During earnings calls a lot of assertions get made that go unchallenged. They may not stand up to scrutiny but they get repeated because if an airline executive said it, it must be true.
American’s call on Friday included one whopper and one claim I’ve been trying to make sense of. (HT: David F. on the latter claim).
American Claims They’re Making More Money Off Premium Cabins
First the claim I’ve been working to understand, from President Robert Isom.
In domestic, our consolidated PRASM was up 5.7%. We saw strength across the board with Philadelphia and Miami leading the way with double digit increases. We continue to implement a number of revenue management initiatives for the Premium cabin and these are proving to be very effective. Our sales initiatives with our high-value channels are also gaining momentum as we continued to see strong performance with gains in corporate share, share gap and average ticket values.
We know that Miami performance improved because Latin America is improving overall. However the claim that “revenue management initiatives for the Premium cabin and these are proving to be very effective” seemed strange.
This is distinguished from the introduction of a new international premium economy cabin which is discussed elsewhere, so that’s not where the revenue is coming from. Upgrades and awards in American’s international business class were already tough to come by, it doesn’t seem like they would be earning more money by avoiding giving away seats cheap.
Domestically first class is being sold at a somewhat higher premium over coach than it was two years ago, but this isn’t a change over the past several months and doesn’t seem as though it ought to be characterized as ‘very effective’ in terms of the incremental revenue it’s driving.
What is new this year is that advance upgrade inventory has mostly disappeared. American used to allow any AAdvantage member to spend miles and cash to upgrade nearly any domestic flight outside of their premium cross country routes. Now that upgrade space is rarely available.
However this actually makes upgrades easier. General members earning miles on a credit card aren’t taking up upgrades, and more upgrades then are redistributed to top elites who receive them complimentary. The loss of the cash co-pay would be revenue-negative.
Meanwhile it’s tough to argue that upgraders were taking up all the seats up front and that customers couldn’t buy first class seats before (if that situation had actually existed then holding back seats could be revenue positive, but that’s simply not the case).
So how could their premium cabin revenue initiatives be driving substantial incremental revenue?
Let’s Just Pretend Changes to AAdvantage Earn American More Money
Derek Kerr, American’s Executive Vice President and Chief Financial Officer, throws out there that changes the airline has made to the AAdvantage program — changes which reduce its differentiation from United and Delta and no longer give customers a reason to choose American over its competitors — is a driver of higher revenue.
Our significant investments in our people, product, and new corporate sales initiatives are paying off, and when coupled with our new revenue management tools, changes to our AAdvantage program, and our new mobile platform, the results have been impressive.
Granted the claim here isn’t very specific, it’s more bundled into a list, and heaped into the same category as American’s mobile platform as a driver of airline performance it’s clear how much credibility should be afforded the claim. You cannot even buy a ticket inside of American’s mobile app.
Changes to the AAdvantage program are cost savers — fewer international upgrade certificates, more miles required for awards, fewer miles awarded for travel. These changes aren’t contributing to revenue.
In fact, American’s new credit card deal was supposed to make more money for the airline simply by virtue of banks paying American more for miles and benefits. This didn’t require customers to like AAdvantage more or want to accumulate miles more than before. As Kerr explained in the call, “the increase in the new credit card deal that we did was more rate driven than it was volume driven.”
And yet American told the SEC they weren’t making as much off the deal as expected. Volume was down.
And since that filing three months ago we’ve seen the biggest signup bonuses ever publicly offered on American’s co-brand credit cards. They wouldn’t be spending more than ever to acquire card customers if they didn’t need to. Changes to the program appear to be dampening interest, not driving revenue and American and its co-brand issuing partners need to spend more to make up for this.
Just because a claim is made in an earnings call doesn’t make it true.