American Airlines, Inc.: Revenue Management
American Airlines, Inc.: Revenue Management
Successful revenue management system is the outcome of a process, technology and people that have been efficiently tapped when maximizing revenues. Gauging the effectiveness of the revenue management process during its progress from the origin to a state is arguably very important and guarantees that the process is effectively leading to the success of an organization and adds to the bottom line.
A forward-looking revenue management process for an airline leads to an increase in revenues. Overbooking controls, discount mix controls on fares, departure and destination controls, and group passenger controls can be effective when introduced. A strong case exists for an airline business investing in revenue management, and it is imperative that airlines deserve to appraise the phases of the growth of revenue management from the origin to the steady state.
The financial growth of any airline company is largely the result of an effective management of its main resource, which are the reservations inventory. The American Airlines with its ticker symbol AMR, from the case study has applied quantitative operations to enhance the management of the company’s reservations inventory. This move greatly led to the growth of the company’s hugely impressive SABRE reservation system.
Yield management entails a wide range of functions, and these include the establishment of levels that are overbooked, appropriation of discounted seats, and price settings. The goal of yield management can be summarized as the move to manage and control the reservations inventory with a view of maximizing the profits that arise from the company. In short, an airline company’s failure to adopt yield management can be a primary contributor to the fall of such a company. The case provided focus on the particular yield management sub-issues, and which include the allocation of discount seats and pricing. The issue can be further complicated by the unreliability of demands, and which in consequent, is a product of the prices of the seats, and prices that are charged by the rivals, weather patterns, and amongst other factors. The right choice in the number of discount seat can be thought of as a tradeoff. This means those if there are excess discount seats, which are allocated, and then there are passengers who are then willing to pay a high fare, will travel at reduced prices, and if few are allocated, then airline then runs at a risk of flying with an empty plane, as other passengers can be uncomfortable paying the normal fare.
Environmental and Root Cause Analysis
The external environment plays an important role in revenue generation to American Airlines, and these external environmental influences manifest in the form of competition, suppliers, customers, new entrants, and substitutes. Even though markets and customers vary, there is an immense cross elasticity of supply in the provision of the services. American Airlines faces intense competition from fellow hub and spoke airlines such as Delta, Continental and others, as well as from the point-to point competitors. Hence, the threat of competition is always strong for not only for American Airline, but also to other airlines. Fuel form the single largest costs that American Airline face, and despite the huge amounts of fuel that American Airline consumes on its planes, there is little bargaining power for the commodity. The bargaining power of customer is very strong, not on pricing rather on other complimentary services. The threat of new entrants is weak in the industry as it costs lots of dollars to set up the company and purchase a fleet. The threat of substitutes to air transport is weak as buses and trains are inefficient for long distances.
American Airline has a huge brand appeal, and this can play to its advantage compared to its rivals.
According to industry experts, American Airline depends on resurgence demand.
More cost cutting measures as fuel continues to plummet.
Volatility in demand and supply of fuel remains the main threat to revenue management.
Root Cause Analysis
This framework commences from the root problem that leads to a deviation from the plan, and the business anchor in form of supply demand and utilized to adapt to the corrective action (Talluri and Garrett 10).
Promotions in Underperforming Markets
Similarly, underperforming markets that have been earmarked for their potential in revenue generation in the future deserve a little push to make them deliver their potential targets. An underperforming market implies that revenue generation shall be lower than anticipated. Aggressive promotions should be conducted in such markets to encourage growth and achieve sales and yield targets. Promotions in underperforming markets deserve a bountiful of advertisements through relevant traditional and nontraditional media.
Promotion of new packages
Promotion of new packages can take a variety of forms for instance; American Airlines can offer round trip fares to lucky winners of a certain package to their preferred destinations in the United States. This sales tactics converts demands from hitherto spiral directly to the grasps of American Airlines. Moreover, effective application of discount controls on tickets can prove pivotal in improving the sales and yield targets.
Match competitor prices
Pricing is an important revenue management task as it communicates the value of the service to the customer. American Airline should set their prices to match that of the other competitors, or slightly below the average industry rate. However, the demand for tickets in the Airline industry is slightly inelastic, and in economics, the general body of knowledge on elasticity declares that an inelastic demand is one in which the changes in prices leads to a less than proportional changes in demand for the service.
Increase the availability of different class Q by point of sales
The class Q by point of sales is likely to increase to more revenue as they have a high number compared to the other group.
Recommendations and Implementation
It is absurd that the revenue management does not factor in the cost, and this is often the anathema for every unsuccessful airline business. Effective management is vital to the organization of a rapid management of demand, given alerts that are produced from the revenue appraisal of the performance measurements (Yu 68). Management of certain events such as the central nervous system demands providing a definition of revenue management key performance indicators at known levels of addition, and frequency of monitoring such as by the week or even hour or even by the day. Moreover, a possible alternative for improved activity through invoking of a demand or supply anchor, and events can determine and implement for practical decision-making. Demand anchors that can be used include pricings, promotions, incentives on sales, and overrides. On the other hand, supply anchors include changes in capacity, frequency changes on current markets that are served, besides entry into a new market can also be a good choice.
Monitoring and Control
To attain the most from a revenue management system demands persistent monitoring of both post-departure and pre-departure measures to give out a persistent feedback. For pre-departure standard measures, the historical performance from a flight is determined after the departure. Load factor is a good key performance indicator, and it is the ration of traffic onboard over the available seats, and can be expressed as a percentage. The yield is the other effective key performance measure given as passenger revenue per revenue passenger per mile. Expected load factor, expected revenue and expected yield are effective key performance indicators that deserve to be constantly monitored and controlled to gauge the effectiveness of revenue management.
Talluri, Kalyan T., and Garrett J. Van Ryzin. The theory and practice of revenue management.
Vol. 68. Springer Science & Business Media, 2006.
Yu, Gang, ed. Operations research in the airline industry. Vol. 9. Springer Science & Business