American Airlines– Case Study Analysis

"American Airlines Inc. Revenue Management." Harvard Business School Case. (Revised June 16,
1993.) – HBR-190-029

Aim/Objective
The aim of this analysis is to find a solution to the American airlines Chicago went pricing

decision to counter Continentals fare and to also find how many seats need to be set aside for full

fare passengers to maximize revenue.

Chicago West Pricing Decision

The principal competitors of American airlines were United and Continental. Both airlines

competed with American in the connecting market in fare and in providing the more convenient

routing through their Denver Hub. In the connecting market there were also other flights in

addition to United and Continental that competed with American based on their fares and flight

schedules. United airlines superior flight schedule and Continentals cheaper fares was affecting

the load factor at American airlines. The load factor for American airlines is shown in Exhibit 3.

As seen in the exhibit the load factor for American was going down between July and October.

They have no issue with full coach capacity. It is evident from the exhibit that the issue with the

lower O&D passenger totals might have been with their discounted fares rather than the Full

Coach passengers. Load factor is measured as the Revenue Passenger Mile / Available Passenger

seat miles. If American were to counter Continentals $159 fare with an unrestricted discount

fare, it might result in cancellations without any penalty. We know that airlines in general have a

thin profit margin and therefore for them to stay operational, they must have a high load factor.

American could increase the available seats capacity at discounted fare and unrestricted only for

the months of September and October. This would be the most cost-effective way for American

to counteract Continentals lower prices.

Seats protected for full fare passengers
If an aircraft has 100 seats for which the full fare is at 499$ while the discount fare is at 99$ and

the demand for full fare is anywhere between 10 and 30, we can assume a uniform distribution

with a mean of 20 and standard deviation of 10.

Cu = 499 – 99 = 400$

Co = 99$

Critical Ratio= F(Q)= 400 / (400+99) =0.8016

F(Q)= (Q* - Dmin ) * Probability where Probability = 1/(Dmax-Dmin)

0.8016 = (Q – 10)1/20 => Q* = 26.032 =>26 seats

Therefore, at least 26 seats must be protected for full fare passengers.