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American Airline 1992 Value Pricing Strategy

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American Airlines 1992 Value Pricing Strategy
Evaluate American’s 1992 announcement of a new rate structure: a. What changes did American make?
To replace the old domestic air-fare system with 16 different prices, discounts, and restrictions that are constantly changing, American made four key changes to its fares. 1. Instead of 16 different prices, American simplified its pricing structure to include only 4 kinds of fares: a first-class fare, a coach fare that can be bought anytime before flight time (full-fare), 21-day advance-purchase fare, and 7-day advance-purchase fare. The new fare structure was expected to reduce administrative labor costs related to managing different fares by $25 million annually. The change was also expected to reduce coach fares by 38% on average and first-class fares by 20% to 50%, while the cuts in discount rates were smaller. American believed that the fare cuts will produce an increase in travel (number of air tickets sold) which would not only cover but also exceed the reductions in prices per ticket. American anticipated the new system will eventually increase annual revenue by as much as $350 million. 2. Unlike the old fare system which did not allow refunds or reschedule, passengers who buy advance-purchase tickets under the new system will have the option to reschedule their flights if their travel plans change by paying a $25 processing fee. First-class and coach tickets are refund-able, which stays the same from the old system. 3. Under the new fare system, many of the volume-discount deals previously negotiated with corporations were eliminated. Before the new system, about 7% to 8% of business travelers fly on fares secured under such deals. American would fulfill existing corporate contracts until they expire, but would not renew any of them. 4. American also tried to rationalize the fare system by

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