AIRLINES: Are We Really Unique? And Have We Really Changed?

1. AIRLINES: Are We Really Unique? And Have We Really Changed? Scott D. Nason VP - Revenue Management American Airlines AGIFORS RM Study Group Honolulu, Hawaii June 4, 2003

2. CHARACTERISTICS OF THE BUSINESS

3. CHARACTERISTICS OF THE BUSINESS • Capital Intensive/High Fixed Costs • Labor Intensive and Highly Unionized • Long-Term Facility Commitments • Low Short-Run Marginal Costs • Highly Perishable Product • Highly Variable Demand by Time of Day, Day of Week, Month of Year • Massive Joint Production Across Network • Some Economies of Scale • Nearly Perfect Information Available to Consumers • Discrete/Mobile Units of Production

4. CHARACTERISTICS OF THE BUSINESS (Continued) • Long Lead Time to Increase/Decrease Production Rates • Distribution Contracted to Independent (Travel) Agents • Viewed by Consumer as Commodity • Highly Susceptible to Weather Disruptions • Customer Has Substantial Flexibility to Modify the Sales Contract • Most Brand Loyalty Results from Ubiquity • That means we want to fly everywhere • Highly-cyclical • Some Residual Elements of Regulation

5. IMPLICATIONS

6. IMPLICATIONS • Incentives to Heavily Utilize Units of Production • Intense Price Competition • Prevalence of Low Fares • Codesharing • Overbooking

7. WHAT HAS CHANGED

8. RECENT TRENDS • Reduced business travel demand • Including more use of travel substitutes • Fewer rules inhibiting use of discount fares by business travelers • Internet and Opaque distribution channels • While the rest of the world is becoming transparent, we are going the opposite direction • Increased security costs and taxes • Increased airport hassles and transit time uncertainty • More alliances, especially domestic • More RJs • Massive financial losses

9. IMPLICATIONS • Less accurate industry data • Renewed competition from ground modes • Lower pay, more productive work rules

10. IMPLICATIONS FOR REVENUE MANAGEMENT • Need more innovative ways to synthesize traffic data • New strategies for selling in the internet world • New strategies for selling in a world with widespread availability of low, unrestricted fares

11. IF …

12. IF … WERE RUN LIKE AIRLINES, ... • If supermarkets were run like the airlines, … • that last Thanksgiving turkey on Thanksgiving morning would cost $1200

13. IF … WERE RUN LIKE AIRLINES, ... • If supermarkets were run like the airlines, … • that last Thanksgiving turkey on Thanksgiving morning would cost $1200 • the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons

14. IF … WERE RUN LIKE AIRLINES, ... • If supermarkets were run like the airlines, … • that last Thanksgiving turkey on Thanksgiving morning would cost $1200 • the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons • they’d charge a lot less for a Coke than the movie theaters do, like they do!

15. IF … WERE RUN LIKE AIRLINES, ... • If supermarkets were run like the airlines, … • that last Thanksgiving turkey on Thanksgiving morning would cost $1200 • the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons • they’d charge a lot less for a Coke than the movie theaters do, like they do! • and the stock clerks would regularly remind you that they were there primarily for your safety

16. IF … WERE RUN LIKE AIRLINES, ... • If McDonalds were run like the airlines, … • they’d still give you a break on a full meal, over buying the items a la carte, but they would insist that you eat the whole meal in order to get the discount

17. IF … WERE RUN LIKE AIRLINES, ... • If McDonalds were run like the airlines, … • they’d still give you a break on a full meal, over buying the items a la carte, but they would insist that you eat the whole meal in order to get the discount • And the price of a Big Mac would depend on how close it was to the nearest Burger King or Wendy’s

18. IF AIRLINES WERE ... • If airlines were run like Microsoft, … • The price for the return flight would go up mid-trip

19. IF AIRLINES WERE ... • If airlines were run like Microsoft, … • The price for the return flight would go up mid-trip • The airplane would stop working every few hours - at random moments - and tech support would tell the pilot to turn it off and back on again (while cruising at 33,000 feet)

20. IF AIRLINES WERE ... • If airlines were run like Microsoft, … • The price for the return flight would go up mid-trip • The airplane would stop working every few hours - at random moments - and tech support would tell the pilot to turn it off and back on again (while cruising at 33,000 feet) • And our stock options would be worth something

21. IF AIRLINES WERE ... • If airlines were run like a long distance phone company, … • We’d solicit passengers by phone, during dinnertime

22. IF AIRLINES WERE ... • If airlines were run like a long distance phone company, … • We’d solicit passengers by phone, during dinnertime • We’d offer unlimited travel for $39 a month

23. IF AIRLINES WERE ... • If airlines were run like a long distance phone company, … • We’d solicit passengers by phone, during dinnertime • We’d offer unlimited travel for $39 a month • And, we’d offer top tier frequent flyer status to anyone who’d switch to us

24. IF AIRLINES WERE ... • If airlines were run like Congress, … • Come to think of it, they are: • We spend more than we take in

25. IF AIRLINES WERE ... • If airlines were run like Congress, … • Come to think of it, they are: • We spend more than we take in • The public thinks we are pond scum

26. IF AIRLINES WERE ... • If airlines were run like Congress, … • Come to think of it, they are: • We spend more than we take in • The public thinks we are pond scum • but they can’t seem to live without us or even change us very much.