Consumption Patterns with the Airlines
Consumer demand at American Airlines 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 with point-to-point business models such as Southwest, JetBlue, AirTran and Spirit (America's airlines, flying on empty, 2005). In the summer of 2005 things finally started looking up, airline passenger numbers increased and planes were on average seventy-nine percent full. However, revenues per seat ("yields") were still falling, decreasing by 1.8 percent for the same period in 2004. And, then even more dramatic fuel costs increases kicked in, with a serious impact on American's bottom line. The airline industry is characterized by very complex pricing dynamics, depending on travel distance, type of traveler, and domestic and international flights, to name a few of the many factors that determine the degree of price elasticity or inelasticity (Air travel demand elasticities: Concepts, issues and measurement). For long-haul international business travel, demand is not sensitive to fare changes because there are few close substitutes. O
American's future outlook is not good. Market indicators imply even further pressure on consumer demand for the foreseeable future. For example, the Congressional Budget Office forecasts real Gross Domestic Product to decline from 3.7 percent in 2005 to 3.4 percent in 2006 (CBO's current economic projections). And, some believe that sharp energy price increases of the past three years will be repeated in 2006. Clearly, American Airlines will need to reshape its business model to survive. Not surprisingly, the elasticity for short/medium-haul leisure is the highest of all travel types (Air travel demand elasticities: Concepts, issues and measurement). For this segment, alternative forms of transportation such as car, rail or bus are the most common substitutes along with not traveling at all. In contrast, elasticity for short/medium-haul business travel is moderately inelastic, being even less than the long-haul domestic business elasticity. Short/medium-haul business travelers are willing to pay higher fares to save time. n the other hand, long-haul domestic business travelers have much higher elasticities than international business travelers. Telecommunications has become more acceptable as a substitute in domestic markets due to common culture, laws, contracts, etc. Likewise, international leisure travelers have greater elasticity than do international business travelers. These consumers are more likely to either postpone their trips in response to higher fares or seek locations that are not as expensive. Today, most legacy airlines such as American have at lea
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Approximate Word count = 1075
Approximate Pages = 4 (250 words per page double spaced)
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