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Copy of CASE STUDY: American Airlines
Transcript of Copy of CASE STUDY: American Airlines
American Airlines Introduction
-Make extra money from the Source Premium Policy.
- relationship with travel agencies to use the designated Global Distribution Systems of American Airlines in order not to pay the extra fee.
-reduce American‘s ticket distribution costs .
-Relationships with travel agencies would be damaged.
-Lose group of customers.
-Negative publicity for American Airlines.
-Save money for company.
-Be known as an environmentally friendly company.
-Losing a significant consumer base.
-Lose future business from travel agencies.
American Airline has been founded in 1930. Its headquartered in Forth Worth, Texas, United States. The first president of the company was C.R. Smith. Its fleet size is 614 Aircraft's . It is extensive international and domestic network. It flights throughout North America, the Caribbean, South America, Europe and Asia/Pacific. On an average day, American Airlines Group: Flies about 530,794 passengers and flies about 6,700 flights. Global Distribution System (GDS) is a worldwide computerized reservation network used as a single point of access for reserving airline seats.
American Airlines could distribute directly via the internet and it's on call centers in a highly cost effective manner. Why then should American Airlines sell via travel agents at all?
Q3: From a GDS perspective, what techniques can it use to retain and protect its current business model?
problem (1) :
American Airlines forced to pay high fees to global distribution services (GDSs)
to distribute its air travel services to travel agents , because travel agents tend to favor which GDS offered the highest commissions impeding price competitors among GDSs.
proposed solutions :
1- American Airlines can negotiate with GDS to reduce the fees on return for provide them a specific ratio from the profits. By this way , American can balance the costs .
2- American Airlines can contract with other distributing firm that may be require less fees to distribute its tickets .
problem (2) :
After the American Airlines proposed a Source Premium policy that would force travel agents to pay the extra cost incurred by American as a result of an agency‘s choice of GDS. Although this policy would reduce the airline‘s GDS expenses, travel agents might steer passengers elsewhere, leaving American even worse off than under the GDSs‘ high fees.
proposed solution :
1- American Airlines must maximize the efforts to improve the quality of its services in order to attract the passengers to favor them. Then the travel agents become obliged to steer passengers to them in spite of extra cost that forced to pay them .
The increase in air craft fuel, spent 34 .2 % out of total expense on air craft fuel (2,180 million).
proposed solution :
1- American Airlines can search for foreign fuel companies that provide fuel at a cheaper price.
2- American Airlines can ask the government to force the local fuel companies to set a fixed price.
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GDS should have some flexibility and response to American Airlines and other travel agencies by reducing the fees that they receive from these agencies. Many of the suppliers now (hotels, airlines, etc.) seeks to build direct relationship with the customer through providing booking systems over the internet to avoid paying high fees to the global distribution system.
Global distribution system can prove that it has many services that any travel agency need, and no one can ignore the importance of its role. So by using fees reduction technique, it can easily attract the travel agencies again and protect its business model. Otherwise, most of the travel agencies will follow the same steps of American Airlines, and the GDS may lose its business.
Q4: Should American Airlines implement the source premium policy?
It is a difficult decision that faces American Airlines. From our opinion, if the GDS makes no change on their high fees, then American Airlines has to go with this challenge and implement the source premium policy.
If they satisfy the global distribution system and keep paying, they may not have the chance to extend their success. The strategy that American Airlines need now is to cut distribution costs and try to save money in order to retain the company performance. This would be better than undergo to the high fees of GDS.
The distribution through internet and call-centers was surely more cost effective but, many people still bought their ticket through travel agents. The reasons behind that are as follows:
People tend not to trust computers, and feel more comfortable as they interact with a human being. As a result, the use of internet use wasn’t as popular as the going and booking through a travel agent.
-Compliance with corporate travel policies and problem solving:
The use of internet and call center was commonly used amongst leisure costumers. The business customers continued to book through travel agents to ensure compliance with corporate travel policies, making sure that any problem is solved immediately and to be ready to change the booking at any given moment.
-Sales and Costs:
The cost of distributing tickets through the internet and call center was surely cost effective. Though, the customers tend to book through travel agents more than online. Therefore, in 2004 travel agents share of sales was 70% of the total sales. As for the internet and call center channels, it was returning most of it costs and may result some profit for some airlines but not in the general picture.
American Airlines spends hundreds of millions of dollars on GDS fees. In the end who is paying for these costs? How are the economic cost paid for in this channel?
As the distribution fees through GDS are in hundreds of millions, they covered it using the following methods:
-Adding costs on the consumer:
As the cost for the GDS goes up, the airlines companies needed to cover the costs. The consumers of business class suffered an increasing price for the ticket they got. In the end, the consumer is the one always paying for the costs.
-Source Premium policy:
To cover up for the extra costs, American issued the Source Premium policy. The policy stated that every ticket issued by a travel agent, the agent had to pay a fay of 3.5$. It wasn’t a problem for the agent of the leisure customers but it was a big one for the business customers. As a result, the travel agents had to add the fee as a ticket cost