April 10, 2003
Re: Revenue impact of extending “More Room” to Super 80s?
In recent years, as you know, we have come under sustained and increasing pricing pressure.
Southwest and other discount airlines have expanded into many of our bread-and-butter routes
and web price search engines have further sensitized many passengers to price. But we can’t
compete with the Southwests of the world purely on price. On a route like Baltimore-St. Louis,
for example, our marginal costs are about $50 per passenger while Southwest’s are about $20.
Consequently, in late 2000 we introduced “More Room Throughout Coach”, an ongoing
marketing campaign that highlights a retrofit of some aircraft in our fleet (mostly those flying
longer routes) to have fewer seats in coach. Now, we are exploring whether to expand “More
Room” to models such as the Boeing MD-80 serving shorter routes.
We’ve selected Baltimore-St. Louis as one of a few representative routes to study in more depth.
American and Southwest both fly this route, with similar schedules – Southwest has seven 737-
300 flights per day (137 seats each), we have five MD-80s (139 seats each). The folks upstairs
hired a team from KPMG to come in and make recommendations, but I haven’t been impressed
with their work so far and want your team to get on this as well. So far, they’ve collected time
series load data for this route at various price points to estimate the expected load per plane for
both Southwest and American for given Coach prices ranging from $100 to $500 per leg on
average round-trip Coach fares. (See attached tables.) Currently, Southwest charges $150 while
we charge $200.
There are several issues that I need you to address. First, are these prices sustainable in the future
at current capacities? Should we expect strengthening, stable, or eroding prices given current
capacities? Also, I’m worried about the worst case scenario in which passengers are not willing
to pay extra for the additional leg-room. In this worst case, how much will it cost us in revenue
per flight
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