American’s Earnings Call: American to Follow Delta on Frequent Flyer and “No Benefit” Fares?

In response to a question about ‘what comes next’ after the American Airlines reservation system integration on this morning’s earnings call, airline President Scott Kirby made two points. It’s telling that these are the two things he chose to highlight.

  • Scott said “more innovation within the frequent flyer program”
  • And “doing more to disaggregate the product” and doing more to “offer fares that can compete with low cost carriers” that have “a suite of attributes that are appropriate to those prices.”

These are of course the same points that Scott Kirby made in May.

“We would have loved to make some modifications to the frequent flyer program,” and then mentions opportunities for merchandising (unbundled services) and then says this includes shamelessly copying some of things competitors have done.

Will American Ruin Their Key Competitive AAdvantege?

Earlier this week I said that my hope is that American won’t ruin the AAdvantage program but I also noted that this may be the least likely scenario. Kirby reminds us that changes to the AAdvantage program are on the horizon. I think it’s too late in any reasonable universe for American to go revenue-based in 2016. But no doubt changes will come.

David Koenig from Associated Press specifically asked if the changes to AAdvantage would be going revenue-based and Scott Kirby demurred, saying they weren’t ready to talk about it. In response to a different question, Kirby said they believe AAdvantage is the best loyalty program in the marketplace and they ‘look forward to making it better’ (cough).

We should also expect to see something along the lines of Delta’s Basic Economy fares.

Some Fares May Exclude Elite Benefits Starting Sometime Next Year

Delta introduced ‘basic economy’ fares to compete against Spirit Airlines where Spirit is offering super low fares on non-stop routes Delta is flying (although they seem to be growing the markets where they offer these fares). Spirit doesn’t offer included seat assignments, and charges myriad fees that Delta does not (like for carry on bags, and Delta still serves free soft drinks in economy even to passengers on these fares which Spirit does not). So Delta offers cheaper flights with fewer inclusions.

Elites don’t get upgrades on these fares. With Delta there’s a minimum revenue requirement on an individual trip for elite benefits, not just minimum revenue across the year to earn status. Delta has minimum revenue requirements for elite status, so presumably customers fly on these fares are doing so only occasionally. Delta sees the customers as profitable enough to reward — just not all the time.

Delta’s elite frequent flyers need to shout from the rooftops, “I am not my fare.” I am a valued customer, or I am not, and how welcome I’m made to feel should not change between Tuesday on a full fare and Thursday on a discount one when I’m buying a ticket pretty much every week. For the rest of customers though Delta is (for the most part) probably doing what they ought to do.

Of course we don’t know what American’s version of basic economy fares will look like. My area of focus will be how the airline’s frequent flyers are treated. American made the point on the call that 87% of customers fly the airline 1 time per year or less, and represent 50% of the airline’s revenue. That suggests regular customers represent an outsized portion of revenue, and that’s important to recognize.

And American clearly suggested frequent flyers will need to ‘buy up’ to get at least some of their benefits. The quote was “we are going to go to a product that is different” sometime in 2016; that “it will allow us to compete with the ultra low cost carriers” and it will allow “our customers who want a better product and better seats on the airplane” to have the choice not to purchase that product.

So whether it’s having to buy something other than the cheapest fare to be eligible for upgrades or premium seats it sounds like American may be taking something away from elites who buy the cheapest tickets at some point next year.

Other Airlines are Benefiting More from Having Just Re-Upped Their Credit Card Deals

Meanwhile on revenue comparisons, American made the point that one driver of lower revenue per available seat miles relative to competitors — in addition to low fare competition, and lower revenue in South America where American Airlines has a lot of capacity — is that their three major domestic competitors (Delta, United, and Southwest) all have new credit card deals which entail higher year-over-year revenue. We’re a couple of years off from a new AAdvantage co-brand deal.

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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  1. So 13% of customers represent 50% off the revenue, and Kirby wants to take away elite benefits from the cheapest fares? I mean, some of the benefits don’t even cost anything (e.g. priority lines) and some only add an incremental amount (e.g., checked bags, miles). Why be the same as the others in disenfranchising loyal flyers, instead of setting themselves apart?

    I’m glad I have my lifetime status, though to have it Kirby’s way it may not mean much in the end.

  2. They should limit benefits and awarding of miles on these crazy fares we are seeing. No way can they continue to offer upgrades, etc on $80 RT fares to BOS, $120 to LAX, and $499 to DPS.

  3. @John: Remember that AA Golds and Platinums have to pay for upgrades (except for about 1/5 of their miles flown). You don’t say where your quoted fares are from, but if you’re talking about a $120 BOS-LAX fare, that will cost 6 500 mile upgrades. That’s roughly $180 of upgrades (a bit less if using earned upgrades), which seems like very nice additional revenue when AA is willing to sell a seat on the plane for $120.

  4. DL elites have definitely been vocal, but to no avail of course. I’m sure if AA goes in similar directions, AA elites will have similar luck (or lack thereof). The 3 remaining legacies can pretty much emulate one another at will doing whatever they think best helps their bottom line. And aside from WN and a few others in certain areas, what choice does one have for domestic air travel?

    Now, eventually there will be a downturn and the airlines may have to be a bit more flyer-friendly and elite-friendly. when that will be, who knows.

  5. @John $499 to DPS? WHERE?!?

    Delta must laugh their asses off. they have a good product and a horrible FF plan and have influenced UA, and soon AA, with poor products to copy their awful FF program. win-win for delta. is AA mgmt really as dense as UA? the ONLY thing AA has going for it is AAdvantage. tweak, ok. destroy and all those UA flyers won’t stay.

    time for the ME carriers to fifth freedom all major US routes. good luck competing with their product US ‘big 3’…

  6. Gary — good summary of the call from a frequent flyer perspective.

    The stat that 87% of AA’s customers only fly the airline once a year — or less — is fascinating. It’s something to remember when you present a sophisticated analysis of the pros and cons of various frequent flyer program minutia. The reality is the vast majority of airline customers don’t have a clue about these benefits: they’re are a lot more “kettles” than experts!

    Which I think explains why “being generous” on frequent flyer benefits is not a winning strategy for airlines. Rather, the winning strategy for them is to lavish love on attracting the highest paying customers (not necessarily the ones who fly multiple times), and be less generous with lower paying, infrequent customers (who probably don’t understand they’re getting less, anyway). I think this differentiation that we’ve been seeing the last few years, aided by data mining, will continue.

    Bottomline, I’m pretty sure AA’s frequent flyer program is going to look a lot more like DL’s and UA’s soon.

  7. AA is on the verge of gutting their AAdvantage program. It’s a huge mistake. Once AA guts the program there will no longer be any reason for me to continue to be loyal to them. It then becomes who offers the lowest price and best service. Now they have me hooked on their program so when I have a choice I typically choose AA. In the future if the program becomes meaningless to me I’m going to start flying airlines I typically don’t fly like Virgin America, Southwest or Jet Blue because I think they offer excellent alternatives to legacy carriers. The majors are being penny wise and pound foolish and during the next major recession they’re going to pay dearly for it.

  8. The executives will have made their bonuses and left for greener pastures and taken a few good looking air hostesses for company by the time the next recession hits.

  9. Perhaps I am wrong, I will be glad to consider alternative scenarios.
    My understanding is that most very frequent fliers and especially those in premium or full fare categories are not paying their own way. Admit it or not, when you are not paying out of your pocket decision making follows a different path. Maybe, just maybe, the airlines realize these people need to fly anyway and the choice of carrier will be decided by most convenient routing or employer policy.
    Based on the above, Airlines need not consider shrill threats unless they come from a bunch of major corporations and they are there to negotiate fares, not frequent flyer benefits.

  10. In ancient times (1970’s, 1980’s and 1990’s), AA had a distinct advantage in things like passenger yield management that it was able to leverage to maximize it’s share of premium travelers. AAdvantage was one of the results. AA would have people who would be able to analyze how certain changes to AAdvantage would change that mix of 13% of passengers providing 50% of revenue. They would know how many were from corporate accounts (which aren’t as sensitive to AAdvantage changes). They would know how that mix changed when UAL and DAL made changes to their programs, etc. They would know how many of this group is hub captured and have an idea of who could be captured from DAL and UAL. Question is, are those people still there? What are they saying if they are still there? And what would Kirby and Parker do with that information?

    Delta’s model suggests that your FF program can be crap if your ops and product are good. United suggests that you’re going to lose some premium passengers if you have a crap program and crap ops and product.

    Right now AA’s ops are better than United’s but still not the “on time machine” of the late 1980’s – no one would say they are as good as Delta’s. And AA still has THE major integration challenge left — employee work groups. Despite the wishful thinking, current management was never able to accomplish that at HP/US. Their record is worse than UAL.

    As far as product goes, there have been improvements but there’s way too much inconsistency right now. Wifi is not universal. MCE is not universal. Seat power is not universal. IFE is not universal. International Business Class lie flat seats are not universal. You simply don’t know what you’re going to get from plane to plane, even within Legacy AA or Legacy US planes. They’ll get there, but it’s still a few years away.

    I guess my take is that they’re going to make changes to AAdvantage and they’re not going to be good. It would be foolish, however, to just match Delta. I don’t think that they’re fools. AA is not yet in a position to match Delta’s product and operations and a better FF program is a differentiation that they still need. How much better remains to be seen.

  11. Of the 13% who fly more than once a year, generating 50% of AA’s revenue, what percentage are flying low-cost fares multiple times a year, and how much do their flights contribute to that 50%? And what percentage of them are experienced at finding outsized value with miles redemptions? What percentage of the remaining 87% hold status with AA in some form, remembering they fly with AA once a year or less?

    I’m not happy at the prospect of AA switching to a revenue-based program. Nor was I when DL and UA did it. But 7/8 of AA’s customer base won’t be affected significantly if they do. More, really, since many of the 13% are *not* flying on the cheap fares. We need to remember that, as noisy and contentious are we may be, we are truthfully a very small proportion of AA’s customer base.

    The hobby has always been in flux, and always will be. Adapt and move on when the current best option ceases to be the best option. Until then, wring what you can out of it. 🙂

  12. iahphx you’ve got it completely backwards.

    87% of AAs flyers provide 50% of revenue, and fly with AA once a year or less. What that means is that those people are highly likely not to make use of any AAdvantage benefits, which means it doesn’t cost as much for AA to offer those benefits.

    13% of AA flyers provide 50% of revenue. Yes, many / most of those people aren’t paying for their own flying. but they ARE taking advantage of the AAdvantage program. Which means that screwing them over on AAdvantage benefits will be felt personally, far more so than screwing them on price.

    If you think that those people can’t find ways to “return the favor” to AA, you are dreaming. Yes, people are constrained by company rules. Which just means they may have to work a bit harder to game the system. It’s therefore to AA’s best interest to avoid giving them motivation to game the system.

    No?

  13. I am wildly entertained by the number of people who are calling on AA to not gut the AAdvantage program–since such a gutting would lose AA its advantage (no pun intended) over UA and DL. What most simpletons ignore is the simple fact that with only 3 major legacies and Southwest, there is more opportunity cost to being the most generous loyalty program than there is in actual costs to gutting the program and being competitive with UA and DL. With 5-6 majors, there were enough competitive forces to keep those majors more honest; with only 3 majors, the competitive forces are substantially less. Once AA has devalued its miles and revamped its loyalty program to be more comparable with that of UA and/or DL, flyers will not necessarily drop AA–since switching at that point to already devalued UA or DL isn’t going to bring any advantage again.

    The future holds that those flyers living close to a major hub will most likely fly that hub’s major airline. Where there is overlap (e.g NYC, DC, LAX, ORD, SEA, etc), flyers will have a small choice between majors. But for most flyers from most major cities, there will be one major airline choice and everyone else. That will redistribute the concept of airline loyalty to one of airline geographical ease.

  14. Bill, I think you’re closer to the truth than Greg D is. There’s no evidence that going to a “less lucrative” revenue-based frequent flyer program hurt profitability. Indeed, the evidence suggests the contrary. So why “pay” customers for their loyalty if you don’t need to? A business would be foolish to do so.

    That said, there are obviously big spenders out there — corporations, some high net-worth individuals, opinion leaders — whose loyalty is worth cultivating by spending money on them. The trick, of course, is not to spend money on customers you’d get anyway: like many hub-captive biz travellers., Given how much information the airlines are now able to collect about their passengers, I’m pretty sure that they now have the tools to mine this information to produce increased profitability. I don’t think that giving every traveler a mile for every mile they fly will be part of that strategy.

  15. Fasten your seat belts AA fliers… turbulence ahead. Here comes the ‘innovations’. FKA enhancements and devaluations.

  16. @Bill @iahphx

    Except… without any differentiator (like AAdvantage), then won’t it become just about price? After all, no reason to stay loyal. No benefit. No “Aadvantage”. May as well kayak and shop around and take what’s cheapest for a given routing. That may well lead to a race to the bottom for price, erasing any outsized margins.

    Or, it may go another way, where business travelers overwhelmingly choose the best operator (currently Delta?). That costs more, requires investment. How much does an airline have to outperform on reliability and IRROPS handling to capture a significant share? How much does that cost? This also reduces margins.

    Or it’s a combination of the two. That’s even worse for the airlines.

    I think a more generous loyalty program can provide additional high-margin revenue far more than it costs to provide the benefits.

  17. The legacy airlines are being short sided. There is nothing great about any domestic carrier including Delta that would encourage me to fly on them if they continue to devalue. Lots of choices and all they will do is start competing over price driving their service even lower. Plenty of choices for significantly better international carriers too when flying long haul. Times may be good for now but the airline business is incredibly cyclical and it won’t be long before they’ll be making all kinds of offers trying to get their better customers back.

  18. Except… without any differentiator (like AAdvantage), then won’t it become just about price?

    Price, schedule and reliability generally rule. Witness DL’s success.

    The FT crowd that selects airlines based on how much Krug and caviar they get out of $99 round-trip mileage runs that route through DFW, ORD and MIA, or how many $250 future flight credits they can get for burned-out overhead light bulbs is a rounding error (and probably not a particularly desirable customer base to court, anyways, since their whole game is finding arbitrage and using it to advantage).

  19. @IAH et al you guys read like you have less than 5 years experience flying/in life. there’s this whole economic cycle thingy. pronouncing that there is no negative blow back to going revenue based, basing it on best-of-times data is comical/naive/stupid. when it hits the fan (and it WILL, world is drunk on 8 years of printed money and 0% interest rates), THEN we’ll see. THAT is when loyalty matters to an airline’s bottom line- not now. geesh. duh. and as to that 87%, they REALLY need them too when cattle class is empty and corp. travel budgets are reduced. have you never been flyers during a recession?!? what business only manages their business based on the perfect scenario for profitability (ie: now)?!? businesses that have to be bailed out by taxpayers during recessions- that’s who! right now, airlines are shifting spend on CC’s to 2x cashback cards and versatile currencies. when redemptions go revenue based, there will be NO REASON to use those cards. i do not fly jetblue, Alaska, virgin or southwest for ONE REASON: loyalty= redeemable miles and EQM’/EQP. when that gets me nothing, i’ll go with the cheaper fare. (period)

    furthermore, treating your best (ie: 13%-ers) like trash part of the time isn’t a good business strategy. that top tier business class guy whose company pays for much of his travel and looks rich, but, in reality, is just a working class slob… when he, wifey and the kids fly on his dime or miles, looks exactly like those ‘unwashed masses’ when valuing him based upon the fare he bought. do you really think he should be treated like nothing bc he found a good fare for the fam vacay? as a business owner, i can’t imagine a scenario where i treat my best customers great when they place a big order, but when they place a small order for low margin stuff, i treat them like dirt and pretend to forget their name! this is the delta model direction they’re all going. perhaps my customer i treat like crap still buys from me in a strong economy bc i’m convenient and have the supply he needs. when times get tough and supply/demand flips to a buyers market, pretty sure he’ll happily buy from the other guys in a heartbeat.

  20. @eponymous_coward

    Yes, but DL is only succeeding because their service, IRROPS handling, and reliability (in addition to the right schedule) is outperforming at a significant margin. If AA gets rid of their main differentiator (the FFP), they would have to either compete on price, or invest more to compete on service and reliability. This is all assuming that the airlines are all trying to have the right # of frequencies and non-stop schedules for business travelers.

    What would it cost to get the entire operation to a point where people ditch DL for AA because of reliability? Even though we make fun of what Smisek said, there is no doubt a point where investing in an additional 1% of improvement will not yield >1% of profit, and then you’re back to competing on price since you’ve tapped out reliability/service.

    We can only guess since we don’t have the data, but my guess is still that having a more generous loyalty program yields far more profit than it costs in benefits.

  21. I fly AA only because AAdvantage is generous. If they gut their frequent flyer program I’m out–even MCE is uncomfortable (I usually fly coach), the service is rarely better than curt, and let’s not talk about the food and entertainment. Platinum isn’t as nice as ExP was, but the perks still make my 50K+ miles/year more tolerable. Take them away and I might as well fly a more comfortable airline and/or get more active in the points game.

  22. @abby, except nowadays Wall St (the patron that CEOs need to keep happy) is mostly about short term thinking. Besides, when the shit hits the fan, just offer fantastic promotions.

    I really don’t know what is this “loyalty” thing some of you speak of. There are only opportunists. On both sides.

  23. What AA should bear in mind is that it lags far behind DL in service (in flight and otherwise), equipment/product, and operational performance. What all revenue-based programs (and employers) should bear in mind is that they create a conflict of interest between the employee who gets ff miles and the employer who pays the bill.

    Airlines in general have become the lackeys of Wall Street analysts who care only about short-term eps. It is now the tyranny of the shareholder. Employees and customers, including the “high value” ones, are only fodder to satisfy the goals of the institutional investors and to keep senior management rolling in the bonus dough.

  24. The rise of the economy minus product does not concern me all that much, there is a market for it and the tickets are usually so restrictive that they are not a reasonable option for business travellers. I think the head of AirAsia said it best in that his ultra low cost airline allowed passengers to fly that otherwise couldn’t and for others to see friends and family more often. that is a good thing. I just wisk the airlines where advancing the economy product a bit in the hard product a bit so the difference wasn’t entirely on the soft side. economy is simply a poor experience with multiple unaddressed pain points airlines have not addressed.#

  25. Several Comments:
    (1) The number of people that “have” to fly are limited. Otherwise, the airline could just raise fares and watch the profits roll in.
    (2) The idea that anyone is getting Cavier and Krug for no cost is absurd. Somebody is paying a lot for that and it is not the airlines. When I get First Class via my Amex miles (done my bonuses already), it is because I put a lot of spending on Amex Everyday Spend card. The retailers, AMEX, and I am paying for that seat and not the airline.
    (3) It is my educated guess that miles hobbyists spend a lot of their descretionary income on flying. It may be that they fly nicer, but they still provide a lot of extra revenue in one way or another. I could certainly save myself a lot of money by buying the cheapest fair all the time.
    (4) Who says that Delta has not hurt themselves by their frequent flyer policies. They probably have, it is just hidden by increasing profits from their operations. I am guessing they have more captured hubs.
    (5) A number of people have indicated that companies are not sensitive to the increased costs of flying. Not sure what world they live in. My company tries to force the lowest fare on me with some other airline than AA. I have to work hard to keep an AA flight. I do it BECAUSE I have status. More and more “essential” flights are being replaced by teleconferences. Companies are becoming more and more expense conscious not less.

    Oh, btw, don’t argue with Bill, he is either a twit, troll, or paid defender of airline’s taking away benefits. Besides, remember the old saying “Never wrestle with a pig—you get dirty and the pig likes it.”

  26. This is a purely selfish post. I will reach Executive Platinum status with American Airlines for the first time this year, mainly (90%) from my own pocket. It’s a personal goal. If AAdvantage’s ‘improved’ model takes away current guaranteed elite EXP benefits for 2016 (e.g., using SWUs on any paid fare, complimentary upgrades to First Class on domestic paid fares, complimentary snacks and drinks, etc.), the benefits of which I am flying to earn this year, I will go AApe. If American Airlines also increases the mileage needed for its award chart, you might see me on the news.

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