Essay about American Airline 1992 Value Pricing Strategy

1133 Words Nov 14th, 2014 5 Pages
American Airlines 1992 Value Pricing Strategy
Evaluate American’s 1992 announcement of a new rate structure: a. What changes did American make?
To replace the old domestic air-fare system with 16 different prices, discounts, and restrictions that are constantly changing, American made four key changes to its fares. 1. Instead of 16 different prices, American simplified its pricing structure to include only 4 kinds of fares: a first-class fare, a coach fare that can be bought anytime before flight time (full-fare), 21-day advance-purchase fare, and 7-day advance-purchase fare. The new fare structure was expected to reduce administrative labor costs related to managing different fares by $25 million annually. The change was also
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Were any customers made worse off?
Small business customers and leisure travelers were the ones benefited the most from American’s new fare structure. Previously, small business customers who does not have the power and volume to negotiate with airline companies for discounted deals had to pay higher rates for first-class or coach tickets. American’s new cost structure reduced the full coach fares which allowed small business customers to purchase flight tickets at cheaper prices more conveniently. Leisure travelers, unlike business travelers, have more flexibility in terms of travel dates, thus allowing them to take advantage of the advance-purchase discounts and Saturday-night stay discounts under the new fare system.
On the other hand, certain large businesses who previously negotiated volume-discount contracts with airline companies could be negatively impacted by the new fare structure. The new coach fares and first-class fares may be higher than the discounted fares they previously negotiated. President of American Airline said it was typical for a representative of a large company to show him a letter from another carrier offering 40% discount and then ask him to offer more (versus the average 38% reduction in coach fare under the new fare system). Also, travel agents were negatively affected by the new fare structure as commissions decreased with the reduced fares. However, some travel agents were happy with the change