American Airlines Case Solution

2. Analysis

In the late 1990s, American Airlines had to compete in the market with other competitors that provided low-cost services. This initiated a new trend in the market of low-cost carriers while the demand also increased due to the new pricing. American Airlines also utilized the opportunity and increased its number of flights at a reduced price. While this situation was ideal for its business, the airline seemed to flip this policy and proceeded in the other direction; it reduced the number of flights and started charging a higher price (CNBC, 2009). From the point of view of the Airline, the strategy was adopted because a considerable market share and reputation had already been gained and now, the airline wanted to take advantage of that position. On the other hand, the customer community did not appreciate the change and several lawsuits were filed against the airline due to its fixing practice (Kierler, 2016).

It should be noted that along with American Airlines, several other Airlines including Delta, United and Southwest were also mentioned in the lawsuits as they were also engaged in price fixing. The reason behind these lawsuits is that these airlines seemed to reduce the flight capacity and charge a higher price for their limited seats (Martin, 2015). There are speculations that the airlines have coordinated with each other about the number of seats and destinations and eventually, a fewer number of flights are being offered to the customers. These practices led American Airlines to maintain a steep negative relation between its prices and the service it provides (Reuters, 2015).

According to the economic concept of pricing, there is a positive relation between the supply and price of a product while a negative relation exists between the demand and price. In the case of American Airlines, it initially increased its demand by providing cheaper flights but changed that strategy by shrinking its quantity supplied leading to an artificial shortage that increased the prices for the customers (Baye & Prince, 2014). Considering the fact that other airlines are also doing the same, the situation leads to the inference that this is a case of a price collusion in which the airlines are fixing the quantity and prices to increase their profits and get the best out of the customer community (Maxon, 2015).

These practices are clearly an example of anti-competitive business strategies that discourage fair competition in the market and lead to inefficiencies. As these airlines combined consist of 80% of the market, it is more likely that this is price fixing because being a dominant service provider group in the industry, it is easier for these airlines to collaborate and illegally manipulate their airfares (Harwell, Hasley, & Moore, 2015).   

3. Solutions

The price fixing strategy of American Airlines raises a lot of questions on its efficiency and business ethics. Although the executives of the airline deny being involved in any illegal behavior, the patterns in their supply and prices coordinate with the idea that price fixing was indeed, practiced. This fixing can not only be harmful to the efficacy of the market but can also affect the reputation of the airline to a major extent. Moreover, the concepts of economic pricing also don’t support the fact of manipulating the price to such extreme extent even in a price cartel (Perloff, 2008).

This price fixing reduces the opportunities for other airlines in the industry to be indulged in a fair competition and also makes it difficult for them to compete with their business rivals. While the airline provided its service at extremely low prices that were probably below its production cost, increasing the price to this level is a form of forced monopoly (Hirschey, 2000). Additionally, while other airlines are also collaborating with American Airlines, this price fixing is in the form of a cartel that further deteriorates the fairness of the market. American Airlines should attempt to reduce the effect of this collusion and adopt other ways to offer an economically competitive service (Kierler, 2016).

Although there are several airlines providing their services in the US, American Airlines limits its service to some specific destinations. This is certainly against the rules of a perfect market as the quantity provided in a competitive market should be at an efficient level. American Airlines should increase the number of destinations and provide the services in more spots than it is offering right now. This is to make sure that an efficient quantity is provided to the customer community, and the price is determined according to the rules of a competitive market and not according to a monopoly (The Economist, 2016).

It is an ethical right of the airline to consider its costs and other related business issues before offering a service to the customers. It means that the airline does not have to offer the same number of destinations it used to provide in the beginning when the prices were extremely low. However, increasing the number of destinations can potentially make its business look more ethical (Kierler, 2016). Additionally, accommodating an increased number of customers will potentially generate more revenues for the airline.