American Airlines CEO Doug Parker spoke at the J.P. Morgan Aviation, Transportation and Industrials Conference today.
He made several interesting remarks such as:
- needing to pay employees more, that they wouldn’t pay frontline employees less than United or Delta. That may ultimately be necessary, but won’t make investors happy — the worry isn’t just higher wages leading to less profit as Parker suggests, but a ratcheting affect where American’s raises lead to Delta’s raises and then higher American wages. It will be interesting to see that play out.
- the importance of investments like new Flagship lounges and Flagship dining, becoming globally competitive, arguing that quality of product is going to be a key differentiator now that the three legacy airlines all have comparable global route networks. He also noted that the retrofit of 767s is complete, and that the 757s will be done next year.
Rendering of New Flagship Lounge Seating, Courtesy American Airlines
American Boeing 767 Business Class
From a customer standpoint, though, the one piece of ‘news’ that I heard in the presentation was about Basic Economy fares.
American announced that they would introduce stripped down Basic Economy fares back in their October earnings call. In their January call they announced that these fares would be introduced in the second half of 2016.
We’ve expected to see something along the lines of Delta’s Basic Economy fares. Delta introduced fares without seat assignments and with no changes permitted to compete against Spirit Airlines — the idea was to offer less, something closer to what Spirit offers, when matching price. Delta now plans to roll these fares out to international markets where they don’t have the same degree of ultra low cost competition.
At Delta elites don’t get upgrades on these fares.
I’ve long said that 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.
Now we know that American is continuing to manage by doing what Delta does. They think their elite customers will give them more revenue to be eligible to upgrade. They’re asking customers to play a lottery, because of course elites whose upgrades do not clear won’t get refunded the difference of the higher fare they had to buy.
American has said that 87% of customers fly the airline 1 time per year or less, and represent 50% of the airline’s revenue. That means more frequent flyers are only 13% of customers but contribute an outsized 50% of revenue. Eliminating the chance of a domestic upgrade from some fares will slap these customer in the face.
Maybe United will do it too, in which case there won’t be a real escape. With American’s March 22 devaluation I said that American had figured out how to reduce the value of the program just enough to avoid being worse than Delta or United. That seems to be the model here as well.
However, if United doesn’t follow suit when they introduce their own version of basic economy (which they intend to do) they have the opportunity to pick up a lot of business travel from customers whose employers require them to buy the lowest fare.
Alaska Airlines once advertised that the cuts had gone so far other airlines would soon be charging to use the lavatory.
American’s basic economy fares won’t go that far. American still offers more legroom than Spirit even at the same fare, and doesn’t charge for carry on bags. So they’re a better value. If they simply continue to ape Delta, they’ll offer AAdvantage miles on these fares (which in the new revenue-based earning model isn’t being that generous). AAdvantage miles on low fares will still be better in my view than Spirit Airlines Free Spirit miles. Besides, Ryanair’s the one that for years has been promising to charge for the lavatory and hasn’t ever done it.