Stacie Gibbs Case Study American Airlines Operations & Systems Management April 18, 2012

Introduction American Airlines, Inc. is a major airline of the United States. It is the worlds largest airline in passenger miles transported and passenger fleet size; second largest, behind FedEx Express, in aircraft. 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 this challenge, the company considered adding business class to it JKF/LAX route ( Business). The move expected to deliver more full-fare first class passengers by allowing Advantage club members to upgrade by coach only to the 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 ( Huefner). The company hoped to recoup its investment by flying with better load utilizations (Karp).

Facts In 1991, American Airlines was the largest airline in the United States. From 1980 to 1990, operating revenues tripled from $3.71 billion to $11.01 billion. However, the operating income did not fare as well, rising and falling, with no clear upward trend. The company planned to upgrade its offerings across the board ( Huefner). Changes to service levels required extensive modifications to planes in order to accommodate three classes of passenger travel and also new procedures for checking in passengers, cooking and serving food, and maintaining scheduling (Business) American officials estimated that it would cost $1.2 million to reconfigure the planes. The cost proposed for food and service improvements was estimated at $10 million ( Geisel).

For American, by simply adding a 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. By changing both the product and the price instead of just the price, American was able to solidify their position as the dominant carrier by making its offerings so potent that competitors would have difficulty copying it in a short period of time. While, they the advantage, it could be a great word of mouth benefit for the traveling public. There were a few draw backs of the introducing of the Three-Class and Trans- Con Service ( Business). The biggest downside of the introduction of this class is the cost for retrofitting the aircraft and establishing entirely new training and service procedures. There was also the possibility that first class passengers would down-grade to the business class to save money. This result would be enormously expensive and with no corresponding increase in revenues ( Geisel). This plan could also impose scheduling constraints and make operations more difficult and ultimately result in higher costs (Business). Mission and Purpose American Airlines Corporation is committed to providing every citizen of the world with the highest quality air travel to the widest selection of destinations possible. American Airlines continues to modernize its fleet while maintaining its position as the largest air carrier in the world, with a goal of becoming the most profitable airline. The airline treats everyone with care and respect, which is reflected in the way each employee is respected. American Airlines recognizes that its employees are the key to the airlines success and invests in the futures and lives of their employees. (Karp) By also investing in

tomorrows technology and by following a strict adherence towards environmental regulations, American Airlines demonstrates its commitment to the world environment. Conclusion

American Airlines is at a crossroads in its history. Competition is intensifying and the company needs to implement ways to continue to distinguish 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 will be key, to obtaining this(Geisel). The business class needs to be an affordable step up from coach, but still distinguishable from the higher level of service offered in first class. With the proper offerings, American Airlines should be able to maximize its load and utilize its profit potential.

References

Business & Industry News - Airline Finance News. (2010). AirGuide Business, 1-9. .

GEISEL, J. (2012). PBGC opposes termination of American Airlines plans. (cover story). Business Insurance, 46(6), 1-17.

Huefner, R. J. (2011). A Guide to Integrating Revenue Management and Capacity Analysis. Management Accounting Quarterly, 13(1), 40-46.

Karp, A. (2012). Brighter Days Ahead?. Air Transport World, 49(1), 23-26.