Environmental & Root Cause Analysis
Alternatives and Options
Monitor and Control
Part 1: Executive Summary
With 1988 operating income of $801 million on a revenue of $8.55 billion, American Airlines, Inc. (American), principal subsidiary of Dallas/Fort Worth-based AMR Corporation, was the largest airline in the United States. At year-end 1988 American operated 468 aircraft on 2,200 flights daily to 151 destinations in the United States, Bermuda, Canada, Mexico, the Caribbean, France, Great Britain, Japan, Mexico, Puerto Rico, Spain, Switzerland, Venezuela, and West Germany. The objective of American Airlines revenue management effort was to maximize passenger revenues by selling the right seats to the right customers at the right prices. As the decision maker of American Airlines, I recommend introducing Upgraded Computerized Reservation System to replace current SABRE system to keep the company leader of the industry while maximizing profit. Part 2: Issues Identification
Low load factors for Chicago – West Coast
Nature: tactic Timing: short term In 1987, in the nonstop markets, American and United competed on the basis of fares, flight schedules, and factors such as quality of service. In the connecting markets, American, United, and Continental also competed on the basis of fares and flight schedules. Once again American and United matched each other's fares, while Continental, with its post-Chapter 11 reorganization and low-cost structure, was the low-price provider. So, United had a superior flight schedule, and Continental cheaper fares. As for American, our load factors were down to an unacceptable level.
Deep discount for New York – San Juan
Nature: tactic Timing: short term New York-San Juan was American's largest market, measured in revenue passenger miles. The market was fairly evenly divided into three categories. The first category consisted of business passengers; business travel occurred year-round. Leisure passengers made up the second category; leisure travel peaked in the summer. Passengers of Caribbean origin either coming to the United States or returning to the Caribbean to visit friends and relatives constituted the third category. Eastern periodically offered deep discounts to stimulate demand during traditional slow seasons. In September 1988 Eastern introduced a restricted round-trip fare of $198 midweek and $238 weekend. The fare was applicable for travel until December 14, 1988. American had to decide if and how to respond. Systemic Issue
Complicity of Yield Management
Nature: Strategic Timing: long term American Airlines broadly described the function of yield management as “selling the right seats to the right customers at the right prices.” At American Airlines, almost everything is automated because the yield-management decision-making process is too large and therefore too complex to be processed manually.
Part 3: Environmental & Root Cause Analysis
In the past, under regulations, airlines were not allowed to set their ticket prices at will. Rather, all fares had to be approved by the government. Normally, fares were set on a cost plus basis in order to guarantee airlines a minimum return. On the one hand, airlines had no incentive to reduce costs by streaming operations and increasing productivity. Essentially, price discrimination under regulation was based on the assumption of two distinct and easily separable types of customers: price-insensitive, yet very time-sensitive business travelers, normally flying on expenses, and...
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