11/19/2009

Modern Airline Strategies

Scott D. Nason, American Airlines Vice President of Revenue Management, published an interesting article that coincides with some of the principles taught in Chapter 10 of our textbook. The airlines industry always seems to be barely getting by in terms of earnings and cost management, but the recession has introduced further challenges to the industry.

Nason notes in this article that the competitive landscape is changing primarily due to "scale economies". Airlines have very high fixed costs and low marginal costs in terms of the number of passengers. In such an environment, economies of scale are critical. Nason's six C's--competition, coopetition, codesharing, coordination, cooperation, and colusion--reveal how airlines are attempting to survive.

This article discusses an interesting concept of working with competitors to achieve a mutual benefit. These various relationships can be evaluated using game theory. A simple example is the following situation: American and a competing airline can either competitively coordinate, or co-opete, by sharing ground services with each other or completely compete by not sharing any auxiliary services. Cost savings will be the highest if they share auxiliary services and most likely the lowest if they compete on their own (such as zero). A decision to share by one and not the other with result in cost savings for the one not sharing with little or no benefits to the other that is sharing. We can imagine that the strategy of not sharing will easily be dominated by the strategy to share. Thus, our Nash equilibrium tells us that if both rationally choose their decisions, the airlines will share auxiliary services in order to increase cost savings.

This is a real-world example in which a corporation would likely use the principles that are taught in Chapter 10 regarding game theory. For additional reading, please access the cited article by clicking here.

2 comments:

Kaylee said...

My question is if the Nash Equilibrium is for both airline companies to share the cost of a runway and equipment, which airline will sell more airline tickets? This Nash Equilibrium seams to matter more with eliminating costs. Good article.

Dr. Tufte said...

-1 on Kaylee for a spelling error.

I think that Kaylee's point about revenue is a good one, but I suspect it wasn't touched in the article for space considerations.

I do know that when airlines do stuff like this, they are usually forbidden from cooperating on most things on the revenue side - so looking at the cost side makes more sense.