1. Issues 2.
American Airlines’ objectives 3. The airline industry 4. Market5. Consumer needs 6. Brand image 7. Distribution system 8.
Pricing 9. Marketingrelated strategies 10. Assumptions and risks 1- Issues The main issue of thiscase is the lack of profits of the airline industry, an industry that should bemore than profitable due to the large amount of customers, the necessity ofusing airlines’ services and the high prices charged by most of theseairlines. What we are going to deal with is, why is this happening? And how isAmerican airlines dealing with this problem?.
To be able to discuss how Americanairlines wants to regain profitability, we must identify and analyse differentissues such as, the company’s background, the airline industry as a whole, thedemand for air travel, the marketing strategies, the distribution systems,pricing policies etc. 2- American Airlines’ objectives American Airlines’prime objective is to bring back value to air travel, through stimulatingbusiness travel, lowering prices etc. So in other words American Airlines’main objective is to become as profitable as possible. To understand better thecompany’s objectives we first have to focus on the company’s background,this way we will find out why the airline is not as profitable as it should, andwhat kind of a change is needed.
American Airlines had been the largest airlinein the United States for a long time. In 1990 and 1991 due to a recession andthe Gulf War, demand for air travel dropped drastically, for this reason, farewars started and all the airlines incurred massive losses. 3,4- The Airlineindustry and the market The airline industry is large, specially in the UnitedStates, mainly due to the “ Deregulation” of the industry. In 1938, theCivil Aeronautics Board was created to control the growth of the airtransportation industry.
This board had the authority to control entry, exit,prices and methods of competition. In the late 1970 this structure was foundinefficient and in 1978 deregulation took place. Due to the deregulation of theindustry competition intensified, prices dropped, and the number of peopletravelling increased. Many new companies emerged and regional airlines sawderegulation as an opportunity to expand. Due to the rise in competition, by1986 mergers started to take place and in 1987 64.
8% of the market wascontrolled by the four largest airlines. The demand for air travel is determinedmainly by price, studies revealed that half of the leisure travellers and onquarter of business travellers did not have a preference for a particularairline, which means that prices determined the preference. So the strategy tocompete for customers consisted mainly in pricing and flight schedules. Thedemand for flights varies depending on the season or the business cycletherefore airlines have to develop different pricing strategies and offersdepending on the season or the business cycle period. An other determinant fordemand is technology, the new telecommunication possibilities have made airtravelling unnecessary in some cases, which of course has affected airlinesrevenues. 5- Consumer needs.
Consumer needs are clear, what airline consumersneed is basically god prices and good flight schedules. These are the basicneeds, apart from these ones we could also point out other needs such as big,comfortable seats for long flights, good service on board, good food, punctualdepartures, check-in facilities, movie channels, etc. All these are consumerneeds, but studies have shown that demand is mainly determined by price and aflight schedules, the rest just add value to these two, therefore companies mustfocus on ways to lower prices and provide good flight timetables. There are twotypes of travellers, business travellers and leisure travellers, these two ofcourse have different needs, for the first ones price is not so importantbecause usually the company pays for it on the other hand punctuality and flightschedules are very important to them. For leisure travellers the most importantthing is usually price, and the rest comes after that.
But as I said beforeconsumer needs can be summarised in these to price and schedules. 6- Brand imageAmerican Airlines’ brand image is good, due to its successful background andits new marketing strategies. In 1991 American Airlines was the biggest airlinein the United States, and the reason for it is that this airline was pioneer inmany fields gaining competitive advantage over the other airlines. Whenderegulation took part in 1978, American transformed in such a way that itbecame the industry’s market share leader. American had also pioneered severalpolicies that affected the industry’s structure and standard practices. In thelate 1960’s, American introduced the first computerised airline reservationsystem, which revolutionised the marketing and distribution of the travelindustry.
American also introduced “the super saver” fares in 1977, whichwas the first programme of deep discounts for leisure travellers, and in 1981,American launched the first frequent-flier programme, which created brandloyalty towards the airline. American Airlines is constantly developing newstrategies, and introducing new technologies, and this is why its brand image isso high. Some of the new innovations that American Airlines is introducing are,the any time fares for business, new plan ahead for leisure, lower first classfares, etc. 7- The distribution system The main distribution system for airtravel is the travel agent, which provides not only the flight ticket, but alsosupplementary services such as car rentals, hotels, excursions, etc. Airlinesask the agents to make reservations and deliver tickets. There is a differencein the distribution of tickets for business travellers and leisure travellers.
Leisure travellers deal always with the agent, but for business travellerssometimes the airlines make deals directly with the companies. Airlines alsomake special offers to large corporate buyers, like price discount for frequentflier travellers, or quantity discounts. Nowadays there are other distributionsystems, such as on line booking, and airlines’ home delivery tickets. 8-Pricing After the deregulation, pricing policies changed drastically, airlinesstarted to offer a wide variety of fares discounted below the regular price.
These discount were accompanied by several restrictions such as advancedbooking, no refund, no changing dates, etc. Therefore people unwilling to meetthese restrictions paid a higher price. At American Airlines management wasviewed as selling the right seat to the right person, this means that theysearch for ways to find out who is willing to pay a higher price, and how canthey make him pay a higher price. By 1991, the industry’s pricing structurehad become enormously complex.
American’s flights involved maintaining 500,000fares. By late 1991 93% of the tickets were sold at one kind of a discount oranother. And the average discount was 63%. Due to the complex pricing structureAmerican developed the “value pricing” plan.
This plan consisted in: Firstfor any given flight there would be only four different fares. Second, all fareswould be mileage-related, and finally, the new fares were set below the levelsof comparable existing fares so lower prices would be available to more businessand leisure travellers. 9- Marketing related strategies Some the marketingstrategies carried out by American Airlines have been: -Computerised reservationSystems: This system changed the industry’s marketing and distributionsystems. This system stored information about, flights, seats availability andfares. Which made the booking and distribution a lot easier.
CRS systems gaveAmerican Airlines a great competitive advantage over the other airlines, asbooking fees by CRS enabled American to earn substantial amounts from itscompetitors. -Hubbing: With hubbing, flights from various origins on spokes ofthe network are channelled through an intermediate location, where they changeplanes and are re-routed to their final destination. This way the airline canserve more locations with fewer planes. -Frequent Flyer programmes: Theseprogrammes provide discounts or bonuses to frequent travellers.
The value of thebonuses increase as the mileage flown increase, the bonuses can take variousforms such as, fare reductions, upgrades to better classes or even free tickets.10- Assumptions and risks In my opinion all of this strategies are brilliant,the only risk I see is in hubbing, customers sometimes don’t want spendadditional time changing planes, there is the risk of missing connecting planes,luggage may get lost, etc. In the rest of the strategies I don’t see any riskswhat so ever.
