I. Description:

American Airlines, Inc., as the largest airline carrier in the United States, is considering a proposal to add a new class on its flagship between New York JFK and Los Angeles LAX. This proposal contain a three class service on the JFK-LAX route (upgrading traditional transcontinental service from a two-class (first and coach) to a three-class (first, businesses, and coach) product. The idea / proposal was originated from Marketing Department, and is motivated by considerations of

1. Its current competition (TWA and Pan Am already flew its flagship with a business-class section on the JFK-LAX route).
2. Frequent flyer upgrade policies (the program that offers upgrade privileges and free-travel awards to loyal travelers)
3. Product consistency (The proposal 3 class American Flagship Service-AFS would allow JFK-LAX passengers-some of whom may be connecting with American’s International flights, to experience the comfort and convenience of IFS).
4. Demand stimulation (for domestic business-class travel)

 
Profile of American Airlines, Inc

• AMR Corporate Vision

• Setting the industry standard for safety and security
• Providing world class customer service
• Creating an open and participate work environment which seeks positive change, rewards innovation and provides growth, security and opportunity to all employees.
• Producing consistently superior financial returns for shareholders.
• Parent Company

• Headquarters

Phone (817) 963-1234

• Active Employees

American Airlines – 86,138 (as of 7/31/96)

• Core Businesses

SWOT Analysis at American Airlines, Inc.

Strengths

• The world largest airlines
• The heart of almost every innovation, from discount fare to frequent flyer
• Wide and Large channel of distribution and subsidiaries offices
• World-Class Customer Service (SABRE Group)
• The Leader of Market share in the Airlines industry
• Modern computer reservation systems and Modern Baggage Handling
• Strong Image Brand/Well perception
• Rapid growth and Ambitious expansion plan (look at the chart below)
• Alliance between AA and British Airways will be a powerful force. They together control 60 % of flights between the UK and the US.

Weaknesses

• Human Resources trouble. There are 2 major strikes since 1993. The first one was happened in 1993 when the Association of Flight Attendants went on strike. The second one was the Allied Pilots Association threat’s strike in 1997.
• Financial trouble which is caused by the over-expansion of the increasing fleets
• The big mistakes that its CEO/Chairman has already done, such as over-expansion, cost cutting Union contracts (that caused 2 major strikes in the last 5 years) and the conversation between AA’s CEO with Chairman of Braniff, Inc that produced an anti trust law suit from Justice Department.
• Unclear Market Segmentation: Business travelers or Pleasure travelers.
• Failure to manage its cost resulted AA lost its profitability in recent years
• Low Overall Satisfaction Service Rating Index(Source: Consumer report, July’91)

Opportunity

• It is a necessity product because people will always need to travel
• An alliance between British Airways and American Airlines will give them an opportunity to be a market leader of an enormous Transatlantic market.
• Technology: (1) Minimize costs and/or use them only where they barely substitute for totally measured dollars, (2) Increase the firm’s electronic commerce transactions, revenues and readership.
• Airlines industry is a high growth industry and a huge market

• The opportunity to substitute the short-haul alternative transportation.

• Airlines industry is characterized as one of high risk and low return, which is obviously the wrong combination.
• Union Labor / Pilot – Strike
• Government Deregulation, Regulation and Re-Regulation
• Antitrust suit law
• Global Alliance, such as Northwest-KLM, Continental-Air France-Virgin, Delta-Air France, and the new and formidable Star Alliance composed of United-Lufthansa-SAS-Air Canada-THAI-Varig
• Technology. For example: If the industry is not using IT or does not need to use it effectively and intensely , the chance of doing anything new is low.
• Substitute products, such as High-speed trains and Auto travel

II. Deregulation and Regulation in the Airlines Industry

The early passenger routes were built on the mail routes that preceded them. The Post Office divided the country into what amounted to geographical franchises. By 1931, the major route systems built on those franchises belonged to Transcontinental and Western Airways (TWA) from New York to Los Angeles to San Francisco, Eastern Air Transport, concentrated along the East Coast; American Airways in the South; Northwest Airways across the Northern tier; and, after Boeing merged his Pacific Transport into it, Airlines across the midcontinent and up and down the West Coast.

These early divisions became the base of the air transport system for half a century. The airlines industry were consolidated and built with almost no change at all. On the other side, the Government eventually evolved into the Civil Aeronautics Board, granted the license, decided where one airline would fly, who its competitors would be, what it would charge, what they (the industry) would charge – everything. The airlines industry did not have much choice about anything up ‘til 1978.

Concerned that government regulation had caused fares to be too high in many heavily traveled markets, had made the airline industry inefficient, and had inhibited its growth, the Congress deregulated the industry. The Airline Deregulation Act of 1978 phased out the government’s control over fares and service but did not change the government’s role in regulating and overseeing air safety. Deregulation was expected to result in:

1. lower fares at large community airports, from which many trips are long distance, and somewhat higher fares at small and medium size community airport
2. increased competition from new airlines entering the market, and
3. greater use of turboprop (propeller) aircraft by airlines in place of jets in smaller markets that could not economically support jet service.

Deregulation of the airlines has also led to an improvement in load factors. Prior to 1978, airlines were selling only about 51 to 56 percent of their seats. After the Civil Aeronautics Board (CAB) began to liberalize their policies, load factors increased to around 60 percent and the average number of seats available in an aircraft was also expanded. The net result was a more efficient utilization of airline equipment.

Re-Regulation. Under the Carter administration, the CAB had proposed restrictions on the antitrust immunity of airlines participating in the international aviation cartel, IATA. And early in the Reagen administration, the CAB announced that it would lift antitrust immunity for rate making on the North Atlantic run.

(Source: Deregulation and Re-Regulation of Transportation by Thomas Gale More)

Rules and Regulation. The Department of Transportation is adopting two rules to further ensure that travel agents using computer reservation systems (CRSs) can obtain a fair and complete display of airline services. One rule will require each CRS to offer one display that lists flights without giving all on-line connections a preference over interline connections. And the other rule will bar systems from creating displays that neither use elapsed time as a significant factor in selecting flights from the data base nor give single plane flights a preference over connecting services in ranking flights. The Department believes that these rules are necessary to promote airline competition and ensure that travel agents and consumers can obtain a reasonable display of airline services. These rules are effective February 2,1998.

(Source: Rules and Regulation, Federal Register page 63837, Federal Information & News Dispatch, Inc)

II.1. Competitors Analysis

The Airlines Industry was divided into three major categories: major airlines, national airlines, and regional airlines. The term "commuter airlines" is used to designate regional. Major Airlines (American, United, Delta, Northwest, Continental and US. Airways) typically has annual revenues above $1 billion. These carriers provide intercontinental as well as domestic route service. American, United and Delta, sometimes referred to as "the big three", have primarily a global geographically focus. Nationals are those carriers which typically have annual revenue between $100 million and $1 billion; they have primarily a domestic focus. However, the term "national" is not descriptive of operations since they do not have the geographical spread of the major; nationals are usually identified with a particular geographical region. Regional airlines typically have less than $100 million in annual revenues. Their primary function is to provide service between the larger hubs and airports in smaller cities, as well as to connect small cities to each other. The vast majority of regional has contractual relationships to serve as feeders for larger airlines.

High-speed trains have been proposed in various locations across the country. Some of them could serve the same routes as some airlines. Auto travel also provides an alternative to air travel, especially shorter flights.

(Source: The U.S. Airline Industry, Strategic Management by Alex Miller and Gregory Dess)

Based on these categories, American Airlines was a major airline. Because of this, American Airlines competes with other major airlines in this category, such as United and Delta.

II.2. Northwest Signs Strategic Alliance With Continental Airlines

Northwest Airlines and Continental Airlines unveiled a strategic alliance Monday, (January 26,1998). This synthetic merger might spark the first major consolidation of the airline business in a decade. The pact between Northwest and Continental, the nation’s fourth and fifth largest carriers, respectively, would automatically blow away a merger proposal from Delta Airlines, the third biggest U.S. carrier.

Northwest, based in Minneapolis, and Continental said the agreement will connect their global route systems, meld their frequent flier mileage programs and link the airlines’ international partnerships. Continental, for instance, already has links with Alitalia of Italy and Air France, while Northwest with KLM Royal Dutch Airlines.

The pact also means consumers would be able to fly both carriers’ routes as though dealing with a single airline. It also means travelers would be able to spend their frequent flier miles with either carrier, and this is important for the airlines’ growth. Moreover, by giving its customers more choices for spending their frequent flier miles; will increase the brand loyalty to both airlines.

(Source: Los Angeles Times, Home Edition, Page D-1, Copyright 1998)

III. Segmentation on the Airlines Industry and How American Airlines Positioning itself.

Basically the market in the Airlines industry can divided into 2 segments. The first one is the business market. And the second one is people who travel for pleasure. Business travelers place great importance on service, and they are highly dependent on timely flights. Base on the "Standard and Poor’s Industry surveys", the business segment consists of man between the ages of thirty and sixty. On the other hand, people who travel for pleasure and personal reasons fly less frequently and demographic characteristics vary widely. For this kind of customers, the price is the most important aspects, not the service.

From the paragraph above, I would to see that the American Airlines position itself on the Business Market. There are several reasons why I said this.

• The first one is because the service that it provides. AA’s management focus and emphasize its products on its preflight service as well as in flight service. The pre-flight service includes checking service & boarding service and the in-flight service includes cleanliness of plane, seat width, leg room, ventilation, flight service, and quality of food. In addition to these are baggage handling and on-time performance.
• The second one is the reason why AA wanted to adopt the proposal for a Three-Class Transcon Service; demand simulation for domestic business-class travel.
• The third one is because the business segment accounts most of the AA’s revenue.

IV. Pros and Cons to the Proposal for a Three-Class Transcon Service

V. The Consideration of the Airlines’ Economies

In the Airlines Industry, Cost Control is the most important factor to make one airline profitable. In the recent years, the industry downturn has forced the industry to operate efficiently and to control its cost effectively. For airlines, some costs usually categorized as variables have characteristics of fixed costs. For example, labor and fuel costs are like fixed costs at the time a plane take off. These costs are significant because labor and fuel are the largest cost component for airlines.

Labor cost represents approximately 37 percent of total expenses, making it the most significant cost to Airlines. On the other hand, labor cost has an important role for influencing the effectiveness and efficiency of operations, because it affects directly to the employee’s motivation and the quality service. Most airlines’ ability to control labor costs is constrained by union wage contracts. However, Airlines in financial difficulty have had some power over unions, because the alternative is bankruptcy and loss of jobs.

Fuel is the second largest cost factor. Higher jet fuel costs contribute to the decreasing in the profitability of the Airlines. Another factors that contribute to the Airlines Economies are airline pricing practices and aircraft utilization. The examples of the airline pricing practices are (1) discounts with "prior purchase" and (2) "remain over the weekend" requirements. Both of these examples are used by airlines to increase their load factors. In addition to these factors, there are several factors that affecting cost control: (a) commissions of the travel agents, (b) Rentals aircraft/equipment/garage, (c) Depreciation and finally (d) maintenance. Here is the chart of the cost structure of American Airlines, Inc.

VI. The Effects of the technology on the Airlines Industry

The technology has given to the Airlines Industry several benefits. The first one is about reservation systems. About 80% of airline tickets sold through travel agents, most of them use a Computer Reservation Systems (CRS) which is owned by the airline. The benefits to the airlines are significant and include booking fees, incremental revenues, and marketing information. (Source: Standard and Poor’s Industry Survey)

The second one is Web-Marketing tools. In this case, American Airlines’ Aaccess marketing . AAccess marketing is designed to increase traffic on the company’s web page and provide customers with low airlines fares. The low airline fares and a list of flights for which travelers can use the fares is e-mailed to subscribers of the firm’s mailing service. American Airlines hopes the chance to obtain low fares will motivate more consumers to access the Web site. The increasing amount of traffic may increase demand for American’s other travel-related services. The low fare information and flight availability is only available online, via the Web site and E-mail. Aaccess is an innovative Web-based marketing campaign that may increase the firm’s electronic commerce transcations, revenues and ridership. (Source: PC Week, Sep 30, 1996)

The third one is Modern Material Handling, which has been used by American Airlines, Inc. The ideas behind this are accuracy, repeatability, and precision; which are needed for around-the-clock operations of airline baggage handling.

VII. The change on the relationship between the Airlines Industry and Travel Agencies

Because of major change in the Reservation Systems technology, It might be said that major Airlines Industry, such as American Airlines, Delta, United no longer need the agents. The first reason is because they already have the reservation system on their Web site, include the schedule of its flight and price. The second reason is because they wanted to cut its cost in order to be a profitable company. The idea behind this is Distribution costs.

Distribution costs take the form of reservations, ticket mailings, and especially paying commissions to travel agents. Distribution accounts for a surprising 20% of an average airlines' total cost; that's $24 billion a year worldwide. The Airline Industry is targeting these costs with electronic distribution mechanisms through several technologies: the Internet, electronic ticketing, and ticketless travel. In fact, the number one electronic commerce industry on the Internet in 1996 was travel.

Southwest and Continental Airlines offer "ticketless travel," where customers purchase tickets at the gate; American, for example, sold over $1 billion in tickets on the Internet last year - without travel agent or reservation center costs. Already, increases in commissions costs are saving airlines money.

(Source: The United States Aviation Industry, US Airlines Research by Steve Ezell)