AmericanAirlines Pricing Strategy
AmericanAirlines Pricing Strategy
AmericanAirlines (AA) is a carrier company based in the United States thatprovides both domestic and international flights. In 1992, the firmannounced a new pricing policy with a Four Tier Pricing Structure. Itreplaced the old version of pricing which comprised of numerous waysof charging passengers. The previous one was based on the ticketsdemand mostly on the schedule of the characteristic of the flight.The revenue management team studied the demand schedule and proposeda plan that would assist the firm in deciding the number of pricesand the tickets that should be made available before a certainflight. However, despite designing the new policy American Airlinesexperienced further losses because of the high costs of implementingit, and the competitors urge to copy it and use it against AA.
TheAmerican firm designed the value pricing procedure regarding its farepricing following lots of complaints from the customers. Some citedthat it was complex not standard. Additional factors that promptedthe company to design the new policy were the urge to increase itsflight demand and also elevate its market share in the Airlinesector. AA anticipated simplifying the rather complex system that itscustomers previously used (Yarbrough, 2013). Also the urge toaddress losses and the operating cost also led to the decision todevelop and implement the new scheme. It led to consumers’satisfaction subsequently leading to increased demand for itsservices. The elevated demand coupled with the decrease in the costsof operations eventually resulted in improved company profitability.
Therewere both positive and negative impacts of the implementation of thevalue pricing plan of the airline company in America. First, thescheme led to reduced flight charges of the first-class passengersbetween twenty and fifty percent. According to Martin (2015), theunrestricted coach charges were reduced by approximate thirty-eightpercent on average. The substantial decrease in the pricing improvedthe demand for the airline’s services since the clients had anincentive to enjoy the services at an affordable price. The clientsof the company were relieved of the complex system that waspreviously used. The simplicity and reduced prices attracted newcustomers. The clients would use it to book their flights wherecharges were based on the miles covered (Martin,2015). They would simply understand that longer journeys attractedmuch airfare as compared to shorter ones hence it was muchpredictable and the clients would easily budget for a journey.
However,the policy had its fair share of disadvantages. Despite the increasein demand for its services most notably due to reduced prices, therewas massive congestion. The available carriers could not accommodatethe increasing number of travelers (Parker& Lemer, 2012). As AA attempted to purchase other planes, theyfound difficulties in doing so since they had not generated enoughmoney to finance the same. Competitors took advantage of the setbackand diverted most of the passengers who were stranded. The TransWorld Airline, for example, reduced its prices too to accommodate theunsettled AA’s clients. The trend of reducing ticket pricescontinued and as airline companies did so in an attempt to have anadvantage over their competitors it resulted in diminished profitswhich made some of them like the AA suffer financially (Parker &Lemer, 2012).
Theairline also incurred extra costs in the implementation of thepolicy. Some included the purchases of more phones and other devicesthrough which the airline used to collect complaints from theclients. Also while implementing the new program, the firm neededextra reservation-agents due to the increased number of customers whoassisted in the booking of flights. They also needed more staffmembers to administer and operate the implemented system.
Anotherdisadvantage that resulted from the implementation of the scheme wasthat the competitors also gained a lot from it. They managed to copyand implement the same in their firms. According to Reed (2015), theyhad easy moments because their work was only to work on the loopholesof the policy. Within a short time, they were almost perfecting itand leaped a lot of profits from it. Also, the implementation of thesystem triggered competitors to come up with alternative ideas toretain their customers and more so attract more. Companies like theDelta Airlines and Virgin America introduced discounted pricing plansto counter the AA’s strategy (Reed,2015). In addition, the Northwest Airlines designed and unveiled‘Grownups Fly Free’ program to counter the AA’s strategy. Theseprograms were attractive, and more clients fled the American Airlinesto enjoy them.
Thefirm needs to understand the game theory in economics. It would helpthem comprehend strategies used by the competitors and move a stepfurther. The corporation needs to evaluate the reactions of thesecompanies when they implement the new policy. The move would makethem have a clear strategy to challenge them. AA should also employmore precise pricing prediction strategies (Bacon,2016).They can be developed in such a manner that they would estimatethe demand schedule for the potential clients as well as the currentones. The firm should also design several price discriminationprograms. For instance, charges for the luggage should be set in sucha way that it can advantage of the price demand estimation. The movecan be a source of additional revenues from those who intend to partwith extra cash to enjoy traveling with their baggage (Scotti& Dresner, 2015).Furthermore, it should consider cooperating with some of thestrategic players in the sector while implementing such demandingprograms. The move would curb resistance during the implementation.
Conclusively,the pricing scheme that the airline designed and the price conflictsthat followed after its implementation clearly altered the wayAmerican Airlines did its business. The main aim of this valuepricing strategy adopted by the company was to provide the clientswith the lowest flight charges while maximizing the value of theconsumer. However, setbacks were more intense than the advantagesprobably due to lack of intense examination of potential negativeimpacts and how to address them. However, the proposed alternativeswould assist it in ensuring that its competitors are not in anadvantageous position. On following them, the company would manage toaddress some of the issues present in it while aligning with itsmission and vision.
Bacon,T. (2016). How American Airlines is taking a more ‘spirited’approach to fare charging. TheEye for Travel.Retrieved fromhttp://www.eyefortravel.com/revenue-and-data-management/how-american-airlines-taking-more-spirited-approach-fare-charging
Martin,G. (2015). American Airlines hints at big changes to economy fares.TheForbes Magazine.Retrieved fromhttp://www.forbes.com/sites/grantmartin/2015/10/27/american-airlines-hints-at-big-changes-to-economy-fares/#3a62df8163b4
Parker,A. & Lemer, J. (2012). American Airlines admits strategy failed.FinancialTimes.Retrieved fromhttps://www.ft.com/content/28e20ac6-1aae-11e1-bc34-00144feabdc0
Reed,T. (2015). American`s too-low pricing hurts the airline industry. TheStreet.Retrieved fromhttps://www.thestreet.com/story/13240568/1/americans-too-low-pricing-hurts-the-airline-industry-analyst-says.html
Yarbrough,B. (2013). Airlines reveal ticket pricing strategies. TheMercury News.Retrieved fromhttp://www.mercurynews.com/2013/06/30/airlines-reveal-ticket-pricing-strategies/