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#2 1985 · American Airlines · Aviation

American Airlines, bled by no-frills discounters, learned to sell the same seat at five prices

the problem

Every unsold seat died at takeoff

background

Deregulation in 1978 let anyone fly any route at any price, and by the early 1980s People Express was doing exactly that: no-frills fares undercutting the majors, filling planes American couldn't match without gutting its own full fares. A straight price war would have meant matching People Express seat-for-seat, at a loss American's cost structure couldn't sustain.

On 17 January 1985 American used its existing inventory-control systems to launch Ultimate Super Saver fares — priced at or below the low-cost carriers, restricted rather than open to the whole plane, full service kept intact. The heavier automation, DINAMO, was a longer project: American kept building out the underlying yield-management system through the decade, fully implementing it, by one account "after twenty-five years in the making," in 1988.

the move

Ultimate Super Saver fares plus the DINAMO yield-management system: sell restricted seats early and cheap, protect flexible seats for late business demand.

the payoff

Robert Crandall credited yield management with roughly $500M a year; the unrestricted-discount competitor People Express collapsed in 1986.

what came after

Estimates of the payoff vary by source and period measured: a Georgia Tech course history citing American's own figures puts the ongoing revenue benefit at over $500 million a year, while an INFORMS case study on the DINAMO system estimates its net impact at $1.4 billion over a three-year period — different measures, not a contradiction to resolve, but reported here as each source states it. The technique spread through the 1990s into hotels, car rental, cruise lines and eventually TV ad inventory. People Express was acquired by Texas Air Corporation in 1986 and its operations folded into Continental by February 1987; its CEO Donald Burr later said the company had been profitable until "American came at us with Ultimate Super Savers" (quoted in Robert G. Cross's Revenue Management, 1997).

filed under

Perishable capacity

references

  1. [1]American Airlines — History of O.R. ExcellenceINFORMS, 2020hsor.org
  2. [2]People Express Airlines (1980s)Wikipedia, 2024en.wikipedia.org
  3. [3]Revenue Management: Hard-Core Tactics for Market DominationBroadway Books (Robert G. Cross), 1997archive.org

was it genius?

same kind of clever