AIRLINES: Are We Really Unique? And Have We Really Changed? Scott D. Nason VP - Revenue Management American Airlines AGIFORS RM Study Group Honolulu, Hawaii June 4, 2003

CHARACTERISTICS OF THE BUSINESS

Capital Intensive/High Fixed Costs Labor Intensive and Highly Unionized Long-Term Facility Commitments Low Short-Run Marginal Costs Highly Perishable Product Highly Variable Demand by Time of Day, Day of Week, Month of Year Massive Joint Production Across Network Some Economies of Scale Nearly Perfect Information Available to Consumers Discrete/Mobile Units of Production

CHARACTERISTICS OF THE BUSINESS (Continued) Long Lead Time to Increase/Decrease Production Rates Distribution Contracted to Independent (Travel) Agents Viewed by Consumer as Commodity Highly Susceptible to Weather Disruptions Customer Has Substantial Flexibility to Modify the Sales Contract Most Brand Loyalty Results from Ubiquity – That means we want to fly everywhere Highly-cyclical Some Residual Elements of Regulation

IMPLICATIONS

Incentives to Heavily Utilize Units of Production Intense Price Competition Prevalence of Low Fares Codesharing Overbooking

WHAT HAS CHANGED

RECENT TRENDS Reduced business travel demand – Including more use of travel substitutes – Fewer rules inhibiting use of discount fares by business travelers Internet and Opaque distribution channels – While the rest of the world is becoming transparent, we are going the opposite direction Increased security costs and taxes Increased airport hassles and transit time uncertainty More alliances, especially domestic More RJs Massive financial losses

IMPLICATIONS Less accurate industry data Renewed competition from ground modes Lower pay, more productive work rules

IMPLICATIONS FOR REVENUE MANAGEMENT Need more innovative ways to synthesize traffic data New strategies for selling in the internet world New strategies for selling in a world with widespread availability of low, unrestricted fares

IF …

IF … WERE RUN LIKE AIRLINES,... If supermarkets were run like the airlines, … – that last Thanksgiving turkey on Thanksgiving morning would cost $1200

IF … WERE RUN LIKE AIRLINES,... If supermarkets were run like the airlines, … – that last Thanksgiving turkey on Thanksgiving morning would cost $1200 – the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons

IF … WERE RUN LIKE AIRLINES,... If supermarkets were run like the airlines, … – that last Thanksgiving turkey on Thanksgiving morning would cost $1200 – the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons – they’d charge a lot less for a Coke than the movie theaters do, like they do!

IF … WERE RUN LIKE AIRLINES,... If supermarkets were run like the airlines, … – that last Thanksgiving turkey on Thanksgiving morning would cost $1200 – the express line would be reserved for frequent shoppers who buy baskets full of the items on sale, and use a fistful of coupons – they’d charge a lot less for a Coke than the movie theaters do, like they do! – and the stock clerks would regularly remind you that they were there primarily for your safety

IF … WERE RUN LIKE AIRLINES,... If McDonalds were run like the airlines, … – they’d still give you a break on a full meal, over buying the items a la carte, but they would insist that you eat the whole meal in order to get the discount

IF … WERE RUN LIKE AIRLINES,... If McDonalds were run like the airlines, … – they’d still give you a break on a full meal, over buying the items a la carte, but they would insist that you eat the whole meal in order to get the discount – And the price of a Big Mac would depend on how close it was to the nearest Burger King or Wendy’s

IF AIRLINES WERE... If airlines were run like Microsoft, … – The price for the return flight would go up mid-trip

IF AIRLINES WERE... If airlines were run like Microsoft, … – The price for the return flight would go up mid-trip – The airplane would stop working every few hours - at random moments - and tech support would tell the pilot to turn it off and back on again (while cruising at 33,000 feet)

IF AIRLINES WERE... If airlines were run like Microsoft, … – The price for the return flight would go up mid-trip – The airplane would stop working every few hours - at random moments - and tech support would tell the pilot to turn it off and back on again (while cruising at 33,000 feet) – And our stock options would be worth something

IF AIRLINES WERE... If airlines were run like a long distance phone company, … – We’d solicit passengers by phone, during dinnertime

IF AIRLINES WERE... If airlines were run like a long distance phone company, … – We’d solicit passengers by phone, during dinnertime – We’d offer unlimited travel for $39 a month

IF AIRLINES WERE... If airlines were run like a long distance phone company, … – We’d solicit passengers by phone, during dinnertime – We’d offer unlimited travel for $39 a month – And, we’d offer top tier frequent flyer status to anyone who’d switch to us

IF AIRLINES WERE... If airlines were run like Congress, … – Come to think of it, they are: We spend more than we take in

IF AIRLINES WERE... If airlines were run like Congress, … – Come to think of it, they are: We spend more than we take in The public thinks we are pond scum

IF AIRLINES WERE... If airlines were run like Congress, … – Come to think of it, they are: We spend more than we take in The public thinks we are pond scum but they can’t seem to live without us or even change us very much.