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American Airlines Inc. Revenue Management

American Airlines initiated frequent flyer programs to build customer loyalty as it is cheaper to retain existing customers than acquire new ones. These programs also help airlines forecast future travel of loyal flyers, reducing demand uncertainty. Revenue management at American considered factors like displacement of full-paying customers by discounted ones and impact on market share from competitors' fare changes. When deciding whether to match a competitor's discount fare, American analyzed differences in flight schedules and customer loads to determine the optimal discount level. Collecting additional data on price sensitivity and customizing loyalty programs for key customer segments can help airlines make pricing decisions.

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745 views12 pages

American Airlines Inc. Revenue Management

American Airlines initiated frequent flyer programs to build customer loyalty as it is cheaper to retain existing customers than acquire new ones. These programs also help airlines forecast future travel of loyal flyers, reducing demand uncertainty. Revenue management at American considered factors like displacement of full-paying customers by discounted ones and impact on market share from competitors' fare changes. When deciding whether to match a competitor's discount fare, American analyzed differences in flight schedules and customer loads to determine the optimal discount level. Collecting additional data on price sensitivity and customizing loyalty programs for key customer segments can help airlines make pricing decisions.

Uploaded by

Max Born
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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American Airlines Inc.

Revenue Management
What was the goal behind
“frequent flyer” programs
initiated by American Airlines?
Marketing Reason

It costs five times as much to acquire a new


customer than to keep an existing one
Need for
Loyal Customers
operational Reason

• Frequent Flyers programs collect a lot of information on the flyers

• This information helps in forecasting the future journeys of these flyers with a higher degree of accuracy

• This reduces the demand uncertainty faced by the airlines


Apart from market segmentation,
what other considerations did the
revenue management system at
American take into account?
Displacement
• Result of the hub and spoke model
• Discount customers displacing full fare customers
• When discount customer is covering a longer route than the full fare customer,
displacement might be desirable for AA

Share Shift
• Impact on the market share of an airlines due to the change in fares relative to its
competitors

Simulation
• Originally non-flyer customers start flying due to the reduced fares- an increase in the airline
market size
Referring to the discussion of the
Chicago-West Coast pricing decision:
Should American counter
Continental’s $159 fare with a
relatively-unrestricted discount fare
on the non-stop Chicago-West Coast
flights?
3 major players on the Chicago- San Francisco route

Superior flight schedule-


No differentiation
Hourly flights from Chicago to LA and San Francisco Cheaper fares

• American Airlines’ passenger load factor on this route is around 800 bps lower than its DFW- West Coast route

• Increase the number of seats available at discount, but do not go for a completely unrestricted discount fare
Referring to the discussion of the New
York-San Juan pricing decision: What
additional information should Doug
Santoni collect to decide on a
response to Eastern’s pricing
initiative?
• Can the passengers of
Caribbean origin be
• Doug needs to better made a part of a special
understand the price loyalty program?
sensitivity of the 3
• Doug can find this out
customer segments
by studying the journey
patterns of these
passengers in the past
years
• Can loyalty programs be Copy from other
Price Sensitivity customized to suit the groups any extra
demands of each of point you may find
these segments

Loyalty Programs
Example: An aircraft has 100 seats
and there are two types of fares: full
($499) and discount ($99). While
there is unlimited demand for the
discount fares, demand for full fares is
estimated to be anywhere between
10 and 30. How many seats should be
protected for full-fare passengers?
Cu= $(499-99)= $400
Co= $99

F(Q)= Cu /(Cu + Co)= 0.8016

Since the demand for full fares is estimated to be anywhere between


10 and 30, we assume the demand distribution for the full fare tickets
(F(Q)) to be a Uniform Distribution with probability= 1/20= 0.05

Q= F-1(0.8016)= 26

26 seats must be protected for full fare passengers


Thank you
for
flying with us

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