Demand and Price in the Airlines
American Airlines provides scheduled jet service to approximately 150 destinations throughout North America, the Caribbean, Latin America, Europe, and the Pacific (Profile for AMR Corp.). It served approximately 250 cities in approximately 40 countries with approximately 3,800 daily flights with a combined network fleet of approximately 1,000 aircraft, as of March 1, 2005. American offers a hub business model which minimizes layover times by scheduling lots of flights to arrive and depart within narrow windows of time called "banks" (Coy and Zellner, 2002). American's major business challenges are that it faces weak consumer demand, intense price competition from carriers that operate lower-cost point-to-point models and price inelasticity for several important market segments along with the diminished ability to price discriminate. Consumer demand at American has been anemic over the past four years. Reasons range from the effects of terrorist attacks, the downturn in the economy, the war in Iraq, the SARS epidemic in Asia, soaring fuel costs and intense competition from the entry of newer low-cost carriers such as Southwest, JetBlue, AirTran and Spirit (America's airlines, flying on empty, 2005). In the summer of 2005 thi
American Airlines has long used differentiated pricing, a form of price discrimination, in order to sell air services at varying prices simultaneously to different segments (Airline). Factors influencing the price include the days remaining until departure, the current booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. Five categories of fares are used, each designed to steal consumer surplus from five different groups of passengers based on their demand elasticity. In contrast, low fare competitors usually offer straightforward, preannounced, simple prices that increasingly eroding American's ability to price discriminate. So, what are the implications of consumer demand, competition and price (in) elasticities for American? If American cannot increase demand, it may be forced to pass along higher fuel costs by raising prices. International business travelers and short/medium haul business travelers would be the groups the most willing to pay the higher fares because they are relatively price inelastic. American should focus on these bread-and-butter consumers to protect itself from the possibility of having to raise fares. Higher fares would significantly impact American's customers that fall into the long-haul domestic business traveler group or the international leisure traveler category. And, the short/medium haul leisure market would all but be hopeless as customer
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Approximate Word count = 1007
Approximate Pages = 4 (250 words per page double spaced)
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