7-1 Milestone Three: Recommendations
Ariel Dorsey
Southern New Hampshire University
ECO 500: Managerial Economics
Professor Burnham, Lyndon
June 29, 2024
Based on the theoretical and quantitative analysis conducted, there can derive several
recommendations made for American Airlines. These recommendations focus on pricing
strategy, capacity planning, and risk management, all supported by market structure and data
analysis. The suggested recommendations include optimizing pricing strategies, enhancing
revenue management, monitoring and mitigating fuel price volatility, expanding in high-growth
markets, leveraging data analytics for demand forecasting, and managing risk and uncertainty.
Optimizing pricing strategy must be implemented with a dynamically defined adjustment.
American Airlines must implement a dynamic pricing strategy that adjusts ticket prices based on
demand elasticity and competitor actions. The regression analysis indicates that demand is price-
sensitive [(beta1 = -4.5)]. Thus, insignificant changes in price can significantly impact demand.
Given the oligopolistic market structure, American Airlines must closely monitor competitors'
pricing and adjust its own prices to remain competitive while maximizing revenue. The company
must use advanced pricing algorithms that incorporate real-time data on demand, competitor
prices, and other market conditions. Regular reviews and adjusted fare structures, especially
during peak travel seasons and in response to competitor actions, can also greatly improve
performance.
Another recommendation is the enhancement of revenue management. Implement
sophisticated revenue management systems to improve seat inventory and maximize load factors.
Seasonal dummy variables (S1, S2, S3, S4) indicate significant seasonal variations in demand.
Effectively managing seat inventory during different seasons can help maximize revenue. High
barriers to entry in the airline industry mean that existing players can invest in technology to gain
a competitive edge. American Airlines must use predictive analytics to forecast demand for
different routes and adjust seat inventory accordingly. Implement overbooking strategies based
on historical data to minimize empty seats while managing the risk of being denied boardings.
American Airlines must monitor and mitigate fuel price volatility. This is achieved by
hedging fuel prices to mitigate the impact of fuel price volatility on operating costs. The analysis
shows that fuel prices [(beta3 = -100)] have a significant impact on demand and profitability.
Fuel costs are a major expense for airlines, and their volatility can significantly affect financial
performance. To act, the company must be into fuel hedging contracts to lock in prices and
reduce the uncertainty associated with fuel cost fluctuations. Continuously monitor fuel market
trends and adjust hedging strategies accordingly.
Expansion in high-growth markets is also an opportunity to increase productivity. Focus
expansion efforts on routes and markets with high-income elasticity of demand. Income elasticity
of demand [(beta2 = -0.015)] suggests that demand increases as GDP per capita rises. Identifying
high-growth markets can offer substantial opportunities for revenue growth. As global economies
recover and grow, targeting regions with rising income levels can capture increased demand for
air travel. The company can act by analyzing economic growth trends to find emerging markets
with increasing GDP per capita. Expand route networks and increase flight frequencies to these
high-growth regions.
The next recommendation is using data analytics for demand forecasting. It is
recommended that the company invest in advanced data analytics and machine learning tools for
accurate demand forecasting. Accurate demand forecasting enables better ability planning,
pricing decisions, and revenue management. The oligopolistic nature of the airline industry
means that better data-driven insights can provide a competitive advantage. American Airlines
must implement machine learning models to analyze historical data and predict future demand
patterns. Use these forecasts to inform strategic decisions on route planning, pricing, and
marketing campaigns.
The final recommendation is managing risk and uncertainty. It is recommended that the
company use scenario planning and sensitivity analysis to manage risks and uncertainties. The
airline industry is subject to various risks, including economic downturns, geopolitical events,
and changes in consumer behavior. Scenario planning and sensitivity analysis can help decision-
makers understand potential impacts and prepare contingency plans. The company must develop
multiple scenarios based on different assumptions about key variables (e.g., fuel prices,
economic growth). Use sensitivity analysis to understand how changes in these variables impact
demand and profitability. Create contingency plans for different scenarios to ensure the company
can quickly adapt to changing conditions.
By implementing these recommendations, American Airlines can improve its operations,
improve profitability, and support a competitive edge in the oligopolistic airline industry. The
suggested strategies leverage insights from the quantitative analysis and are designed to mitigate
risks and capitalize on opportunities in the market. The use of advanced data analytics, dynamic
pricing, and risk management tools will help the company navigate uncertainties and enhance
decision-making processes.
References
Baye, M. R., & Prince, J. T. (2000). Managerial Economics and Business Strategy, 9e. American
Airlines’ Actions Raise Predatory Pricing Concerns.
https://learn.snhu.edu/content/enforced/1567752-ECO-500-Q4268-OL-TRAD-
GR.24TW4/Course%20Documents/American%20Airlines.pdf
Segal, T. (2024). The North American Airline Industry. Retrieved from:
https://www.investopedia.com/ask/answers/011215/airline-industry-oligopoly-state.asp
Thomas, C. R., & Maurice, S. C. (2016). Managerial economics: Foundations of business
analysis and strategy (12th ed.). New York, NY: McGraw-Hill Education.
