Jetblue Airways Versus American Airlines: A Competitive Dynamics Game

Abstract

This exercise has been used in Darden's first-year strategy course in conjunction with the Airways versus American case series and is appropriate for any strategy course in a module addressing competitive dynamics. The purpose of this game is to explore the interdependencies of firms in competitive decision-making situations. The game requires pairs of competing firms to make a series of decisions over 12 rounds, each representing one month in a calendar year. Teams consist of a VP, a Regulator, and one or more strategic advisers. At the beginning of every month, each team has to choose one of the two pricing options to use that period. Teams will be given cards representing the two options for their respective firms. At the end of 12 rounds, the Regulators will add up the monthly profits for each team and report them to the Facilitator, who will announce industry and firm profitability. To help with calculating profits, a spreadsheet (UVA-S-0250X) is available. Excerpt UVA-S-0250 Rev. Sept. 15, 2015 JetBlue Airways versus American Airlines: A Competitive Dynamics Game On Wednesday, January 7, 2004, JetBlue commenced service from Boston's Logan International Airport. The same day, American Airlines announced a new promotion, “Fly Two to the Sun,” offering its frequent fliers a free round-trip ticket to anywhere in the world if they took two nonstop flights from Logan. In response, JetBlue was considering offering $ 69 one-way tickets on most flights originating from Boston—a substantial 22% off normal fares. In anticipation, American Airlines contemplated a similar pricing move to keep current customers and to potentially scare JetBlue out of the Boston market. Analysts predicted that a price war would have two immediate effects: a moderate increase in demand, given lower fares, and a decrease in operating profit per available seat mile, given the decline in revenues. But if one airline adopted lower prices while the other did not, the economics would favor the one making the price cuts. In other words, the decrease in price would offset the substantial increase in demand one would receive as the sole low-price provider of air travel from the Boston market. (See Exhibit 1 for a full analysis.) In addition, in an internal analysis, American Airlines had estimated that for every new passenger who took advantage of low fares from American, there was a 5% likelihood that the passenger would enroll in American's frequent flyer program and become a loyal customer. American Airlines had found that such loyal customers were unlikely to abandon the airline even if fares increased compared to its rivals. . . .