American Airlines Case Study

American Airlines Case Study

Written as an airline industry analyst assessing the pricing move (post-mortem) of American Airlines in 1992 intended for American Airlines CEO Robert L. Crandall as a strategic guide for next steps following the price change.

2. Evaluate American’s 1992 announcement of a new rate structure:

The airline industry in 1992 was comprised of the “big three” and discount commuter firms, of which American Airlines was the largest and best funded. Previously accustomed to market dominance, they were dealing with discount firms (led by fledgling Southwest Airlines) undercutting their coach fares. In response to this, American announced a sweeping strategy to simplify their booking system and drop their coach fares in most markets, while rising them in others. This forced most competitors, both large full-service airlines and discount commuters, to follow suit and set prices commensurate to American. Similar competitors to American happily raised and dropped prices to equilibrium, according to American’s policy, in order to benefit from their lead in setting prices for the industry. However, their discount brethren were not so happy about the change, as they were forced to abandon their low price leadership position in order to survive in certain markets.

As with all pricing moves, some customers benefitted while others were worse off. Customers that benefitted were leisure travelers, and corporate travelers from smaller firms. Leisure travelers were typically traveling with their families on vacation or weekend getaways. Unable to benefit from negotiated corporate rates, leisure travelers were paying full coach fares, multiplied by all the members of the family. Corporate travelers from smaller companies that weren’t previously offered negotiated discounts, which were granted exclusively to large firms, also benefitted. The latter group is probably more price-sensitive than corporate travelers from large firms and more appreciative of the change. Both were paying full fares while deep pocket corporation had discounts.

Corporate and military travelers were worse off, but in reality neither is price-sensitive because their employers pay for the travel. Corporate travelers were receiving negotiated discounts sometimes 30%-40% lower than coach fares, which seems contrary to the fact that they don’t really need those discounts. Military travelers also experienced a rate hike, which is another example of a large entity that needs their large volumes of personnel to reach their destinations and don’t have a feasible alternative. Therefore, discounting military travelers during peace time is not a sound strategy, that was curtailed as a result of the new pricing strategy.

The market structure of the airline industry facilitates the type of tacit collusion initiated