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American Airlines Value Pricing

American Airlines Value Pricing. Debriefing Professor Joel Huber Fuqua School of Business Duke University. April 9 - American April 12 - TWA April 13 - US Air, Continental, America West. Announces Value Price Investment banks “brilliant strategic move

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American Airlines Value Pricing

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  1. American Airlines Value Pricing Debriefing Professor Joel Huber Fuqua School of Business Duke University

  2. April 9 - American April 12 - TWA April 13 - US Air, Continental, America West Announces Value Price Investment banks “brilliant strategic move Marketing press “Bob Crandall gave a tutorial to the airline industry.” AA up 3 1/4 to 71 7/8 Delta up 1 1/2 to 60 3/4 United up 2 1/2 to 133 1/4 Undercuts AA by 10-20% Cut Prices American - What Happened?

  3. April 20 - American May 20 - American May 26 - Northwest May 27 - American May/June - Other Airlines 1992 Q2 Matches competitor’s cuts on most leisure routes Raises fares 10-25% on many routes Grown-ups fly free Cut fares 50% for travelers in summer months Match 50% off Operating losses by all major carriers American - What Happened?

  4. Could we predict who would defect? Yield .18 .16 .14 .12 .10 (Case exhibit 2) PROFITS USA DEL AA NW LOSSES UA CON TWA SWA AW .10 .12 .14 .16 .18 .20 Operating Expense per Rev. Pass. Mile

  5. American: Take Aways • Key Tools from Class • American’s mission, assumptions (Company) • Porter’s 5 Forces (Competition) • Segmentation Analysis (Customer) • Expected Value Calculation (Marketing Math)

  6. How Crandall limited airline competitiveness through partitioning • Hubs: Separates competitors—tie flights to the same carrier • Load management: lowered costs, facilitated selective retaliation • Frequent flier programs: partitioned customers from each other, lowered price sensitivity • TACO’s increased agent loyalty, less incentive to search for prices

  7. Balanced competitors Slow industry growth High fixed costs Low customer loyalties Added capacity comes in large increments Diverse competitors High strategic stakes High exit barriers Yes Yes Yes Yes Yes Yes Yes Yes Why he could not succeed Forces creating intense competition: Michael Porters 5-forces

  8. American: Takeaways • Understand company’s limitations—Can AA enforce price leadership? • Understand what benefits exist for your segments - how will customers react? • Understand what benefits/liabilities exist for your competitors - how will they react?

  9. Wisdom With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. Warren Buffet

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