Why American Has Its Frequent Flyer and IT Priorities Right (and Randy Petersen is Wrong)

Doug Parker said that American AAdvantage wouldn’t be going revenue-based at this point, that their key metric is combining the AAdvantage program with Dividend Miles, and that once they accomplish that they’ll evaluate what’s next.

In his opening remarks to the September issue of Inside Flyer, Randy Petersen seems to push for a revenue-based program now. He asks,

Really? How could the topic not even be on the plate right now? Let’s see, the change in both the Southwest Rapid Rewards and Delta SkyMiles programs reportedly cost tens of millions, if not hundreds of millions of dollars in technology changes to cconvert to revenue-based programs – and both were delayed upwards of two years because of technical hurdles associated with the change – and the topic is not on the table at American? … I would think that regardless of where they might end up down the road, they would be building their new system with revenue-based loyalty in mind.

I genuinely don’t understand Randy’s apparent enthusiasm for revenue-based programs. He has been predicting for some time that American would adopt one as part of the merger with US Airways (US Airways apparently had such a program more or less ‘in the can’ before the merger made such a move irrelevant for Dividend Miles). He suggested making one transition (merge programs and become revenue-based at the same time) rather than two (get members comfortable with a combined program and then go revenue-based).

Changing the underlying value proposition of a profitable, multi-billion dollar business is a pretty big, bold step – that could work well or fail spectacularly (or do very little, Delta may just not need to spend much on marketing these days to fill the incremental seats on its planes).

But it also makes good sense to:

  • Wait and see what happens when other programs actually do it. Does it work for them? Do they lose business?
  • Focus on getting the merger right. Integrating two airlines (in some some cases, really three, to the extent that US Airways and the legacy America West systems continued to operate in parallel) is a Hurculean task. United flubbed it badly with Continental. Getting it wrong could easily cost hundreds of millions of dollars or more. So why risk it?

The mantra across American is “integrate before we innovate.” You hear it over and over from every department. Applying that to AAdvantage recognizes that the single biggest gain they have to make comes from successfully combining to programs and two airlines.

In the meantime, they get to wait and watch.

The strongest case that seems to be convincing lots of industry folks about the wisdom of revenue-based programs is that:

  1. Delta is a very successful airline. They’re earning a good rate of return and running a strong operation.
  2. Delta is doing it.

But not every airline is Delta, even if they want to be. And Delta has had its successes without being revenue-based. If anything, the Delta experience suggests that being a good airline and being not revenue-based works.

United is managing by doing what Delta does. American isn’t at this point. The smart play is to look at the data and see what it tells you as you make decisions.

American AAdvantage is keenly aware of what the rest of the industry is doing. And it wouldn’t be surprising at all for them to have folks game-planning what possible future scenarios look like.

They should be doing that. But they also appear to be taking a much more prudent course — maybe not making investments in the tens or hundreds of millions of dollars — not to mention the focus of senior IT leadership — when they need their IT infrastructure focused primarily on integration.

So on this one, I think Randy’s wrong about how American ought to be ordering their resources, and what the airline and program have said they’re doing appears to be overwhelmingly the prudent course.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Fact: AAdvantage is quite profitable
    Fact: UA/CO murger was a mess
    Fact: DL was profitable before the SkyMiles revenue switch.

    I’m guessing switching AAdvantage to revenue based while merging with DividendMiles is going to be cheaper than going the merge and the switch separately down the line, but based on the above facts, saving that money to take a risk of breaking everything seems pretty short sighted.

  2. Why bother with revenue based earning but mileage based status? Delta could have achieved the same thing by doing what every Asian and European carrier does – by chopping the earnings rates for discounted economy booking classes down to 25% or even 10%, while raising full Y and J upwards. Achieves the same thing, and they do it already for partners. Doesn’t AA already do this with EQP?

  3. From an implementation perspective, it’s far easier to integrate the data from two sources (Dividend Miles and AAdvantage) and then build a new application that uses the data (revenue-based). It’s harder to build the application and then integrate the data because you have to build pathways to two data sources instead of one. And the hardest thing of all would be to get halfway down the road of integrating the databases then drop everything and build a revenue-based system, and then pick up the data migration where you left off.

  4. I think Gary is spot on with this one. And if there is an example of how not to do it, it’s UA/CO — they changed way too much as they brought things together, they ended up losing valuable customers (and that’s before going revenue based).

  5. Do keep in mind reg Delta they have not yet seen the real impact of #Skymiles2015. Most, even elite flyers, have no clue what is to come. They will by Feb/March and we will see just what impact the implemented program has on the company. Delta has done 4 SDC rule changes over a few years; expect HUGE SM changes if this go bad next year!

  6. Completely agree with you Gary. What is Randy’s problem for pushing so hard for a revenue based system? It makes no sense for aa and for Randy’s businesses either- if all airlines go revenue based travel blogs become significantly less relevant

  7. I think the elephant in the room is what happens to programs that are revenue based once the IRS decides to look into it. If it truly becomes a rebate for travel paid by someone else (most business travelers are spending their company’s/investors’ money, not their own), then the IRS may treat this as compensation. That then becomes taxable.

    If it’s not revenue-based earning, then it’s something they might not sniff around on as much.

  8. Andy has it right: AA doesn’t need to switch to revenue-based status earning because qualification with EQPs already fast-tracks passengers who spend more. It’s a long-in-place de facto revenue-based program.

    AnonChi does raise an interesting point about potential tax consequences, especially for business travelers.

  9. Sounds like Randy gave Doug Parker a cold headache……….Advantage has never been a frequent flyer follower as much as they have been an innovator……why change that Randy?…….and Andy and Susan B have the formula laid out…….much simpler for IT folks to program in the % rather than change it all to $$$…….

  10. AA already has the capability of running a revenue based program. That is a large part of what ventana upgrade was all about. Any age t using the system can now see your spend numbers and decide whether to give you a fee waiver or frant you a specia, request accordingly.

    All they have to do is migrate US on the same platform and make a few adjustments to calculations and the GUI and voila, there is the revenue based system.

    I wouldn’t trust Douggie not to declaue any further than I can throw him….

  11. Corky has is right. Integrate then innovate. Trying to bite off more than you can chew is a mistake that hurts everyone if things don’t go perfectly – morale is lowered, Customers are let down, investorts forecast inaccurately. Worse, it can be more expensive to build as you try to duplicate everything across 2 systems and deal with unique errors. Much easier to come to common, established standard, then innovate.

  12. I wonder at Randy’s motivation behind his advocacy of revenue-based programs. (I’m not 100% clear if he’s in favor of RDM, EQM, or both) The FFP game changes significantly if a full revenue-based (a la’ Southwest) came to fruition across the board. And so too would BA, MP, and all the related miles & points businesses.

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