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.