The Role of Purchasing

Purchasing at American Airlines

When it comes to running and operating a business, one of the most important functions in many to most situations is purchasing. Whether it be things like fuel, office supplies, uniforms or other things, buying such items at competitive prices and in a way that keeps the business operational and steady in terms of its day-to-day operations is very important and this cannot be understated. Even so, purchasing is far from a simple thing as there are many options out there, there are competing firms that influence the proverbial playing field and there are also regulatory and legal concerns that have to be dealt with and taken into account. This particular report will focus mostly on American Airlines in particular but there are obviously some industry trends and events that American Airlines has or will need to take seriously so they will be mentioned as well. While the airline industry is very treacherous and perilous at times, there is a set of standard practices that should be the norm when it comes to executing and maintaining purchasing within the airline industry sphere.

Analysis

While this report will not be long enough to cover all of the ins and outs of purchasing, this report will cover some of the more important facets of the subject as it relates to the airline industry in general and American Airlines in particular. Upon reviewing each of the facets, a specific description of American Airlines will be rendered including how their purchasing is structured, what strategies they use and how the broader purchasing process contributes to the success of the organization. One such facet that has to be focused on is what is referred to as customer loyalty and how purchasing figures into that equation. Indeed, there are some that say that purchasing can be used as a tool to enhance a company's customer loyalty performance scheme and, by extension, their loyalty scores. Indeed, keeping customers coming back to the same airline (e.g. American Airlines) would be an important thing to do as keeping a loyal customer is a lot easier than attracting new ones, especially those that have been turned off by your airline. With that in mind, Schultz (2014) discusses that customer loyalty (or lack thereof) has an impact on the marketing or business model of a company and this would certainly impact purchasing to at least some degree. The degree to which this is all assessed and analyzed includes the use of customer modeling techniques. Such modeling has been used with success by Tesco PLC and it is now being applied to the airline industry. The gist of using the model is that the behaviors and patterns of customers are observed and analyzed based on what motivates them, what products they tend to favor and why they make the decisions they make. This in turn could and should be used to craft and design a customer loyalty program that will attract them to a given product and keep them loyal to the same. To state the obvious, what the customers do and do not glom onto will have a marked and complete effect on the purchasing decisions that are made as a result. For example, if it is found that consumers prefer Pepsi products from the concessions on the flight as compared to Coke, then that would influence what the airline in turn purchases. They could either buy Pepsi only or they could buy a bit more Pepsi than Coke based on what consumers tend to prefer (Schultz, 2014).

The customer loyalty/purchasing paradigm is further expanded upon by Chacon and Mason (2011) when they focus on low-cost airlines. While American is not really in this class, they obviously compete with them and thus their purchasing decisions are certainly not irrelevant. Further, American often does discounts on their fares at least some of the time when planes are not as full as they would like or when they generally want to attract new business. As such, the habits and propensities of low-cost carriers would certainly not be irrelevant. With that, the Chacon piece also makes mention of "network" carriers and this would absolutely involve American Airlines. When it comes to customer loyalty levels at any airline, there are four levels that are commonly seen when it comes to customer loyalty and those are loyal, latent loyalty, spurious loyalty and no loyalty. These benchmarks are assessed against the "relative attitude and repeat patronage toward the airline" that a given consumer uses the most. When it comes to making purchasing decisions and when looking at customer loyalty in general, the most important factors were frequent flier programs (FFP's) and the destinations that were most commonly used by frequent fliers in general. For example, if it is found that O'Hare Airport in Chicago and Hartsfield-Jackson in Atlanta are a main focal point when it comes to customer loyalty and repeat buyers, then purchasing decisions centering on customer loyalty should center a lot on the customers at those airports. A main source of opportunity for airlines are the people that are latently loyal. If handled and marketed to the right way, those are the customers that will most likely increase their patronage and the dollars they spend. This would mean that airlines like American should center their customer loyalty purchasing decisions on those that are already loyal or are on the cusp of being that way (Chacon & Mason, 2011).

The realm of purchasing when it comes to travel on the airlines extends to the customer and consumer perspective. Indeed, what used to be done in offices and via the phone is now done partially or completely online. This requires the creation of marketplaces by American Airlines itself or by other vendors that sell flights from American and other airlines like those of travel agencies, clearing houses for flights (e.g. Travelocity) and so forth. These third party sites are a major conduit for selling flights and there is very much a "pay to play" dynamic to these sites. American has to spend money on purchasing that involves selling on third party sites so that they can get planes as full as possible on as many flights possible. Further, there are different kinds and levels of customers when it comes to purchasing sales space on these sites including business travelers, summer vacationers and so forth. The strategy of American and other websites when it comes to these sites has to be very focused, careful and aligned with profit maximization and sales volume in general (Park, Wang & Fesenmaier, 2011).

One thing that airlines have to be careful of, at least on the surface, is that segmenting the consumer market too rigidly can be something that customers grow resentful of. For example, many airlines have seized on the fact that business consumers are ready and willing to pay more for tickets because their business needs necessitate it. After if all, if a business traveler feels they must be in Los Angeles the following Monday, they will typically pay more than those that are more flexible due to having less urgent matters to attend to. However, if that same business passenger is heading home, they are deemed to be less likely to be willing to staying overnight on given nights of the week because they need to get back to their home base. The airlines realize this tendency and acting accordingly. Some would say, however, that this is not proper because it is, in a way, discrimination against the consumers. Perhaps a regular vacationing consumer wants to be home on Saturday but is pigeonholed into having a Sunday return flight because they are not a business consumer and/or they are unwilling to pay a huge premium on the flight fare to return sooner. While some assert that consumers are not obliged to fall into the proverbial slots that the airlines might want to sort them into, consumers often acquiesce to this game and the airlines are usually not betrayed by engaging in purchasing patterns that reinforce the same. Even so, it is an ethical question that does bear some merit as customers are treated more as stereotypes rather than individuals with individual needs when this sort of pattern continues. Some may counter that giving a true individual treatment to every single passenger is not rational or possible but the fact remains that some passengers are adverse affected due to what the airlines do (Rakowski, 2004).

A different study looked a bit deeper into the purchasing decisions that are made by airlines and the reactions that are rendered and manifested by consumers as a result. Indeed, when airlines like American make purchasing decisions that are centered on revenue and pricing in general, there is always going to be some sort of consumer reaction even if the consumer is not fully aware of the calculus and decision framework behind the decision. To further state the position, certain purchasing decisions can lead to certain consumer perceptions coming to light and this can lead to a lessening of trust and respect for the airline even if the perception is incompletely or simply wrong on its face. Further, this is something that is certainly not limited to airlines in a particular company. Indeed, Chapuis (2013) engaged in a "cross-cultural analysis of passenger's reactions to revenue and pricing management" and he did so for airlines in the American, French and Pacific Island markets. One takeaway from this analysis is that there is an emerging global consumer culture and it very much exerts its presence and reactions against what the airlines and other global companies of the world are doing (or not doing). As awareness of airline purchasing decisions and the like grow, Chapuis (2013) asserts that the airlines, including American, should "use global pricing strategies that maintain trust of the consumer in the provider, that is signal their benevolence and integrity" (Chapius, 2013).

Another facet of purchasing is that prices are not static and constant at all times. Some may think this is limited to gas prices and their consistent ebb and flow. However, this would be just the tip of the iceberg when it comes to the airline industry. Indeed, there are terms to learn such as systemic peak-load pricing, congestion premia and demand diverting. For example, flight volume and demand in March is one thing but the same thing during Thanksgiving weekend is something entirely different. The price, demand and supply of supplies and services ebbs and flows with the demand for flights. Fuel prices often swing based on the season as well as supply factors and shortages. For example, a refinery shutdown can cause gas prices to go up overnight. One way that airlines have been able to mitigate price spikes is to purchase things fuel and other supplies or service in advance at an agreed upon rate. What his means is that the rate remains constant even if the market rate engages in a major swing. While this can be a boon to the airline in many cases, it can also be a bust. For example, if an airline purchases fuel at a given rate and then the bottom falls out of the market price of fuel, the airline is still locked into that fixed price unless there is a mechanism in the contract stating otherwise. However, such events are rare. Even so, airlines like American have to make a decision on whether they will accept the market prices as they come or if they want to "lock in" a price in advance of what is anticipated to follow in the coming months and/or years (Escobari, 2009). Indeed, fare prices tend to stay steady or rise even when the economic climate is a little tumultuous. To wit, precisely that happened in the late 1990's when there was economic tumult in Asia and this was responded to in kind by companies like American Express and their operations in nearby Sydney, Australia (Russell, 1998).

One thing that can lead to loss of business despite the other conditions that may be present would be a plane crash. Airlines can insure themselves against a lot of things and the direct costs of a crash would indeed be one of them. However, the direct costs are just part of the picture and not everything that happens after a plane crash can be insured against. Indeed, American does not have any plane crashes to speak of ... unless one counts 9/11. Indeed, there were four planes hijacked. Two of them were United Jets and the other two were of American Airlines. Such an even or any plane crash will almost inevitably lead to a loss of demand for American (or the airline affected if it's someone else) and there is no insurance or protection against such a happenstance. Further, there is an obvious and palpable social cost to such crashes and it does not get more socially expensive than the planes that were hijacked on 9/11/2001. Even so, most safety-related events are minor and localized and do not usually result in long-term effects for the airline involved unless the entire plane and its passengers are lost as a result of whatever went wrong (Borenstein & Zimmerman, 1988; Davidsson, 2013).

Finally, purchasing can be radically affected when one airline merges with another. Indeed, American Airlines went through this themselves when they merged with Trans World Airlines, or TWA for short. To be sure, TWA has had their own consumer, safety and crash issues in the past. Beyond that, the purchasing habits and traits of each firm would be different between each airline and those differing habits would have to be merged and brought together to form a single viable company. To state the obvious, there are public fears and concerns when it comes to the merging of two or more airlines into a new company. As stated by Myong and Geddie, there is a "real impact of an airline merger" when it comes to "airline service and customer satisfaction" (Myong & Geddie, 2006). Regardless of the decisions that are made, the ongoing financial viability and survival of the airlines has to be maintained and making the proper purchasing decisions would be a huge part of that (Myong & Geddie, 2006).