A Swot Analysis Of American Airlines Tourism Essay

A Swot Analysis Of the Statesn linelines Tourism EssayINTRODUCTIONAmerican air passages was the U.S.s largest holder in 1992. It had a fleet of 622 jet aircraft, flying 2,450 flights daily to 182 locations. It also had innovative technology and programs. They were the first to introduce a computerized airline reservation organisation called Sabre, Super Saver f atomic number 18s and frequent- flier programs. Despite these innovations, American Airlines and the airline industry as a whole was still not operational as productively or providing client bliss the way it should in 1992. at that place were two principal(prenominal) reasons. First, the airline industry was suffering from the stinting downturns in 1990 and 1991. In 1991 alone, the industrys accumulative losses were $1.87 billion, which exceeded the total amount of profits the industry had ever earned doneout its 60-year history. American Airlines itself reported losses of $77 million in 1990 and $ one hundred sixty- five million in 1991. In terms of customers flying, the dollar volume of pleasure endure grew only 8% in the 1989-91 period comp ard to 19% for 1987-89. The corresponding figures for handicraft depart were a 9% increase for 1989-91 in contrast to 28% growth experiences in 1987-89.April 9th, 1992 American Airlines announced that their gets were too low and they were going to suffer value back to air travel through a newborn pricing strategy termed, cling to Pricing.SWOT ANALYSISStrengthsMarket leader American Airlines is the largest U.S. airline in 1992 with a 19.15 market shargon in 2001.Strong InnovationTechnology American Airlines created the first and largest Computer qualification Service, SABRE, which was a blue-chip resource for yield management and redundant profits. It was such an effective technological innovation that in 1992, 92% of domestic reservations were made through Computer Reservation Systems in the get together States.Marketing Promotions American Ai rlines were the first to create a frequent flier program aimed to increase discolouration committedness with business customers in 1981.Distribution The use of hubs meant replacing non-stop flights with a set of connecting flights, and this benefited both carriers and consumers. Airlines could serve more locations with hardly a(prenominal)er planes. American Airlines benefited by having six hubs in 1992, two of which are ranked as the largest airports in America Chicago and Dallas.Market Growth Between 1981 and 1991, passenger volume grew by almost 80%, the equivalent of a compound annual growth rate of 6%. There are still opportunity gaps to further increase bring.Strong Brand Image A survey that generated the ratings of domestic airlines on service quality, American Airlines had the joint highest satisfaction index of 76. This implies that American Airlines has a stronger image of high quality service, relative to rivalrys.ProblemsThere are high risks of delays and inbound fl ight delays of even a few will inevitably delay connecting flights and then affect large portions of the network thereafter. huge transaction be from the extreme complexity of capametropolis cooking, crew roistering, flight scheduling, ground handling and fare structures.High risk of missed connections and lost baggage with connecting flightsOpportunityIncrease the demand for air travel through reaching more customers and increasing the frequency of travel per customer There is already a growing percentage of Americans is using air travel. In 1991, 76% of American Adults reported that they had flown at some season in their lives and 32% had flown in the past snips year. The increase in American air travel can be seen in the table belowPercentage of American adults who have1981198919901991ever flown?65%78%74%76%flown in the last 12 months24%34%31%32%The table implies that Americans are increasingly adapting to air travel and this means that their is an opportunity for American Ai rlines to continue their expansion.Price discrimination models Price discrimination models provide an opportunity for American Airlines to capture the two main customer segments, business and pleasure travelers in the most profitable way. Using expenditure discrimination models provides an increasing opportunity.Percent of American Adults traveling on1989199019992001 telephone line52514241Pleasure47495357This provides an opportunity for American Airlines because the two segments have different demand fluctuations and get characteristics and if American Airlines can capture both markets through different pricing fares then it will increase their yield per customer, smooth out overall demand fluctuations and achieve profit maximization. The differences can be distinguished by demand and buying values.Buying differences Business travelers are more loyal to one position airline because they have the ability to build up frequent flier miles. They are less pricing sensitive due to bein g more time sensitive. On the other hand, leisure travelers are less loyal, more price sensitive and more flexible in terms of time, involution etc.Online Reservations exchangeable low follow airlines and adopt online reservations, which mean less need for travel agents, no paper tickets and convenient booking.American Airlines currently only serves 80 destinations worldwide, compared to 182 locations in the U.S. mainland and Hawaii. Therefore, there is a strong opportunity to focus on increasing ample haul, international flights as opposed to short haul flights.ThreatsAfter the deregulation of the airline, industry competition intensified as national and regional airlines grew or merged and became fixated on profit maximization. American Airlines major domestic competitors are United Airlines and Delta Airlines as they both operate with similar scope and service to American. American Airlines main competition from regional airlines includes US Air, America West, Southwest, TWA, Northwest and Continental. US Air serves primarily eastern and southwestern markets. American West and Southwest are discount carriers serving the Southwest and California areas. TWA that offered primarily coast-to-coast service, Northwest that served the Northern storey of the U.S. and Continental that served the southern tier. Furthermore, mergers meant that the combined market look at of the four largest airlines rose from 54.2% in 1982 to 64.8% in 1987.Growth of low cost airlines Low cost airlines are expanding rapidly. Southwest in particular is successfully promoting its bargain fares, low cost and no-frills approach to service and are the seventh largest U.S. carrier, though only operating in 15 states for local, and short haul markets. The low cost airlines are able to charge extremely low discount prices becauseDistribution costs are sign ond using direct selling through the internet or call centers and having no ticketsPricing segmentation only occurs on two variables the date of booking and the effective demand of that specific flight so there are less complex fares and less restrictions imposed to increase customer satisfactionThe operating expenditure passenger and their operating margin are also significantly high(prenominal). American Airlines does not have the ability to compete directly through matching such low prices because they could never achieve such low costs, nor does the brand image of American Airlines compliment this strategy.Airline Industry is vulnerable to price wars Industries that have extra capacity, high fixed costs, and low differentiation and are price elastic are the most vulnerable to price wars.High situated costs and extra capacity are profit-damaging combinations because it means that airlines must have high yields through yield management in set out to keep an eye on lucrativeness, which is real complex.Low Differentiation means customers see airline travel as a commodity- like business. In general, they si mply want to get from one city to another in the shortest amount of time, at a convenient time that fits their schedule, and at a reasonable price.High Price Elasticity Due to the combination of the above, airline travel is typically price elastic. Therefore, airline companies are becoming more inclined to lower prices in order to stimulate demand.Sensitive to economic downturns due to high fixed costs structure, for example in 1991 the industrys cumulative losses were $2.67 billionThe dominant distribution channel is the travel agent. Therefore, the cooperation of travel agents with the Airline is necessary. Airlines get the agents cooperation through giving them commissions from ticket gross sales.Key IssuesDevelop a pricing strategy that will increase the demand of air travel and the languish term advantageousness of the airline industry.Identify and evaluate alternatives by considering competitors controvertions, customer impact on yield, costs and long term profitability.1. Value PricingThe main objective of this pricing strategy was to provide simplicity, equity, and value for air travel, compared to the existing system with a multitude of ever changing fares and discounts.Value Pricing divide Pricing On any given flight, there would be only four different fares First Class, Regular Coach, Discount Coach (booked seven old age in advance) and Discount Coach (booked twenty-one days in advance). Each fare had different restrictions and offerings. E.g., Discount coach involved Saturday night stay over, travel purchases (21 days), not refundable but they could be re-issued for another flight and priced 49% below the regular coach fares.New fares will be 38% below the levels of comparable existing fares and will be the same for everyone, meaning no need for special deals.Advertising American Airlines would spend $20 million on media time and space over two weeks. They anticipated that revenue would increase additionally by $300-350 million annually and co st savings of $25 million per year.Pros Business travelers will benefit from value pricing. The advantages for business travelers is that, theyno longer need to worry about inflexible restrictions attached to reduced fares, forcing them to pay higher prices. today they can get the advantage of being able to book at short notice but ensuring that they will still receive the same 38% off full Coach with no restrictions with any time fares. Furthermore, if they can book in advance they can pay even less.Reduced be American Airlines forecasts cost savings of $25 million per year through the reduction in the number of fares offered, as it will reduce its CRS from 500,000 to only 70,000. Secondly, as all flights will be priced based on the distance of the flight path, so the variable costs actually determine the prices, in theory providing higher revenue.ConsPrice elasticity Air travel has quite high price elasticity as a review found that the majority of estimates were between the ply of -.8 and -.2, with the elasticity for business travel generally being less than unity, while that for pleasure travel typically exceeding unity. Therefore, leisure travel demand changes with changes in price more than business travel because of a price change.American Airlines, the price sensitive customers will be highly dissatisfied by the new value pricing and they will be encouraged to switch to low cost airlines.American Airlines will no longer benefit from the business travelers that were typically price insensitive but time sensitive and so prepared to pay the higher costs. This will have incremental affects on yield and profitability as the high fixed costs of airlines previously depended upon business travelers to buy higher priced tickets.Competitors Reactions For air travel demand, which in turn creates the lack of customer brand loyalty to airlines, a 38% reduction in American Airline prices in theory would cause customers to switch to American Airlines. However, Amer ican Airlines has failed to consider competitors reactions in their value pricing.Lower their prices to match American Airline prices to guarantee the consumer the lowest fare without committing to a lower price but ultimately keeping their customers and displace the message to American Airlines that they should increase their prices.In turn, this will reduce the profitability of the Airline industry, as airlines will need to keep lowering prices in order to remain competitive, leading to a decrease in profit margins and economic growth.Competitors reactions will ultimately prevent American Airlines from reaching their forecasted revenue for 1992.Promotion problems The travel agents are less likely to promote this reduced fare platform and the CEO only plans a one-time $20 million advertising effort.High resolute cost of Airlines American Airlines has a high cost structure and as a result, they rely on high-yield and high traffic. Therefore, it is not feasible and it will be disas trous for them to lower costs in the long term without reducing their fixed costs.They expect market share to increase by an additional one-half of 1% of the totalU.S.market.They believe that in the second quarter of 1992, revenues could decrease by $100 million, but that revenues will increase by $300-350 million for the full(a) year.They assume that the demand for air travel as a method of transportation will increase by 3-4% with the new pricing structure.American Airlines yield and revenue assumptions are flawed because the value pricing is assuming that all present factors in the industry will remain the same but in reality competitors will match prices and travel agents will not be so cooperative.Break Even changes American Airlines would need to increase their sales dramatically in order to break even, which will be very difficult.Regular Coach199019921992Route New York- ChicagoOldNewNew (including $20m advertising) change Price$854$500$500Total Revenue (assume sell 1000)$85 4000$500000500000%Variable Cost as a percentage of the total costs3.60%3.60%3.60%Variable Costs per person$40$40$40Total Variable Costs$40000$40000$40000Unit Contribution= selling price- variable cost$814$460$460Fixed Costs as a percentage of the total costs96.40%96.40%96.4% + 20mFixed Costs ( 96.4/3.6=26.77740000= 1071111.111)1071111.1111071111.11121071111.11Break Even= fixed cost/ unit contribution1315.861316$2328.50241545806.76328Break Even sales change1012.64109944490.90196Break Even Point % sales change176%3481%ProsProduct Differentiation will be valued On long haul flights added frills are valued because passengers are on the plane for longer so they will require more services in order to feel comfortable. There are a range of services and products that American Airlines has the opportunity to offer customers to differentiate their fare prices..Reduce the risk of a price war.Through concentrating on long haul flights and maintaining low but profitable prices, competitors will be less likely to reduce their costs because American Airlines is the market leader and every competitor wants to have profit maximization. Furthermore, it will increase the long-term profitability of the industry as demand and profitability will increase.Increase customer brand loyalty American Airlines are differentiating their products from competitors and if these differences are valued then customers will be encouraged to be loyal to American Airlines, as they will receive the extra benefits from the products on top of their frequent flier program.Opportunity gap in the market Expanding into new markets will increase their customer base and market share as long haul flights e.g. 15-18 hour will become more and more popular through increasing international business communications.It is impossible for American Airlines to match the leading low cost airline fares while at the same time operating at a profit due to their higher cost per seat mile.The current brand is image of a hig h quality service airline.Simplifies pricing without the need to price too low and curbs demand, so customers will be willing to pay more and also they will better maximize flight capacity through curbing demand and so they will not suffer from opportunity costs found in value pricing.ConsIncreasing the number of services will increase their variable costs per customer. Fixed costs will rise dramatically from initial expansion.Risk of International Business ProblemsAs American Airlines expand they must ensure that they maintain good communication or else their costs could increaseForeign markets will bring more challenges when facing new competitorsCurrency differencesAmerican Airlines does not react to the growing number of low cost airlines by matching their low prices then they will expand further, increase their market share within America with price sensitive customers and decrease American Airlines competitive advantage. This could reduce the profitability of the U.S. air trav el industry in the long term.Require heavy investment, funding, planning and advertising in order to implement and communicate the difference of services between flight fares to customers and get customers to value these differences.RecommendationRecommended that Value Pricing be adjusted and combined with alternative three, to focus on long haul flights and segmented pricing through service differentiation as despite Value Pricing being a very innovative pricing strategy it has many shortcomings. The value pricing must be embedded in a broader and consistent marketing strategy.The value pricing aim to simplify fares through offering four fare structures should be implemented as this will reduce CRS costs and increase customer understanding of fare prices. However, the restrictions imposed should be reduced on the discount fares, otherwise customers will go to low cost airlines. Instead, it is recommended that fences be built between the different fares to prevent customers from swi tching from higher fares to discount fares through service differentiation, not just the transportation and a few marginal restrictions. Furthermore, American Airlines should focus on long haul flights as opposed to short-medium haul flights within America because it is within these flights that service differentiation is highly valued. In addition, if American Airlines can expand into more markets it will increase their market share and long-term profitability. This will also prevent the erosion of profitability in the airline industry because it will prevent a price war.