The things that were most interesting to me about American’s earnings call weren’t falling airfares and weakness in South America market; the Zika virus; or American’s record profits, whether it’s fair to say that they had the most profits of any airline in history (or whether Delta ‘excluding employee profit sharing’ is higher, since of course those are wages and as Doug Parker pointed out the difference in profits between the airlines is Delta’s big losses on fuel hedging, something American doesn’t do).
I think what matters to customers is fares, operational reliability, product experience, and frequent flyer. There wasn’t a lot of discussion of product experience, but fares, operational reliability, and frequent flyer got more than cursory mentions.
The audience for the earnings call was mostly financial analysts. American was getting beaten up on, despite its profits and margins, for low fares. The critique was, why don’t they do more, actively manage to find ways to keep more of the cost savings from lower fuel? However there’s always some important tidbits that matter from a customer perspective, and to understand the direction the airline is going and what matters to its leadership. So here’s what was most interesting to me, that will be a different emphasis from mainstream financial reports on the call:
Basic Economy Fares Will Arrive in the Second Half of 2016
I listen for updates on things like Basic Economy fares, which American revealed last quarter would be how they plan to compete with ultra low cost carriers like Spirit – selling fares that don’t include some of the things that current fares do. We don’t know what things are excluded yet, like advance seat assignments or frequent flyer miles. And we don’t know what elite benefits might be excluded either.
In October American clearly suggested frequent flyers will need to ‘buy up’ to get at least some of their benefits. Airline President Scott Kirby said “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.
On today’s call American President Scott Kirby said that it would be some time in the second half of the year before Basic Economy rolls out, and 2017 before there’s a meaningful effect on revenue. But he sees the change “as significant as the change to ancillary revenues in the 2008 timeframe.”
AAdvantage Frequent Flyer Program is an Important Financial Driver for the Airline
American repeated again more than once that they don’t have a new credit card deal at higher revenue the way that United, Delta, and Southwest do on a year-over-year basis. They re-upped a 5 year deal in 2013 with Citibank, and of course that will get renewed or replaced sometime over the next 24 months.
That’s one the differences they point out as to why they’re not improving performance at a faster rate relative to competitors (analyst Jamie Baker had suggested their not outperforming peers suggested there really aren’t integration gains). The other explanations were the huge increases in capacity in Delta and American’s exposure to Brazil, which was over 6% of revenue at the time of the merger and is now down to 2%. But the credit card deal…
American is banking (heh) a lot on its credit card agreements. Which means the value of the AAdvantage program matters. A lot.
They describe revenue-based frequent flyer program as ‘upside’ for the airline. It’s cost-savings. The award chart is going to be cost savings. Revenue-based earning is going to mean fewer miles awarded going forward than under the status quo program. American admits that (they argue that mileage-earning will be the same as it was under the old program before the premium cabin earning bonuses).
The new program won’t be doing more to put butts in seats, help them sell more miles, etc. Delta went revenue-based in an environment of increasing fares when they didn’t need to spend on marketing. United copied Delta because United copies Delta. American is taking the plunge after the revenue environment has turned. Their program isn’t going to be worse than Delta’s and United’s (although award availability isn’t as good as United with its Star Alliance partners), so they may not lose too much business by doing so. But talking about it as through it will drive revenue upside is either delusional or disingenuous.
American’s Operational Reliability is a Lesson in How to Annoy Customers
American sees the key metric for operational reliability as “D=0” – pushback exactly on time (or before). It’s an “important metric, indicative of where we’re headed.” And the way they’re getting there is anathema to customers (see American’s Goldilocks Problem).
Of course operational reliability is important and leaving on time contributes to arriving on time (which is what matters most). But American gets there by starting the boarding process earlier than the printed time on boarding passes.
Passengers can’t just adjust for that and American doesn’t print earlier boarding times e.g. 40 or 45 minutes before departure instead of 30 minutes. Sometimes the aircraft isn’t on the ground or ready to board.
So you get variable, unpredictable boarding times. Customers either have to waste a lot of time at the airport and gate earlier (or stopping work in the lounge early to go to the gate) or wind up gate checking their carry on bag and wasting time on arrival at baggage claim.
Given the focus on ‘D=0’ I expect unpredictable boarding and gate chaos to continue.