Question

MANAGERIAL CHALLENGE Why Charge $35 per Bag on Airline Flights? American Airlines (AA) announced that it would immediately begin charging $35 per bag on all AA flights, not for extra luggage but for the first bag! Crude oil had crushed from $54 to $20 per barrel in the previous 3 months. AA’s new baggage policy applied to all ticketed passengers except first class and business class. On top of incremental airline charges for sandwiches and snacks introduced the previous year, this new announcement stunned the travel public. Previously, only a few deep discount U.S. carriers with very limited route structures such as People Express had charged separately for both food and baggage service. Since American Airlines and many other major carriers had belittled that policy as part of their overall marketing campaign against deep discounters, AA executives faced a dilemma. DEMAND AND SUPPLY: A REVIEW Demand and supply simultaneously determine equilibrium market price (Peq). Peq equates the desired rate of purchase Qd/t with the planned rate of sale Qs/t. Both concepts address intentions—that is, purchase intentions and supply intentions. Demand is therefore a potential concept often distinguished from the transactional event of “units sold.” In that sense, demand is more like the potential sales concept of customer traffic than it is the accounting receivables concept of revenue from completing an actual sale. Analogously, supply is more like scenario planning for operations than it is like actual Jet fuel surcharges had recovered the year-over-year average variable cost increase for jet fuel expenses, but incremental variable costs (the marginal cost) remained uncovered. A quick back-of-the-envelope calculation outlines the problem. If total variable costs for a 500-mile flight on a 180-seat 737-800 rise from $22,000 in 2007 Q2 to $36,000 in 2008 Q2 because of $14,000 of additional fuel costs, then competitively priced carriers would seek to recover $14,000/180 = $78 per seat in jet fuel surcharges. The average variable cost rise of $78 would be added to the price for each fare class. For example, the $188 Super Saver airfare restricted to 14-day advance purchase and Saturday night stay

overs would go up to $266. Class M airfares requiring 7-day advance purchase but no Saturday stay overs would rise from $289 to $367. Full coach economy airfares without purchase restrictions would rise from $419 to $497, and so on. The problem was that by 2008 Q2, the marginal cost for jet fuel had risen to approximately $1 for each pound transported 500 miles. Carrying an additional 170-pound passenger in 2007 had resulted in $45 of additional fuel costs. By May 2008, the marginal fuel cost was $170 – $45 = $125 higher! So, although the $78 fuel surcharge was offsetting the accounting expense increase when one averaged in cheaper earlier fuel purchases, additional current purchases were much more expensive. It was this much higher $170 marginal cost that managers realized they should focus upon in deciding upon incremental seat sales and deeply discounted prices. And similarly, this marginal $1 per pound for 500 miles became the focus of attention in analyzing baggage cost. A first suitcase was traveling free under the prior baggage policy as long as it weighed less than 42 pounds. But that maximum allowed suitcase imposed $42 of marginal cost in May 2008. Therefore, in mid-2008, American Airlines (and now other major carriers) announced a $35 baggage fee for the first bag in order to cover the marginal cost of the representative suitcase on AA, which weighs 25.4 pounds.

Discussion Questions:

a. How should the airline respond when presented with an overweight bag (more than 42 pounds)?

b. Make a list of some of the issues that will need to be resolved if American Airlines decides to routinely charge different prices to customers in the same class of service?

c. What would you do if you were the CEO of AA? Define and justify your Pricing strategy.

Answer 1

Answer :-

a):- The American Airlines (AA) ought to react to this issue with their clients utilizing empathic approach and determine free baggage which is permitted on the flight previously followed by extra baggage charges in slab position if the baggage weight is more the qualified free breaking point.

The slabs ought to be structured so that it may not appear to be difficult to the clients, for example, incremental section framework past free cutoff. This would help in holding its clients and recuperating the extra expense on baggage.

b):- The American Airlines (AA) may consider underneath hardly any focuses if on the off chance that chooses to charge various costs to clients in a similar class of service. It might be the survey of minor expense on per flight premise on the off chance that the expense is lesser than the revenue, at that point American Airlines (AA) should check different methodologies, for example, solid interest forecast, past booking and cancellation patterns request in top hours and off pinnacle hours completely which may incorporate long ends of the week and vacations also.

Further the American Airlines (AA) ought to likewise audit its promoting financial plan and in particular it should take a shot at client driven methodology and fortifying some referral plans which will indirectly prompt benefit of the carrier while keeping up high fulfillment of representative provided that workers will be exceptionally happy with their activity they will assume incremental job in customer fulfillment.

c):- In the event that I were CEO of American Airlines (AA) I have utilized distinctive strategy to amplify consumer loyalty and human driven methodology which may had indirectly lead to benefit maximization.

Different exercises, for example, unwaveringness program, referral plans and in particular I have had given a slogan "people groups aircraft" through remarkable service understanding. This could have helped the aircraft to acquire notoriety among individuals which can help in benefit maximization.

My pricing strategy may have been founded on experience which individuals feel during the whole excursion beginning from flight venture. The strategy may incorporate purchasing conduct of the shopper, review and direct communication with existing clients, industry patterns, esteem based methodology and above all human driven methodology.

These above focuses are legitimate on the grounds that making an awesome encounter to the shopper while considering its value may increase representative and customer fulfillment which will prompt revenue maximization.