American Airlines, Inc.Revenue Management

Presented by

Syndicate 1

Abbasi Attarwala, Abhishek Goel, Rouble Goswami, George John, Manoj K, Rakesh Tiwari, Ravi Khyani, Fares Kilpady, Dilip Kr Singh

Agenda

Fact Sheet Background Discussion points Conclusion/Way forward

Fact Sheet (1988)

Fleet Size: 468 Aircrafts Flights: 2200 per day Destinations: 151 Total Revenue: USD 8.55 Billion Operating Income: USD 801 Million Hubs: 6 hubs( Dallas/Fort Worth, Chicago,

Nashville, Raleigh/Durham, San Jose, San Juan)

Post Deregulation Scenario Free Entry and Exit Route structure became an important tool for

competitive strategy. No Pricing restrictions Entry of many players in the market. Decrease in market share Decrease in prices Increase in fuel prices.

Hub & Spoke System

Developing and managing the complex time slots to provide convenient passenger arrival and departure with same carrier and minimum delay.

American managed 12 complexes, 382 daily flights to 95 cities, arriving & departing through 41gates,

Discussion points

Cost management Revenue Management at American prior and

post deregulation (SWOT Analysis) Specific Route problems and solutions Development of Price, Service and Competitive

Environment Based Demand Models To Move from Revenue to contribution Based

Pricing and RM model to be applied on Origin and destinations (O & D)

Integration of Decision Support Systems for pricing, YM (both marketing) and Schedules (An operations system)

Rationalization of internal & external database with improved end user support

Future designs of the SABRE Display

Cost Management

Two tier wage structure• Pay less to new entrants

Fuel & maintenance cost• New Aircraft with better fuel

efficiency• Lower maintenance cost• Need smaller crew

SWOTSTRENGTH

•Network•Quality of service.•Multi-hub•SABRE•“AAdvantage”•Two Tier wage structure leading to labor cost reduction

WEAKNESS

•Old Revenue management system•Operating system•Pricing decision

OPPORTUNITY

•Better Revenue Management system e.g. Optimal Pricing, EMSR•Tactical to Strategic •Price Indexing•O&D / RM•Over Booking•Airline connections•Schedule of optimization

THREAT

•Cannibalization by low cost carriers•Human intervention•Free entry/ Exit

Chicago West coast Decision

Issue Main Competitors - United and Continental Their offerings- competing non-stop flights and less price Drastic reduction in load factors of American UA had schedule advantage

Reactions by American Reduced prices – still lost initiative in terms of flight schedules Pricing USD 10-20 more than with advance purchase condition Before price war, full fare was USD 575 and discounted fare was

USD 177

Possible solutions Superior flight schedules Allocate discount seats with USD 10-20 premium with restriction

like advance purchase etc. Hence Force Continental to go out of the market

Focus on better price mix Change in metrics from load factor to Revenue per available seat

mile (RASM)

New York-San Juan Pricing Decision

Issues Principal Competitor – Eastern and TWA – offering non stop flight

service Predominantly point to point traffic Low season fares

• EA offered deep discounting – introduced restricted one way fare of USD 79 and USD 198 round trip for weekdays & USD 238 weekend fare.

Background Market

• Business traveler (round the year)• Leisure traveler peaked in summer• Other Passengers travelling to visit travelers without definite return

plans• Common unrestricted fares rather than restricted round trip discount

fares

New York-San Juan Pricing Decision (contd…)

Possible solutions by American

Grow the Caribbean market with more flights and better schedules to connect with.

In both directions promote attractive return fares and sell as bundled product.

Ensure to retain the business traffic. System driven RM Management to optimize yield

Yield Management @ AA Challenges

American applied the principals of yield management by discounting wherever required, efficient hub and spoke system, O&D fare allocation, better inventory management, indexing and nesting techniques.

Problems Demand was not only uncertain but was variable

over time demand and lack of correct forecasting Leisure demand was “lumpy” Multiple fare types restrictions monitoring was

humanly impossible Allocation to seat buckets Standardized overbooked/ cancellation regulations

Way Forward

Automation of route pricing decisions AA reactions to competitive pricing decisions Development of Price-Service-Competitive

environment based demand models Need to develop system which support initiative rather

than being reactive Shift from Revenue to Contribution based yield

management to drive revenue. Capture O&D markets rather than flight legs Integration of decision support system Rationalization and Integration of internal and external

database

Way Forward… contd.

Indexing of fare classes to buckets to optimize initial inventory allocation

Adjusting authorization levels dynamically to reflect differences between forecasted and actual demand

Taking market specific factors in consideration of determining the price.

Study on the price elasticity of all the class of passenger with the help of past data to correctly predict the response of customers

Post departure data by month/ day of the week To determine the overbooking level scientifically.

A way forward…(contd.)

Shift in paradigms:- Tactical RM Strategic RM Load factor RASM Static Responsive/ Dynamic Integration of discreet organization silos System Integration

MIS - Internal / external Pricing & Yield management with Marketing Operational database

User friendly interface

Thank You