The Nature of Competition

...to push, not to be just as good, but to be better

Consumers gain from the "one-upsmanship" played by corporations

Ex: The evolution in public comfort "standards" throughout Europe

The Carousel of Life - "These are the best of times"

American Airlines Inc.

The period of the 80's was one of intense price competition

Chairman Crandall's "ruling on olives" as quoted in Business Week

Competition "nineties-style" would change to reflect the consumers' desire for service

VP for Marketing Michael Gunn: "We think service is in." also quoted in Business Week

The WHAT, WHY, HOW and WHEN of the case

Exactly what is the American three-class proposal?

1. The addition of a business class to the JFK-LAX route
   In name only - no real change to the service level for this class
2. Reposition first class to business and add an enhanced, competitively viable, first class
   In essence this action redefines the JFK-LAX route as an international route
3. A move to achieve product/service consistency between international and transcontinental flights
   Defining product/service consistency is difficult.It is especially problematic to determine "how far to go." AA became its own worst enemy when it went international.This action highlighted the comparative discrepancies in its own service quality
4. An action to balance AA's offering with competition
   There proves to be substantial differences in what is "first class." The lack of uniformity in the labels applied to service leads to interesting consumer conflict (Thanks to Lori and her observations regarding the allowability of some business travel).
5. A system to satisfy existing first class and AAdvantage Gold members
   Under the current scheme neither first class nor business travelers have an appropriate service category.

Why adopt? Why reject the proposal? The arguments in the affirmative

1. Competitive necessity.
   A graphic comparison of the service offering for AA and selected domestic competitors indicated that AA was not competitive in the existing Transcon market. The significant gains by MGM Grand Air demonstrated the need for improved product/services on the up-scale end.
2. Capacity relief.
   Class discussion centered on the apparent misallocation of total cabin space in the "mix" of compartments (first class and coach) as indicated in the high rates of spillage and downgrading out of first class on the JFK-LAX route. Under the assumption that all slippage was lost to competitors we computed the opportunity loss that is attributable to the cabin "mix" problem at over $15 million annually. There were legitimate questions regarding the instructors arithmetic skills, but on balance it seemed obvious that the potential loss was substantial. Furthermore the probable underestimation and/or overestimation of this value was discussed.
3. To fulfill demand.
   AA currently missing tremendous opportunities to promote demand for a business class and a legitimate first class category. The existing mismatch for both of these segments permits significant demand to go unfulfilled. The proposal would give AA two clearly defined product/service offerings that could be directly focused on two distinct segments.
4. Consumer need.
   Given the popularity of up grades in accomodations for AAdvantage flyers, there is a need for a place for them to go. Similarly true first class passengers need to be assured that they can find accomodations that will isolate them from the common folk. The real consumer need is then for an equitable "buffer zone" (equitable to both the up graders and the full fare payers).
5. Consistency.
   The need for consistency was demonstrated by considering the quality of the flight experience of a "first class" traveler who selected American Airlines to go from London to Los Angeles with a stop in New York. Not the best way to build or maintain a reputation for quality service.

Why? The arguments against

1. Possible negative customer reaction.
   The discussion here focused on:
   1. The image problems from existing AA patrons who might be alienated by yet another "class" distinction
   2. The actual hard costs (opportunity costs) associated with the loss of capacity (seats) in coach
2. Loss in Flexibility.
   The case's report of scheduling and Systems Operations Control problems were recapped. These difficulties arise from having a dedicated sub-fleet within a larger fleet that is subject to periodic disruptions.
3. Inconsistency.
   The same service inconsistences that were observed between international and transcon flights now arise within transcon flights without a JFK or LAX hub. An example of two different business travelers was used here.
4. Costs.
   One time setup expenses, to include $12 million to reconfigure 10 DC10s, $10+ million for intro promotions, and an undetermined amount to train flight, terminal and sales staff, and an enormous (yet undetermined) opportunity cost associated with loss of revenue with downed planes during retrofit were discussed. Also reoccuring annual costs, to include increased service improvement costs (est @ $10 million annually), varying isolation costs ($2-10 million annually depending on uncontrollable weather and equipment factors) were discussed.

Supposing a "go" decision - How and When?

They did decide to go so How did they do it?

The decision was based less on the economics of the situation (although the expected gains from avoiding spillage and downgrading opportunity losses were substantial) but to return to a leadership position in customer service. They needed to move with the shifting trends in consumers' desire for service.

1. AA elected to delay announcement until most of fleet was reconfigured
2. AA developed "cover" story to permit the use of the partially reconfigured fleet to gather additional consumer acceptance information while disguising their true intent not to allert competitors
3. AA introduced the three class system using "An International Flight that Never Leaves the Country" theme
4. AA followed-up their introductory theme with directed messages to each of the three involved segments. Each target group, first class, business and coach travelers were assured that they would receive the service attributes that they wanted in a transcontinental flight

Epilogue

In the summer of 1992, United did introduce their three class system on modified Boeing 767s on theJFK-LAX route. By November 1992, American extended its "international" service to the JFK-San Francisco route. Some other competitors followed, some did not. Other factors within the airline industry cause considerable change and shake-outs. As for the innovator? MGM Grand Air had focused all of its efforts into offering premium service to the JFK-LAX, LAX-JFK travel niche. They went out of business after the major airlines discovered the shift in consumer preferences and went international within the continental United States.

As of October 25, 1996, AA had extended its three class AMERICAN FLAGSHIP SERVICE to a total of nine routes:

1. New York - Los Angeles
2. New York - San Francisco
3. New York - San Diego
4. Washington, D.C. - Los Angeles
5. Boston - Los Angeles
6. Miami - Seattle
7. Miami - San Francisco
8. Miami - Dallas/Fort Worth
9. Miami - Los Angeles

Parting observations:

This case demonstrates the difficulties that arise when a course of action presents itself that makes great marketing sense but makes little immediate economic sense. No matter what numeric analysis you put on the data, you will be hard pressed to make this situation out to be a money "winner" in the short run. American Airlines elected to implement the three class system not because of the prospect of immediate returns, but to live up to its vision of providing the highest quality service to its customers. Obviously a constant diet of such high minded ideals might be hazzardous, but within a dynamic market environment, to be successful you really have no choice. If you don't go with the flow that is established by your customers (and yes, to some degree by your competitors) you will find yourself so far behind that you'll never catch up. Recall during the lecture portion of this class we made a distinction between a marketing firm and a management firm. That was just talk, this case demonstrates one company's action.

                                            
                                                 
                           hjg

The listings above are to provide structural assistance to your study. They are not attended to be inclusive of every item/topic that was presented in the lecture period.