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American Airlines is evaluating pricing approaches for two markets - Chicago to West Coast and New York to San Juan. For Chicago to West Coast, a "bucket" pricing approach that separates customer segments could work, but the market leader United focuses more on frequent scheduling. For New York to San Juan, Eastern Airlines offers deep discounts seasonally for price-sensitive travelers, so American should consider a seasonal bucket and separate buckets for business and leisure travelers. American proposes offering full coach fares for business travelers and discounted fares for price-sensitive leisure travelers, with different booking windows and change/cancellation policies between the two.
American Airlines is evaluating pricing approaches for two markets - Chicago to West Coast and New York to San Juan. For Chicago to West Coast, a "bucket" pricing approach that separates customer segments could work, but the market leader United focuses more on frequent scheduling. For New York to San Juan, Eastern Airlines offers deep discounts seasonally for price-sensitive travelers, so American should consider a seasonal bucket and separate buckets for business and leisure travelers. American proposes offering full coach fares for business travelers and discounted fares for price-sensitive leisure travelers, with different booking windows and change/cancellation policies between the two.
American Airlines is evaluating pricing approaches for two markets - Chicago to West Coast and New York to San Juan. For Chicago to West Coast, a "bucket" pricing approach that separates customer segments could work, but the market leader United focuses more on frequent scheduling. For New York to San Juan, Eastern Airlines offers deep discounts seasonally for price-sensitive travelers, so American should consider a seasonal bucket and separate buckets for business and leisure travelers. American proposes offering full coach fares for business travelers and discounted fares for price-sensitive leisure travelers, with different booking windows and change/cancellation policies between the two.
1. Evaluate the pricing approach for the two markets for
which data is available in the case. Is the bucket approach the appropriate one? a. Chicago-West Coast markets: From the data available in Exhibit 3 of the case, it is seen that United is the market leader with around 40% share. The company was competing on the flight schedules such as hourly flights from Chicago to LA, and SF. Another competitor to American, the Continental was competing on cheaper fares. Proportion of full coach passengers was also increasing from July to October as can be seen from the exhibit. In this sense, putting the buckets for different consumer segments like what was done by Continental can be helpful as it can appeal different classes of consumers, such as business, leisure, separately. However, seeing the market leader (United) and its strategy, the focus was more towards availability of the flights. Better scheduling in these markets, worked well for them, and helped gain around 40% of the market. b. New York-San Juan markets: Eastern Airlines was the major competitor in the Caribbean Market. This market was basically divided into three categories: Business, Leisure, and Seasonal passengers. As different from the Chicago-West Coast markets, this market had one more segment which was on seasonal demand. Passengers in this segment often travelled at sour of the moment, without definite return plans, and used one-way unrestricted fares rather than restricted round-trip discount fares. Following the pattern of these seasonal travellers, Eastern started giving deep discounts during the seasons of fall and late springs, and lowered the prices up to $79 one-way, with no/few restrictions. Also, Eastern introduced the discounted round trips for weekdays and weekends. Checking the feasibility of the bucket pricing in these markets, the seasonal market could not be targeted in any buckets and hence, there would be a different bucket for those customers during the peak demand periods. However, putting the price buckets for business class and leisure class, taking into account the demand during weekdays and weekends, can help airline companies in better revenue management.
2. Given the market situation in the case, suggest changes
that will improve revenues in the two sectors. The tickets are divided into full coach fares and discounted fares. Full coach fares: These fares are targeted to Business customers who are ready to pay upfront ticket charge. Restrictions will not be provided to these customers. They can buy the ticket at any time and cancel the ticket if it is not needed. However, when these customers cancel the tickets
85%-90% of ticket charge would be refunded. This will compensate the
empty seat if any exists in the end. Moreover, these empty seats can be sold under discounted fares. Additionally, a few tickets are set aside and sold to regular or business customers for discounted prices (usually 20-30%) who booked ahead of travel date. These people have to book the tickets 3 weeks ahead of flight travel date. In addition, these tickets can be refunded if cancelled and 85%-95% of ticket price would be refunded. The number of seats to be discounted in full coach seats quota will be calculated from the AMR SABRE systems. Discounted Fares: These fares are targeted to the price sensitive customers. These people are provided discounts more than the discounts (40%-50%) provided to full coach customers; however they have to book the tickets one month ahead of the flight travel schedule. They ticket charges are not refunded if the tickets are cancelled. These people would not be provided immediate flight connectivity from hubs and therefore they need to stay for maximum one day and minimum for 6 hours to board connectivity flight for their destination.
3. What are the differences between the two sectors and
how do these reflect in your suggested pricing? Full Coach Fares are targeted to business class and price insensitive. Discounted fares are targeted to Economy class people who are sensitive to prices. These people are distinguished by providing more value to Full coach customers. Full coach customers: These people are provided with refundable options and can book the ticket anytime. They dont have restriction such as booking the ticket ahead of time. However, under the full coach customers, a discount charges are provided who needs to book ahead of travel date by 2 to 3 weeks. Discounts are provided in the range of 2030% to these people in order to utilise the full capacity of full coach customers. In case of over capacity of full coach, compensation is provided. These people are provided with immediate connectivity with maximum delay to board in connectivity flight is about 2 to 3 hours. Discount Fare customers: In Case of Discount fare customers, discounted tickets are provided one month ahead of flight travel schedule. They wont get refund in case of cancellation. Additionally, they need to wait for minimum 6 hours and maximum 24 hours to board in connectivity flight at the hub.