American Airlines President Scott Kirby spoke yesterday at the Wolfe Research 9th Annual Global Transportation Conference offering mostly extemporaneous comments in response to investment analyst questions.
The theme that analysts are interested in is the revenue environment that airlines, and especially American, are facing — they’ve seen declines in passenger revenue per available seat mile (PRASM) despite huge declines in fuel costs that have driven profitability. And they want to know when that will turn around, and what American is doing to accelerate that.
American already rolled out new forecasting system as part of its improved yield management. He believes they simply didn’t have good, actionable data at the flight level about likely purchase of different kinds of fares, giving the example of ‘0.1 tickets sold at a given fare with a standard deviation of 3’. There’s some challenges in the near-term where individual managers had local knowledge about a flight, with separate spreadsheets, and made changes to flight availability based on that knowledge while there’s a learning curve for the new system. But they want to get better at tailoring availability of fares on a flight to demand for that flight.
In his narrative, it used to be that airlines would forecast demand for full fare tickets and they would forecast demand for leisure tickets, and those were treated as distinct – but in a world where there are discount fares with no advance purchase requirements that simply isn’t true anymore. People only buy more expensive tickets when less expensive tickets aren’t available.
In the past they segmented customers based on fare rules. Now they’re moving to segmenting customers based on the product those customers want to buy. Instead of treating everyone the same after their tickets are purchased, they want to give customers exactly what they are buying. That’s the Delta model, where Delta has been saying they want customers “to pick the airline and the product that works best for them.”
Kirby says he thinks customers who want premium economy aren’t willing to fly basic economy and separately notes (when talking about incremental costs of Basic Economy and Premium Economy initiatives that he sees driving revenue growth) that “[p]remium economy will probably have free drinks.”
I’m not sure that Kirby is right, that customers are either one product or another. This week I bought a United ticket and was offered discount economy and discount first class for $159 more. I wasn’t going to spend the $159. During the purchase process I was offered a buy up to Economy Plus extra legroom seating for $79. I wanted extra legroom, but I didn’t want extra legroom for $79.
Indeed Kirby’s whole model of incrementally higher pricing for better product suggests passengers make tradeoffs between product and price all the time so the notion that customers are going to buy a particular product – period – can’t be right regardless of Kirby’s stated belief that consumers are price inelastic with respect to flying.
I decided to stick with regular economy. Sure, it included a seat assignment. But it effectively didn’t offer any changes since the fare was less than the change fee. It didn’t include upgrades, since I’m not a United elite.
Once I committed to the purchase, United came back with a $99 offer for first class. I took it. I buy my tickets based on the value proposition embodied by schedule and price. There are tradeoffs, and whether or not I’ll pay more depends at what margin?
Maybe Kirby is right, of course, and I’m unique in that I’ll fly a number of different possible products — American, United, Southwest and I recently considered Frontier based on schedule and price (though I’ll pay a premium to avoid it).
I’m not a top spender with American (I don’t qualify for Concierge Key) but I’m at least an average-spending 100,000 mile flyer, with my work trips I will easily break-even under American’s new revenue-based earn.
I continue to question the wisdom of share buybacks as a non-expert, the idea of having ‘too much cash relative to what it takes to run the company’ to paraphrase Kirby’s explanation, seems an expression of failure: a belief that management has no stronger growth opportunities, either in its current industry or elsewhere. It says that the business sees itself as in a specific industry, with constrained opportunities, rather than as a set of capabilities that can be leveraged into opportunities elsewhere. But if the highest value use of cash is buybacks, it’s not a growth company and not a growth stock.
It also seems a perverse perspective when American Airlines hasn’t managed to yet offer a consistent product across its fleet, or even power ports or in its legacy US Airways planes.