American Airlines Ticketing Case Study

American Airlines Ticketing

In April 1992, American Airlines scrapped its convoluted system of airline fares that had evolved over the last decade and announced a new rate structure. The new system simplified the fare structure of its US domestic routes from having 16 different kinds of fares to only 4 tiers, including a first-class fare, a regular coach fare and two discount fares requiring purchasing 21 days and 7 days in advance respectively. It simultaneously reduced prices for most of the fares. This change was expected to save American $25 million annually by increasing administrative efficiency and reallocating resources. The system also eliminated the special treatments some corporate customers used to enjoy in the past by having a transparent and fair pricing scheme in place for all types of customers. Furthermore, the new system increased the rescheduling flexibility of discount tickets by charging an extra service fee. The simplification of the fare system presents a permanent change.  We see American return to the mileage-based system to rationalize the new and simplified fare system.  

However, not all customers were happy about the change under the new fare system. Customers benefited from this change include those who usually buy regular coach and first-class fares. Those who were less price-sensitive, typically the business travelers, were offered a price reduction of 38% on coach fares and 20-50% on first-class fares.  In comparison, the lower willingness-to-pay groups of customers, typically the leisure travelers who normally purchase discount tickets in advance, were offered little or no discount, in some cases higher fares with restrictions on stay-over and black-out days. But the discount tickets were more flexible than before as customers were provided with the option to change their itinerary and reuse tickets. In addition, travelers who used to buy tickets with special fare deals (e.g., corporate deals, convention and meetings deals, and discounts for government employees and members of armed forces – could be worse off because their prices used to be about 30-40% lower than typical coach fares. However, as the new system reduces most of the fares anyway, this effect cannot be clarified definitely.

By 1992, the US airlines industry was already saturated and ravaged by price wars. In this market, leadership is often everything while followers are often relegated to the lowest possible margins, high setup costs and high sales & marketing expenses.

American Airlines was a true leader in marketing innovations and it had enjoyed numerous success from being the first-mover in the past. For example, it was the first airline company that introduced the SuperSaver fare and adopted the tiered fare structure in the late 70s; it pioneered the computer reservation system for yield management; it also pioneered the two-tier wage system in the mid-80s to cut labor costs; it came up with a “co-host” plan and later on bonus payment to capture incremental sales from travel agent channel; it was also the first that introduced the frequent flyer program to enhance customer loyalty and capture revenue from the higher willingness-to-pay business travelers before everyone else in the industry followed suit.