American Airlines Presentation

American Airlines By, Group 6 Laurent Deconinck April Vassau Brock Vestrum John Vilendrer MegganWier

Agenda Company History - Brock Market Structure – Meggan Competitive Advantage – John Game Theory/Pricing – Laurent Industry Update & Conclusion – April Quiz Q & A

American Airlines TimelineThe Beginning: 1930’s-40’s

American Airlines TimelineBuilding an Empire: 1940’s-50’s

American Airlines TimelineIndustry Innovators: 1960’s

American Airlines TimelineModernism & Regulation: 1970’s

American Airlines TimelineProgression: early 1980’s

American Airlines TimelineContinued Expansion: late 1980’s

American Airlines TimelineA New Era: early 1990’s

Market Structure Deregulation of 1978 Civil Aeronautics Board Free market Some countries and still regulated to some extent Europe Asia

Market Structure Oligopoly - Concentration ratio of 50%

Characteristics of an Oligopoly Interdependence “Bags fly free” Price setters Few firms High barriers to entry

Competitive Advantage“Innovation” SABRE Computerized Reservation System(CRS) American was the first airline to implement such a system. By 1990, SABRE was the largest reservation system in the world and had a market share of 40%. Screen Bias

Competitive Advantage“Innovation” Advantage Frequent Flier Program In 1980, AA introduced the first frequent flier program. Many other airlines followed due to the huge success of this program. Originally the only reward available for AFF members was free tickets. This evolved into a point system that also offered a variety of products that were presented in a catalog.

Competitive Advantage“Innovation” Two Tier Wage System Starting wages would be on the lower tier. Existing employees would be on the higher tier. In response to the high wage requirement stated by union contracts. Starting salaries could be up to 50% less Necessary to compete against the newly formed companies that were non-union.

Competitive Advantage“Innovation” Airline of the Year 1988 & 1989 Mostly due its focus on service On Time arrivals in Sept 1989 - 84.6% Better than Delta or United ,[object Object]

Baggage Service Complaints 1989 – 5,999

Better than Delta and United,[object Object]

Example of Pricing 66 different pricing for one flight. What is the customer willing to pay. Overbooking practice to make sure the flight is full. Adjust pricing based on passenger load factor Sophisticate computer system to maximize profits based on demand and supply.

Game Theory Thus, both airlines will set their fares to $200, a similar analysis was carried out in court to prove that there was price fixing among airlines and in October 1994 some airlines settled for $40 M.

AA uses Yield Management Maximize Profits Maximize Assets Utilization

Milestones to Modern Day SABRE spins off into its own company. Subsidiaries include: Travelocity, Sabre Travel Network, Sabre Airline Solutions and Sabre Hospitality Solutions.

American partners with Travel Agents to provide consumers with better pricing, while reducing distribution costs. American celebrated the 25 th anniversary of its AAdvantage program – the world’s first frequent flyer program that revolutionized the airline industry and set the standard for similar initiatives in many other businesses. AAdvantage began with 300,000 members. Today, it has more than 50 million members.

Industry Leaders Then…and Now 1990’s Aeroflot American United Delta Northwest British Airways Continental US Airways TWA Japan Airlines 2000’s Delta Southwest American United Lufthansa Air France China Southern Ryanair Continental US Airways

Low-Cost Airline Impact Locally: Southwest entrance into MSP Southwest's entry into Minneapolis has been closely watched because it is an assault on a so called fortress hub of Northwest Airlines, which is now a part of Delta Air Lines Inc. Northwest has a reputation for matching competitor prices and adding extra flights when its hubs are threatened. Last month Northwest executives said they would do both of those things on the Chicago route once Southwest's service starts. – USA Today "We are likely to be in for some serious fireworks on prices out of Minneapolis in the coming days for spring travel" FareCompare.com CEO Rick Seaney. Adding “that the cheapest fare on that route for Northwest, American and United is round trips for $376, which works out to $188 each way. The cheapest one-way fare is $426, Seaney wrote. "The legacy airlines will quickly have to restructure their airfares, by offering one-way fares instead of the two-night minimum stay roundtrip fares they currently file — likely matching Southwest's new price points," Seaney wrote.

Low-Cost Airline Impact Globally: ,[object Object],between 1996 and 2006 averaged five per cent a year – no greater than in the years before the arrival of no-frills airlines. The only years when growth exceeded 10 per cent in the past 20 years was in 1987 and 1994. ,[object Object],no-frills airlines, this growth seems to have been at the expense of other carriers – both scheduled and charter airlines – which have been forced to close down unprofitable routes. ,[object Object],no marked change in the socio-economic profile of air passengers. "The main effect of no-frills flights is to provide further opportunities to those in middle- and higher income groups to fly more often.” – Dr. Harry Bush, CAA Director of Economic Regulation.

Quiz When did AA start the frequent fly program? 1980 When did AA begin trading on the NYSE? 1939 When did deregulation take place in the US? 1978 When did AA fly its 1 billionth customer? 1991 Who has the highest market share in the Domestic Airline Market? AA

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