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American Airlines: A Competitive Analysis
Introduction
American Airlines faced intense competition from rival airlines offering either upgraded services overall or a three-class system—coach, business class, and first class. To address the challenge, the company considered adding business class to its JFK/LAX route. The move was expected to deliver more full-fare first class passengers by allowing Aadvantage club members to upgrade from coach only to business class, not first class. Segmenting the classes in the airline cabin would require extensive modifications to the airplanes themselves as well as to the training procedures for flight personnel. The company hoped to recoup its investment by flying with better load utilizations.
Facts
American’s solution was to meet the challenge head on by finding the best way to introduce three-class transcon service from New York to Los Angeles.
In rolling out the service, the company planned to upgrade its offering across the board—a competitive thrust that other airlines would find difficult to match. Business class passengers would be located in a separate cabin, where they could enjoy more legroom, better food, and other accoutrements, which would make them glad they escaped the hoi polloi traveling in coach. For those willing to take out a second mortgage, there was first class, where the customer is king—lots of legroom, sleeper seats that recline to a 53-degree pitch, videos, fresh-baked cookies, and flight attendants at your beck and call. To bolster the service offering, there would also be separate, more convenient check-in procedures for business-class and first-class passengers. The proposed three-class fares were $1,236 for first class, $963 for business class, and $656 for coach.
Analysis
Benefits of Introducing Three Class Transcontinental Service
For American, adding business class to its coach and first class offerings could increase the number of full-fare customers in first class by diverting upgraders from coach to business class instead of first class. There is also an opportunity to gain customers who would be willing to pay business class fares but who would never pay first-class fares. By changing both the product and the price instead of just the price, American can solidify American Airline’s its position as the dominant carrier by making its offering so potent that competitors would have difficulty copying it in a short amount of time. And while the company had its first-mover advantage, it could enjoy tremendous word-of-mouth benefits from the traveling public.
Drawbacks of Introducing Three-Class Trans-Con Service
The biggest downside of introducing business class is the cost of retrofitting the aircraft and establishing entirely new training and service procedures. Plus, there is the possibility that full-fare first class passengers may decide to downgrade to business class to save money. The result would be enormous expense with no corresponding increase in revenues.
The new plan could also impose scheduling constraints and make operations more difficult and ultimately result in higher costs because planes cannot be easily substituted because of the unique three-class design on the New York/Los Angeles route. Thus in periods of bad weather or for maintenance reasons, the airline would have less flexibility in redeploying aircraft if it instituted the three-class service. American would either have to substitute a two-class plane and force those in business class to fly in coach or wait until a three-class equipped plan was available, which would lead to the possibility of delayed or canceled flights. Either approach could eliminate any goodwill the company may have generated by rolling out business class service.
Advertising Strategy
American is considering a number of advertising concepts for the proposed service. I would recommend focusing on the space and environments in the new first-class and business class cabins. This pitch seems the most focused on the needs of the customers. The other advertising proposals seem focused on the company and fail to specify what’s in it for the customer, which is what marketing is all about.
Analysis Paralysis
Why has it taken the formal planning committee so long to make a decision? There are, in short, many issues to consider—not just the actual retrofitting of the planes but also the myriad changes in how people work as a result. Plus, it’s unclear exactly what the payoff from these changes will be. It’s difficult to determine how frequently planes should fly in relation to the demand for the three classes of service. If the level of service is too frequent, it will fly with half-full planes. If it flies not frequently enough, competition will be intense. Because the airline is planning to change a number of factors at once, it is difficult to determine how customers will react. It’s like when you do a science experiment, it’s easiest to determine cause and effect if you only change one variable at a time. Here the company is trying to change a number of things at once. In addition, the competitive landscape is changing as a result of deregulation, and the airlines can probably look forward to much more intense price competition. Most importantly, the risk here seems high and the payoff is uncertain.
Product/Brand Management
American should consider establishing a brand manager for its New York/LA routes. As the company’s flagship product, this route deserves special marketing attention. Plus the company could determine what the benefits of a brand management approach would be for the airline. The brand managers should have cross-functional teams they can call upon for expertise and for help in making decisions quickly—which should speed the implementation of changes.
The brand managers would be useful in segmenting customers and determining the unique needs and desires of each segment. That would be the first step in keeping one valuable group of customers happy without making another group of customers unhappy. For example, the offering for coach passengers could be focused on value. For business class customers, the offering could focus on providing a quieter, more comfortable environment for professionals to get work done. Finally, for first-class customers, the offering could focus on status and luxury. By assembling the right array of attributes for each segment, each type of customer would feel that its offering provided the right level of value.
Should American’s Planning Committee Go-Ahead?
If a “go” decision is made, American should prepare for the new service and introduce it in the JFK-LAX market within one year’s time. This scheduling would allow it to revamp its aircraft for business class while making sure all airline personnel had the proper training. A fairly rapid deployment would also prevent competitors from gaining market share at the company’s expense.
I feel it makes sense to go ahead with the business class service. In American’s competitive landscape, it appears that offering business class service will soon become a critical success factor for any airline offering long-haul flights. I would suggest, however, rolling out business class to the full fleet of DC-10 aircraft so the company always has planes it can use on its New York/LA route should circumstances call for it. Also the company should examine carefully the frequency and demand estimates. If the company provides service more frequently than the market demands it, it will drive up costs and find itself flying underutilized planes. Plus, the greater the frequency it flies, the greater the chance it has that planes will be have to be called out of the rotation for service, causing the airline to delay or cancel flights. Ideally, it wants to devise a schedule that provides the greatest convenience for customers and the least competition for itself at the lowest possible costs.
American Airlines is at a crossroads in its history. With competition intensifying, the company needs a way to continue distinguishing itself. Offering three-class trans-con service is one way to maintain its dominant position. The three-class service could also serve as a guide for where the company needs to go in the future. Pricing policy will be key. Business class needs to be an affordable step up from coach, but still distinguishable from the higher level of service you can only get by flying first class. With the proper offerings, American Airlines should be able to maximize its load utilization and profit potential.