Case Study America's Strategic Pricing Strategy

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2. Evaluate American’s 1992 announcement of a new rate structure:

a. What changes did American make?

American instituted a “simpler” four-tier fare system which sought to lower its top fares by as much as 50%. The move was expected to reduce next quarter’s revenue by $100MM, but increase annual revenue by $350MM. To accomplish this goal, American instituted the following changes:

 First-class ticket prices would be reduced by 20-50%
 Unrestricted one-way and round-trip coach fares would be reduced by 38% on average
 A non-refundable, twenty-one-day advance purchase ticket requiring a Saturday night stay would be introduced at 49% less than business coach fares but on par with leisure fares
 A non-refundable, seven-day advance purchase
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What future strategic moves would you recommend American make to address the problem of fierce pricing rivalry in the airline industry?

American should pursue a three-pronged strategy:

1) Drive low-cost competitors out of the market through pricing pressure
2) Acquire/ merge with other significant players to secure greater bargaining power
3) Seek favorable regulation such that “sharpshooters” are not allowed to pick-off its most profitable routes

Driving low-cost competitors out of the market through increased pricing pressure will remove the spoiler-factor from the competitive landscape and allow major carriers to exert greater pricing power. This in turn will make the industry more profitable as a whole if the remaining players can maintain some level of discipline and not attempt to underbid each other. Air transportation being an increasingly commoditized product, any form of price war would serve to undermine long-term profit dynamics.

Acquiring/ merging with other significant players will also serve to concentrate more pricing power into the hands of the major airlines and allow the industry to reach some level of profitability. There are natural issues with this strategy, viz. government interference and the continued existence of low-cost spoilers; however, interference from bureaucrats can be ameliorated through lobbying efforts and low-cost spoilers can be removed through various action if competitive cover is provided in

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