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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


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