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

2. American - What Happened?
April 9 - American
April 12 - TWA
April 13 - US Air, Continental, America West
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
Undercuts AA by 10-20%
Cut Prices
Note speed of response: due to the magic of computerized reservations

3. American - What Happened?
April 20 - American
May 20 - American
May 26 - Northwest
May 27 - American
May/June - Other Airlines
1992 Q2
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
Note: American tried to raise fares elsewhere
Northwest is hurting AA where it most hurts: leisure traveler
Note: a 10-day sale in those days resulted in losses for the next three quarters

4. Could we predict who would defect?
Yield
.18
.16
.14
.12
.10
(Case exhibit 2)
PROFITS
USA
DEL
AA NW
LOSSES UA
Note: Three generic strategies: SWA low cost, USAir focus, AA and Northwest and Delta: differentiation better product (schedules, speed, service)
Continental and TWA are vulnerable and cannot afford to have empty seats!
CON
TWA
SWA AW
Operating Expense per Rev. Pass. Mile

5. 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)
American tried to be the price leader…cutting price is not appropriate unless you want a shake out…
That may have been Crandall’s goal.
The goal of simplification was good, but almost certainly misread by the competition.
Customers Large and small business, sensitive and insensitive leisure segments.
Notice how much is available from Public sources.

6. 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

7. 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

8. 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?

9. 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