1. Issues 2. American Airlines’ objectives 3. The airline industry 4. Market
5. Consumer needs 6. Brand image 7. Distribution system 8. Pricing 9. Marketing
related strategies 10. Assumptions and risks 1- Issues The main issue of this
case is the lack of profits of the airline industry, an industry that should be
more than profitable due to the large amount of customers, the necessity of
using airlines’ services and the high prices charged by most of these
airlines. What we are going to deal with is, why is this happening? And how is
American airlines dealing with this problem?. To be able to discuss how American
airlines wants to regain profitability, we must identify and analyse different
issues such as, the company’s background, the airline industry as a whole, the
demand 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 stimulating
business travel, lowering prices etc. So in other words American Airlines’
main objective is to become as profitable as possible. To understand better the
company’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, and
what kind of a change is needed. American Airlines had been the largest airline
in the United States for a long time. In 1990 and 1991 due to a recession and
the Gulf War, demand for air travel dropped drastically, for this reason, fare
wars started and all the airlines incurred massive losses. 3,4- The Airline
industry and the market The airline industry is large, specially in the United
States, mainly due to the “ Deregulation” of the industry. In 1938, the
Civil Aeronautics Board was created to control the growth of the air
transportation industry. This board had the authority to control entry, exit,
prices and methods of competition. In the late 1970 this structure was found
inefficient and in 1978 deregulation took place. Due to the deregulation of the
industry competition intensified, prices dropped, and the number of people
travelling increased. Many new companies emerged and regional airlines saw
deregulation as an opportunity to expand. Due to the rise in competition, by
1986 mergers started to take place and in 1987 64.8% of the market was
controlled by the four largest airlines. The demand for air travel is determined
mainly by price, studies revealed that half of the leisure travellers and on
quarter of business travellers did not have a preference for a particular
airline, which means that prices determined the preference. So the strategy to
compete for customers consisted mainly in pricing and flight schedules. The
demand for flights varies depending on the season or the business cycle
therefore airlines have to develop different pricing strategies and offers
depending on the season or the business cycle period. An other determinant for
demand is technology, the new telecommunication possibilities have made air
travelling unnecessary in some cases, which of course has affected airlines
revenues. 5- Consumer needs. Consumer needs are clear, what airline consumers
need is basically god prices and good flight schedules. These are the basic
needs, 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, punctual
departures, check-in facilities, movie channels, etc. All these are consumer
needs, but studies have shown that demand is mainly determined by price and a
flight schedules, the rest just add value to these two, therefore companies must
focus on ways to lower prices and provide good flight timetables. There are two
types of travellers, business travellers and leisure travellers, these two of
course have different needs, for the first ones price is not so important
because usually the company pays for it on the other hand punctuality and flight
schedules are very important to them. For leisure travellers the most important
thing is usually price, and the rest comes after that. But as I said before
consumer needs can be summarised in these to price and schedules. 6- Brand image
American Airlines’ brand image is good, due to its successful background and
its new marketing strategies. In 1991 American Airlines was the biggest airline
in the United States, and the reason for it is that this airline was pioneer in
many fields gaining competitive advantage over the other airlines. When
deregulation took part in 1978, American transformed in such a way that it
became the industry’s market share leader. American had also pioneered several
policies that affected the industry’s structure and standard practices. In the
late 1960’s, American introduced the first computerised airline reservation
system, which revolutionised the marketing and distribution of the travel
industry. American also introduced “the super saver” fares in 1977, which
was the first programme of deep discounts for leisure travellers, and in 1981,
American launched the first frequent-flier programme, which created brand
loyalty towards the airline. American Airlines is constantly developing new
strategies, and introducing new technologies, and this is why its brand image is
so 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 class
fares, etc. 7- The distribution system The main distribution system for air
travel is the travel agent, which provides not only the flight ticket, but also
supplementary services such as car rentals, hotels, excursions, etc. Airlines
ask the agents to make reservations and deliver tickets. There is a difference
in the distribution of tickets for business travellers and leisure travellers.
Leisure travellers deal always with the agent, but for business travellers
sometimes the airlines make deals directly with the companies. Airlines also
make special offers to large corporate buyers, like price discount for frequent
flier travellers, or quantity discounts. Nowadays there are other distribution
systems, such as on line booking, and airlines’ home delivery tickets. 8-
Pricing After the deregulation, pricing policies changed drastically, airlines
started to offer a wide variety of fares discounted below the regular price.
These discount were accompanied by several restrictions such as advanced
booking, no refund, no changing dates, etc. Therefore people unwilling to meet
these restrictions paid a higher price. At American Airlines management was
viewed as selling the right seat to the right person, this means that they
search for ways to find out who is willing to pay a higher price, and how can
they make him pay a higher price. By 1991, the industry’s pricing structure
had become enormously complex. American’s flights involved maintaining 500,000
fares. By late 1991 93% of the tickets were sold at one kind of a discount or
another. And the average discount was 63%. Due to the complex pricing structure
American developed the “value pricing” plan. This plan consisted in: First
for any given flight there would be only four different fares. Second, all fares
would be mileage-related, and finally, the new fares were set below the levels
of comparable existing fares so lower prices would be available to more business
and leisure travellers. 9- Marketing related strategies Some the marketing
strategies carried out by American Airlines have been: -Computerised reservation
Systems: This system changed the industry’s marketing and distribution
systems. This system stored information about, flights, seats availability and
fares. Which made the booking and distribution a lot easier. CRS systems gave
American Airlines a great competitive advantage over the other airlines, as
booking fees by CRS enabled American to earn substantial amounts from its
competitors. -Hubbing: With hubbing, flights from various origins on spokes of
the network are channelled through an intermediate location, where they change
planes and are re-routed to their final destination. This way the airline can
serve more locations with fewer planes. -Frequent Flyer programmes: These
programmes provide discounts or bonuses to frequent travellers. The value of the
bonuses increase as the mileage flown increase, the bonuses can take various
forms 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 spend
additional 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 risks
what so ever.