American Airlines Value Pricing Debriefing Professor Joel Huber

American Airlines Value Pricing Debriefing Professor Joel Huber Fuqua School of Business Duke University Product– 1

American - What Happened? • April 9 - American • Announces Value Price – Investment banks “brilliant strategic move – Marketing press “Bob Crandall gave a tutorial to the airline industry. ” – AA up 3 1/4 to 71 7/8 – Delta up 1 1/2 to 60 3/4 – United up 2 1/2 to 133 1/4 • April 12 - TWA • April 13 - US Air, Continental, America West • Undercuts AA by 10 -20% • Cut Prices Product– 2

American - What Happened? • April 20 - American • May 26 - Northwest • May 27 - American • May/June - Other Airlines • 1992 Q 2 • Matches competitor’s cuts on most leisure routes • Raises fares 10 -25% on many routes • Grown-ups fly free • Cut fares 50% for travelers in summer months • Match 50% off • Operating losses by all major carriers Product– 3

Could we predict who would defect? (Case exhibit 2) Yield. 18. 16. 14 AA NW DEL UA CON . 12. 10 USA PROFITS SWA. 10 LOSSES TWA AW. 12. 14. 16. 18. 20 Operating Expense per Rev. Pass. Mile American – 4

American: Take Aways • Key Tools from Class – American’s mission, assumptions (Company) – Porter’s 5 Forces (Competition) – Segmentation Analysis (Customer) – Expected Value Calculation (Marketing Math) Product– 5

How Crandall limited airline competitiveness through partitioning • Hubs: Separates competitors—tie flights to the same carrier • Load management: lowered costs, facilitated selective retaliation • Frequent flier programs: partitioned customers from each other, lowered price sensitivity • TACO’s increased agent loyalty, less incentive to search for prices Product– 6

Why he could not succeed Forces creating intense competition: Michael Porters 5 -forces • • • Balanced competitors Slow industry growth High fixed costs Low customer loyalties Added capacity comes in large increments • Diverse competitors • High strategic stakes • High exit barriers • • Yes Yes Product– 7

American: Takeaways • Understand company’s limitations— Can AA enforce price leadership? • Understand what benefits exist for your segments - how will customers react? • Understand what benefits/liabilities exist for your competitors - how will they react? Product– 8

Wisdom With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. Warren Buffet Product– 9