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American Airlines Employs a Strong Retail Strategy

American Airlines is keeping up with the retail Joneses. Last week, the company announced that “it will begin selling Basic Economy fares in addition to the wide range of Main Cabin fares currently offered. These no-frills tickets provide a simple and affordable way to experience American’s network, and provide customers the option to pay extra for the services they want.”

This is a classic retail revenue management strategy. Hotels and cruise lines have done this for ages – if you are okay with a windowless, interior room on a low floor, it is quite affordable, but you pay extra if you choose more space, higher floors, balconies, better views, concierge-level amenities and so on.

The legacy airlines, American included, are finally catching up and applying this retail strategy to flights: low base fees and you pay for upgrades and add-ons, including the opportunity to pay for a carry-on bag.

Admittedly, American’s model delivers more tradeoffs than the typical American Airlines customer is willing to sacrifice, such as no choice of seat assignment, cattle boarding groups, and lack of upgrades.

But, American’s new Basic Economy option will be competitive and, more importantly puts the customer in control of their flight experience.

If you have lots of luggage and want a more full-service, comfortable experience you will pay for it. But, if you have a day trip with a backpack or briefcase that fits under the seat, this could be an excellent low cost option, especially for small businesses or last-minute personal travel.

And while this approach is considered “business as usual” in most industries, Southwest Airlines was thought of as an innovative game-changer when they launched this exact strategy back in the 1970s.

So, if this is basic retail strategy and has been executed for ages in other industries such as hotels, why did it take so long for a legacy airline to catch up?

Well, we believe it goes back to the Airline Deregulation Act of 1978. Prior to 1978, airline travel was regulated by the U.S. Federal Government. The government had control over such things as fares, routes and market entry of new airlines. As a result, airlines did not operate like a consumer business, because that typical consumer “levers” were out of their control. The airlines operated more like your local post office, albeit with better employee uniforms and fashionable scarves.

The Airline Deregulation Act introduced a free market in the commercial airline industry which led to a great increase in the number of flights available, a decrease in fares, and an increase in the number of passengers and miles flown.

Statistics as of 2013

But migrating the company culture of a legacy brand takes time. There was no consumer-centric view of airline travel in 1978. Many employees had joined the regulated airlines in the 1960s, had been promoted through the ranks and held an old-world view in a new consumer paradigm. So, modern revenue management was a foreign concept to these airlines, as they continued their plodding ways with inflexible, one-size-fits none pricing.

What caused the change? Well, these airlines were also losing money, had a near-death experience via bankruptcy and were court-ordered to change. (Think big ship, tiny rudder, big iceberg. Sound familiar?)

Today, planes are flying fuller, airlines are making money and the customers are getting the ability to pay fair value for the precise kind of flight experience they desire.

Ultimately the consumer wants what they want and are more than happy to pay fair value for that, maybe even a slight premium for the convenience. But beware of the backlash if your business model violates this.

Which brings us to the recording industry.

Back in the 1970s, record labels controlled all content and all distribution. So, if you liked a song, you had to hoof it down to a record store – a physical brick and mortar location - and buy the entire album, i.e., the song you wanted and 9 songs you didn’t. Of course, you could listen to the radio with a cassette recorder nearby and record the song, but that ensured a significant decrease in quality and a high likelihood of the DJ talking over the first 4 bars of the song’s introduction. (That doesn’t mean we didn’t do it, and we spent HOURS making mix tapes of imperfectly captured individual songs to listen to and share with friends.)

But that is hardly what the consumer wanted. There was just no viable alternative.

Then in 1982, CDs came along and now one person could buy a CD, record the one song he/she wanted and share it with their friends. This was followed by peer-to-peer file sharing services like Napster in 1999 and LimeWire in 2000 and then the iPod’s introduction on October 23, 2001. On October 24, 2001, the recording industry began a slow but steady implosion that is still going.

Like the airlines, the recording industry was not built to allow the customer control of their buying decisions and suffered because of it. Today, the industry is so disrupted that the primary earnings channel for the artists has shifted from selling records to touring. And although other royalty agreements for electronic downloads and copyrights are in place, the old-school model remains, broken, today.

So, unlike the record industry, airlines are finally flexing to what the consumer actually wants: they want to only pay for the services they want and need per purchase occasion.

Consumer needs may be different by occasion and revenue models need to account for that flexibility. There’s no longer value in offering all-inclusive pricing when the consumer occasion only calls for individual price and item execution.

Welcome to a Brave New World where the consumer is in control.

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