Airlines case

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Harvard Business School

9-594-001
Rev. May 11, 1994

American Airlines' Value Pricing (A)
At a press conference on April 9, 1992, Robert L. Crandall, chairman, president and CEO of American Airlines, the U.S.’s largest carrier, made the following statement: We have a major strategic announcement to make, one which recognizes a very fundamental truth: no industry and no company can affordto ignore change. . . . In the airline business, which is simply not working as it should, change is clearly needed. . . . We have said for some time that our yields1 are too low, yet the conventional solution, higher and higher full fares and an ever-growing array of discount fares surrounded by an ever-changing plethora of restrictions, simply does not work. . . . In our unsuccessful pursuit ofprofits, we have made our pricing so complex that our customers neither understand it nor think it is fair. . . . We absolutely must find a way to bring value back to air travel. . . . By moving to a new approach, which emphasizes simplicity and equity and value, we hope to regain the good will of our customers. We think our new system is both logical and fair and because it offers our customersboth lower prices and a greater flexibility that it represents great value. We call it Value Pricing. . . . It will give our customers a better deal, it will increase our revenues and it will help restore both American and the U.S. airline industry to profitability. Among its other virtues, our value plan will stimulate business travel and thus overall U.S. economic activity. Getting businesstravelers back in the air, selling, seeing their customers face to face, hunting up deals, will, in our view, do a lot to get our economy back on track. Value pricing represented a radical simplification of the complex pricing structure which had evolved over more than a decade following deregulation of the industry. Instead of selling seats at a dozen or more different prices on any given flight,henceforth American would offer only four kinds of fares: first class, regular coach, and two discount coach fares requiring purchase of the ticket either 7 or 21 days in advance of departure. These changes would reduce the total number of different fares American maintained at any time for its total flight operations network from 500,000 to just 70,000. Furthermore, the plan lowered prices for bothbusiness and leisure travelers. First class fares were dropped 20-50% while regular coach fares were cut an average of 38%, with smaller reductions in advanced purchase discount fares.

1"Yield" is revenue from passenger fares per revenue passenger mile flown. A "revenue passenger mile" is one

paying passenger flown one mile. Steven C. Michael and Alvin J. Silk prepared this case as the basisfor class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors are indebted to Robert Dolan for his valuable comments and suggestions. Copyright © 1993 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing,Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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594-001

American Airlines' Value Pricing (A)

Following the Crandall press conference, the burning question beingasked throughout the industry was: What would be the fate of American’s bold initiative?

Company Background
In 1992, American Airlines, Inc. was the largest airline in the United States. Its fleet of 622 jet aircraft flew 2,450 flights daily, serving 182 locations in the U.S. mainland and Hawaii, 14 in Europe, 38 in Latin America, plus 22 other destinations worldwide. American Airlines was the...
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