American Airlines Inc. Revenue Management

AmericanAirlines Inc.: Revenue Management

AmericanAirlines Inc.: Revenue Management

Beforethe year 1978, commercial airline industry functioned as anoligopoly. That means that it operated in a state of imperfectcompetition, where a small number of airlines shared a market. The1978 deregulation law played a significant role in the operation ofthe airlines such that it gave them the freedom to enter as well asexit and adjust fares accordingly[ CITATION Har93 l 1033 ].

Inits operations, this industry operated on cost minimization andprofit maximization. It used this strategy to gain competitiveadvantage and competitive edge in the market. In this concern, thecompany looked at various ways to reduce costs including fuel,production and labor cost which captured the attention of thestakeholders[ CITATION Har93 l 1033 ]. Onthe negative side, this strategy worked against the will of theentire staffs in that it sharply decreased the salaries new recruits.In long-term strategy, the company worked hard to replace old lessefficient airplanes with the new ones, which were more fuel costeffective. The newly purchased aircraft absolutely saved on the costof fuel and needed smaller crew. At the same time, they were cheap tomaintain.

Airlinesalso used route strategy as one of its competitive plans. Thisstrategy was more significant in that it allowed freedom of entry andexisted in major local routes, which led to the evolution of thehub-and-spoke system. This strategy worked to its advantage becausethis airline was able to explore all routes and was able to operateone of the broadest route systems in the USA. In marketing, TheCompany used different competitive strategies to ensure it is in linewith long-term vision[ CITATION Har93 l 1033 ].In marketing, it applied ticket distribution, revenue management, andcustomer service and frequent flyer programs. All these programs wereaimed at cost minimization and profit maximization. It also worked onquality of services provided to its customers to retain them.

Thegoal of revenue management was achieved when the company focused onmaximizing the passengers by selling correct seats to the correctclients at the right prices. The strategies applied include pricingas well as yield management. In pricing, the company came up withfare system, which helped to categorize the passengers and theirpossible fares. The firm had already recognized that the customerswere diverse in their price restrictions and sensitivity. In thiscase, pricing dealt with other issues such as penalties andconditions of buying tickets[ CITATION Har93 l 1033 ].Whiledevising fare scheme, the management tried much possible not to givediscounts to travelers who were sensitive to prices, for example,those on business trips. This strategy sought to reduce thereduction of revenue through regulations like minimal stayrequirement and advance purchase.

Inyield structure, the management focused on ensuring that all classesof seats are available for the customers. Because flight is treatedas a perishable commodity, the yield management is supposed to workstrategically to balance between full seats and discount seats, orelse it is prone to make losses. The problem is the capability ofmaximizing the tradeoffs between the cost of turning away full-farepassenger and cost of the empty seat. Observing American revenuemanagement it can be concluded that it has five key functions, butthe question to ask is if such functions are effective in airlineindustry[ CITATION Har93 l 1033 ]. Thepositive side of these functions is that they have helped the companyto divide its operations to capture each aspect business managementin its operation.


Harvard Business School. (1993, June 16). American Airlines, Inc.: Revenue Management . Retrieved September 30, 2016