers were worse off. Business travelers have high WTPs, since their companies are picking up the tab for the fare. They have low flexibilities and look up the most convenient route last minute. AA was able to extract higher prices off of this group. c) AA was able to make such intricate pricing decisions, mainly due to the information provided by computer reservation systems (CRSs). Only 3 airlines had integrated these systems tightly into their marketing efforts to extract maximum yields out of different consumer groups. Other airlines, without CRSs, faced immense challenges to match up AA’s aggressive underpricing. People Express CEO Don Burr,...
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