University:
Massachusetts Institute of Technology
Course:
15.992 | S-Lab: Laboratory for Sustainable Business
Academic year:

2023
Views:

158

Pages:

2
Author:

zameralotp0

American Airlines Strategic Analysis Group Eastern United States Division Attention: Chief Strategist Re: Revenue impact of extending “More Room” to Super 80s? In recent years, as you know, we have come under sustained and increasing pricing pressure. Southwest and other discount airlines have expanded into many of our bread-and-butter routes and web price search engines have further sensitized many passengers to price. But we can’t compete with the Southwests of the world purely on price. On a route like Baltimore-St. Louis, for example, our marginal costs are about $50 per passenger while Southwest’s are about $20. Consequently, in late 2000 we introduced “More Room Throughout Coach”, an ongoing marketing campaign that highlights a retrofit of some aircraft in our fleet (mostly those flying longer routes) to have fewer seats in coach. Now, we are exploring whether to expand “More Room” to models such as the Boeing MD-80 serving shorter routes. We’ve selected Baltimore-St. Louis as one of a few representative routes to study in more depth. American and Southwest both fly this route, with similar schedules – Southwest has seven 737300 flights per day (137 seats each), we have five MD-80s (139 seats each). The folks upstairs hired a team from KPMG to come in and make recommendations, but I haven’t been impressed with their work so far and want your team to get on this as well. So far, they’ve collected time series load data for this route at various price points to estimate the expected load per plane for both Southwest and American for given Coach prices ranging from $100 to $500 per leg on average round-trip Coach fares. (See attached tables.) Currently, Southwest charges $150 while we charge $200. There are several issues that I need you to address. First, are these prices sustainable in the future at current capacities? Should we expect strengthening, stable, or eroding prices given current capacities? Also, I’m worried about the worst case scenario in which passengers are not willing to pay extra for the additional leg-room. In this worst case, how much will it cost us in revenue per flight to reduce the number of seats that we offer by 10% (to 125 seats)? It will be important, of course, to think about how Southwest is likely to respond in terms of pricing. To keep things from getting too complicated, please just assume that Southwest does not retrofit its cabins. Price Charged by Southwest Airlines Table I Average number of passengers on Southwest Airlines flights 100 150 200 250 300 350 400 450 500 100 137 73 24 2 0 0 0 0 0 150 137 90 35 5 1 0 0 0 0 Price Charged by American Airlines 200 250 300 350 137 137 137 137 120 132 134 137 78 117 131 134 18 77 113 119 4 11 75 106 1 3 9 47 0 0 1 2 0 0 0 0 0 0 0 0 400 137 137 136 129 113 84 19 0 0 450 137 137 137 131 122 99 65 9 0 500 137 137 137 132 126 118 98 55 7 450 139 139 139 139 139 139 135 89 15 500 139 139 139 139 139 139 139 135 39 Price Charged by American Airlines Table II Average number of passengers on American Airlines flights 100 150 200 250 300 350 400 450 500 100 139 125 108 67 45 14 13 12 10 150 139 139 134 99 50 15 13 12 10 Price Charged by Southwest Airlines 200 250 300 350 139 139 139 139 139 139 139 139 132 139 139 139 115 129 139 139 96 114 127 138 16 17 25 116 14 15 16 19 12 13 14 14 10 10 11 12 400 139 139 139 139 139 137 120 17 13