American Airlines Inc. Revenue Management

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AMR faced supplier power when purchasing aircraft, as two giants, Boeing and Airbus dominated the supply for commercial airliners. The smaller number of firms in the aircraft manufacturing industry gave the bargaining power to the supplier.

Labour is the third major input to operations in the airline industry. Labour in the airline industry is unionized and wages, salaries and benefits constituted about a third of AA's total operating expenses. While some of American Airlines' competitors have achieved labour cost reductions through bankruptcy proceedings and consolidations, AA continues to pay some of the highest labour costs in the industry. It is unclear whether this gap can be closed as the bargaining power lies with the unions. Union pressure, however along with the seniority of its workforce, will likely to keep AA's labour costs higher than those of its peers. Another driver of AA's escalated labour cost is their approach to maintenance. AA's perform all of their heavy maintenance in-house at facilities in Tulsa, Oklahoma and Kansas City, Missouri. Though AA management rationalizes this decision by emphasizing the control over their product, many of their competitors have been able to achieve significant cost savings by outsourcing all aspects of mechanical labour.

Due to the proliferation of online ticketing, consumer have had perfect knowledge of pricing in the industry. This factor, combined with the price sensitivity arising from the undifferentiated nature of airline service, granted a significant amount of buying power to the consumer. Furthermore, because passengers had low switching costs, even within the same travel schedule (i.e. multiple carriers for the same trip), passenger benefitted with low fare choices. This enhanced ability of consumers to act on price has benefitted LCC's, which can offer more attractive pricing on many of the high-traffic routes.

Alternatives and/or Options

Developing Yield Management and Revenue Management

Keep investing and developing Revenue Management and specifically Yield Management. Rely on advance technology to make better decisions to sell the seats to the right customer at the right time at the right price. Yield Management will assist American Airlines in understanding, forecasting and influencing potential clients in order to maximize profits (https://en.wikipedia.org/wiki/Yield_management). Developing advance technology and pioneering concepts such as Yield Management will help American Airlines to grow and overcome its competition.

CONS:

- Very expensive

- Time consuming

PROS

- Maximizes profit growth

- Better decision making capabilities

- Ahead of competition

Cutting Costs

American Airlines is facing challenges from increased competition and declining profits in the industry. Cost reduction is one of the options to keep competitive and generate more profit by cutting costs in a long run. Saving money is the same as making money. Aircraft fuel is the second highest expense after wages. In 1988 it was at 14% of total expenses or $1,094 millions of dollars. American Airlines should continue in investing and switching to fuel efficient planes. In addition, the company should keep investing in similar type of aircraft for efficiency purposes. It would be easier for maintenance and training. In addition, by outsourcing maintenance to other countries, it would further reduce costs.

CONS

- Purchasing new planes would drain companies capital or leverage the company

- Outsourcing to other countries could jeopardize quality

PROS

- Save money in a long run

- Bring down expenses equals generate more profit and be able to stay competitive

Growth Opportunities

American Airlines has several options to pursue growth opportunities. One of the options is to make strategic alliances with Asian and European carriers to break into the emerging markets overseas. This will allow for exponential growth, wider reach, customer loyalty and increased earning potential. Second, option is to expand hub and spoke system throughout North America and other parts of the world. This would allow American Airlines to increase its market share. Third option for the growth is to pursue strategic alliances through partnership with smaller carriers to cover less profitable routes. Thirdly, keep investing into loyalty programs to create loyal customers that are reworded for using same airline.

CONS

- Building hub and spoke infrastructure is very expensive

- Become very dependent on the hubs

PROS

- Alliances is a great opportunity to expand without investing a lot of capital

- Increasing market share and profits through alliances

- Increase customer loyalty

Recommendations

American Airlines should choose a combination of options that would assist the company in achieving sustainable growth, outperforming competitors and becoming a leader in the industry. Investing resourcing into Revenue Management will help to predict consumer behaviour by segmenting markets, forecasting demand, and optimizing prices for several different types of products such as business class and regular seats (https://en.wikipedia.org/wiki/Yield_management). Yield Management will help American Airlines to maximize revenue through proper inventory control. It is a pivotal move for the company’s long term success. Furthermore, American Airlines should proceed with cutting its costs down. Reducing fuel costs is possible by purchasing or leasing fuel efficient standard type planes. Although, it will have high initial cost but overtime it will save money and be a good return on investment. Pursuing Alliances in Europe and Asia will expand American Airlines reach worldwide. The company could now compete not only in the domestic market but also on the international stage. Creating brand loyalty through loyalty programs