American Says They Have a Problem With Premium Revenue. Will They Fix It?

During last month’s earnings call American Airlines revealed that while costs are going up at the airline revenue is flat. Their domestic revenue per available seat mile (‘RASM’) didn’t go up measurably, and total revenue per available seat mile is up just 2% year-over-year (and that even includes growth in credit card revenue).

At a meeting between American Airlines employees and airline President Robert Isom last week, a sim instructor asked whether – with higher fuel prices – there’s an ‘industry initiative to increase fares’ to compensate.

Isom immediately jumped in with “so I don’t go to jail, and no one else here goes to jail, there is no industry anything.” That was a good laugh line, though in June American agreed to pay $45 million to settle a lawsuit arguing they had illegally colluded with other airlines.

He goes on to explain though that American is lagging behind on premium revenue.

For probably 18 months going into 2018 we had outpaced the industry in terms of unit revenue performance, had really closed the gap compared versus all competitors and had months and months of outperformance versus the industry as a whole.

We’re still outperforming the industry as a whole which is great news but if you take a look at the first and second quarters our ability to keep up with some of the industry leaders like Delta has decreased. What we’re taking a look at is where are the performance gaps.

…We’re not driving in terms of premium revenue at the same pace as we had in the prior year.

Isom thinks that premium economy will drive higher performance, and that basic economy and segmentation will “offer our customers what they want to buy, trying to encourage that move up the ladder” and that this will fix things.

Of course these are initiatives that began in 2016 and in 2017, and expanded segmentation has happened while the airline falls behind its biggest competitors in premium revenue. Which brings to mind the definition of insanity, doing more and more of the same and expecting a different outcome.

I’d begin by noting a couple of things they’ve done over the last few years that make it harder for customers to spend more to fly American.

  • Their frequent flyer program is no longer a reason to choose the airline over others While American’s operation and overall service has been a notch below Delta’s for some time, their frequent flyer program was a reason for customers to choose the airline over competitors. However they’ve given up that advantage by copying changes their competitors have made, while offering less award space on their own aircraft (they now have a goal as offering as much but not more space than competitors). A ‘me too’ offering isn’t enough to get customers to pay more and connect on a less reliable option in order to choose American over a competitor.

  • Giving up on the most premium market in the country. American is number four in New York. They compete flying to LA, San Francisco and London but they’ve transferred some transatlantic flying to Philadelphia and dropped routes like crucial banking center Zurich. They fly regional jets to key US business markets while competitors fly larger planes. And they fail to serve key leisure markets. These combine to make it difficult to secure and retain corporate contracts and the loyalty of business travelers who are also leisure travelers.


American Airlines Terminal New York JFK

It’s always a helpful clarifying question to ask what’s different and since Isom identifies 2018 as being different from 2017 we should look at what may have changed year-over-year.

  • Operational performance has degraded this year as even United outperforms American. Despite a relentless focus on exact on time departures no matter the customer experience consequence they’re not running an on time airline.

  • Actively making the domestic product worse. American isn’t just shrinking the space between seats in coach and shrinking the size of lavatories, their new standard domestic product offers less legroom in Main Cabin Extra and even in first class. They’ll eventually even remove seat back video screens from planes that have it.

    To date this interior is only on new Boeing 737 MAXs and on a couple of retrofitted 737s, however customers are increasingly aware of the direction that American is headed. Meanwhile I hear from customers all the time whose patience has run out on legacy US Airways planes that still don’t even have seat power and operating long flights like Charlotte – Los Angeles. American’s route network and passenger traffic is more heavily skewed domestic than United or Delta.

  • Customer awareness of some of the changes. There’s a lag as not everyone is as focused on day-to-day and month-to-month changes as blog readers. Most frequent flyer program members don’t come to realize changes until it’s time to redeem miles, so there can easily be an 18-24 month lag.


American’s New Coach Seats

So will American improve its premium revenue going forward? There are forces working both for them and against them.

  • Premium economy is growing but business class is shrinking. For instance to add premium economy to the airline’s Boeing 787-8 aircraft they’re removing business seats, that plane will go from 28 in business class down to 20. And in the name of standardization their Boeing 777s with 45 business seats will go down to just 37. Fewer premium seats will make it harder to grow premium revenue.

  • They don’t just compete against Delta on the other hand while United’s operation has been beating theirs, a Scott Kirby-led United tried to eliminate meals from three hour lunch flights. There’s a chance that United will own-goal and drive some premium customers back over to American.


Boeing 777-200 Zodiac ‘Concept D’ Business Class

Ultimately my guess is that air travel demand will move with the economy and if we experience a slowdown — as one of the longest economic expansions in US history ends, as the federal reserve raises interest rates, and as the administration imposes tariffs — that unit revenue and premium revenue could fall.

However that would be an overall industry trend. As far as whether or not American can improve its performance relative to peer airlines, I’d simply ask: what reason is American giving business travelers to choose them over competitors?

  • Better operational performance and flight reliability?
  • Better service?
  • Better inflight product?
  • Better mileage program?
  • Better schedules flying to the place premium customers want to go?

Premium economy is doing well, people want to buy it. United and Delta will offer it too. And at American it’s trading off with even more premium seat choices.

In order to earn a revenue premium over competitors American needs to make an argument how they’re unambiguously better than those competitors and it’s not clear they have initiatives to win along the dimensions that are important to customers.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Comments

  1. Why would anyone want to pay for AA’s inferior premium product over an airline like JetBlue on if they were to fly the same route. They should just get rid of their premium seats all together and add more seats to their sardine can

  2. I have rec’d several calls from AA (EXP, Executive Office, etc) in the past month because they said they noticed my travel on AA had dropped & wanted to know what they could do to rectify that. Have told everyone I’ve talked to that AA no longer gives me a reason TO fly their airline but is giving me lots of reasons NOT to. Many of those reasons are outlined in the article here, but a big one that is missing is customer service which had been dropping steadily anyway, but I suspect the ‘Triangles of Success’, outlined in Feb which put employees on top & paying customers literally at the bottom, was the tipping point. That sent a very clear message to the front line staff about how AA views it’s paying customers & even if management, now, tries to claim it wasn’t intended to be taken that way, it’s clear many staff did. They have told me there is a company wide iniatitive to change the culture & refocus on customer service but that it will take several years to fully implement-told them good luck & let me know when you’re done. In the meantime, I’ve booked multiple paid F trips on DL & have been very pleased w/the product & the way I’ve been treated.

  3. Gary, I think you’re spot-on. What incentive do I have to reward AA with my premium class dollars, especially domestically? Hard product is getting worse, soft product is still bad (eg, 90 min delay at the gate last week on a 763 & FAs chose to chat in the galley rather than serve PDBs), and declining benefits for EXP. What’s the upside?

    Combine that with the enhancements competitors are making. DL, for example, let’s me buy up my fares online after corporate travel booking, making it much easier to add significant ancillary premium revenue. AA makes me call in and spend an average of 30 mins on the phone for the same thing, and most people (and more than a few reps!) don’t know it’s even an option.

  4. I’m sure AA management has a bean counter somewhere who can whip up a spreadsheet to solve this. OR maybe hire the ex-UA guy who said take one olive out of the salads….that’s gotta help.

    I guess their assumption that customers are idiots and will be okay with paying more while getting less isn’t working out as well as they hoped.

  5. @ Dug – Well, I mean the real silverware in F is heavy. Plastic maybe? You can get the flashy sliver kind. Or take the two of the three cheeses off the cheese plate? The best would be to raise baggage fees until it’s cheaper to UPS your bags to your destination. That would cut down on fuel/weight.

  6. Dug Parker says:
    August 15, 2018 at 9:40 am
    I like that olive idea. Any other suggestions?

    Maybe go down to just 1 shrimp, instead of the 2 we’re now getting, for the shrimp appetizer?

  7. Gary, I wish AA would listen to you!

    I’ve been loyal to them for many years, and even though I’m based in DFW and will renew my EXP status this year, I’ve spent most of 2018 thinking of a switch. I’ve tried a couple other carriers, and really haven’t been impressed. The takeaway for me personally isn’t that DL or UA or whoever is that much better than AA, it is that AA is getting so bad. With 2019 around the corner, I’m seriously considering a status challenge next year to DL (or perhaps even UA).

    I’m not a business traveler and 85% of my flights are paid premium fares. You know things are bad when 20 year veteran loyalists based in their fortress city are considering moving on from AA.

  8. Gary, your list of reasons is spot-on.

    I’ll add a few:
    –While the investments in Flagship lounges are nice, there still is not a Flagship lounge at the biggest TATL hub, PHL. This inconsistency in the premium product makes it harder to fly AA–especially when they continue to cut TATL destinations from the locations with Flagship lounges, like JFK.
    –The Admirals Club–when is what most premium customers use when flying domestically–has major problems. Clubs in PHL and CLT are dumps, with ripped furniture and no plugs. DCA C is a dump, too, and consistently overcrowded. ORD was so busy this week that the registration line stretched to the H gates and, upstairs, they were out of coffee, milk, creamer, etc. How very ‘premium.’
    –Gate agents routinely ignore boarding procedures. Delta’s enforce them. I’m less likely to fly AA if I’m in group 1 and board with a bunch of people from group 8 that the gate agent is too lazy to stop. And most gate agents now simply ignore the two boarding lanes; it’s too much work, I guess, to actually use them.
    –Let’s also talk the definition of ‘premium.’ An example: right now, if I want to fly from LAX-DCA around 5pm, I have two choices when booking first class: Delta, which flies a lie-flat 757 with international-style multi-course meals and in-flight entertainment…or AA, which is flying a 737 MAX with reduced first class legroom, no entertainment, and a crappy, one-tray meal. I wonder which I’m going to choose.

    And THANK YOU for mentioning the old USAirways planes. Nothing like boarding a cross-country flight where you’ve paid for a premium seat to find that you can’t charge any devices because all AA did was put some gray leather on top of the crappy old USAirways product.

    Surprise! You fail to invest in your product and you run a crappy operation and your premium revenue drops. What a big shocker.

  9. I took premium revenue to mean getting customers to buy seats (economy included) at a premium to the average air fare. AA often looks higher than others in fare.

    Could it have meant that they thought they could charge more than competitors and still get full planes?

  10. Spending tens of thousands at jet blue alaska and southwest for short haul
    I buy first class tickets but never from American
    My one flight on revenue on AA metal was denied mileage credit because it was
    booked through another partner carriers website
    When I used miles through BA American blocked my elite status for bags and coach seat assignments
    I hope American rots in h### I’ll pay anything or connect through any city
    to not fly them unless they are last carrier flying to the destination
    I’m not certain if I wouldn’t fly spirit to avoid American
    The. Corporate idiots hate customers and it shows
    Many of their employees do a good job but they share that they are deeply disappointed embarrassed too of the negative business decisions coming from Parker the worst CEO in Americans history
    They are clueless
    Signed a former frequent flyer @ American & lifetime Platinum

  11. Wow great analysis Gary.
    Do you think their ridiculous decision to cut codeshare ties with Qatar and Etihad could be harming them with premium customer flow to/from Middle East & India as well?

  12. Normally, I might chime in with my usual list of all the things wrong at AA, or why this airline has been on a “No Fly” list since an unforgivably horrible experience back in Spring, 2014 at JFK Airport when a check in agent blatantly lied to us, but in not knowing beforehand that the person she attempted to tell a bald faced lie to would instantly recognize the lie being told for what it was – a bald faced lie – faced the unpleasant outcome of having their supervisor requested to intervene to sort things out correctly, that alas, took so long, we missed our flight from JFK, which was the last flight of the day from there to RDU, but agreed to race over to LGA (in the evening traffic that makes the Van Wyck Expressway is parking lot heading out of JFK) that was only made possible by: 1.) taking the AirTrain to the Long Island Railroad Jamaica Station; 2.) Taking an express LIRR train to Woodside Station; 3.) and finally, the 10 mins car service from there where we were lucky enough to find the Brooklyn Queens Expressway free from any mishaps that would close off one of the two lanes that link it between the main roadway and the Grand Central Parkway and cause bumper-to-bumper traffic, plus a slightly delayed departure time for the last AA departure of the day to RDU that night.

    It was a horrible experience – especially when considering my partner has reduced/impaired mobility arising from Polio he had as a young child.

    And that was in 2014, back when Dougie’s wrecking ball was just getting underway to gut and destroy AA as he’s done very effectively in the years since.

    But hey, since so many others have followed up with much more recent and timely accounts of how badly degraded this formerly great airline has become since our unforgivably horrible experience in Spring, 2014 I’ll just echo what others’ have said:

    So well put by both Gary and many others!

    And then conclude by asking this:

    If the CEO makes clear by his own ACTIONS that the product he sells isn’t good enough for him to use (for example, STILL never bothering to actually sit in the rear rows of main cabin seats his customers do for 3-6 hours aboard those shamefule and despicable Boeing 737-8 Max aircraft, or use those kiddie sized loos when nature calls), then why should ANYONE else pay for a product that the CEOs very refusal to use himself makes clear is a substandard, inferior product not worthy of his precious rump to sit in?

    Just sayin’ 😉

  13. I am not surprised by this and basically, “US Airways” management has just ruined it for legacy AA. These days I try and avoid AA due to inflight service, non-existence customer service recovery, inferior product and inconsistent product offerings. To add to this, their FF program has gone down the drain now that they have introduced miles based on spending.

    Good luck to them trying to beat DL which now I use the main bench mark especially for US mainline carriers.

    Cheers!

  14. Has anyone ever done an analysis of how screwed AA would look even compared to even United if they didn’t have a partner in the Charlotte Airport that rolls over for AA and permits such a huge price premium to be captured?

    I fly UA mostly because my business commitments take me to UA hubs (DEN, ORD, IAD – the Virginia side, SFO, and I’m based in LA). Fares are more reasonable than WN in most cases. But the most expensive trip I’ve had recently was to Charlotte because UA just price matches what AA is permitted to charge.

  15. I’m glad one of AA and UA is admitting it has a premium revenue problem.

    All it takes is one of them to improve the proposition, and the other gets forced to follow.

  16. Reliability , a desired and consistent product , service delivery , service recovery , and transparency are a good start .

    Your earlier aeticle about partner availability is a perfect case study . They acknowledge that customers want to be able to book partner awards online but have dragged their feet for years . So , customers have to call in and take the time of an agent who is now unavailable to book revenue or assist with irops or service recovery etc . Keeping with this single scenario , it’s total luck of the draw on drawing a competent agent who can book some partner awards so the passenger and agent waste time and HUCA , thereby spending more time – a lose – lose scenario for AA and customer . Sometimes the award , even when booked properly, fails to ticket (example is CX requiring certain agent input when pax has no middle name on passport – that only took me 7 calls over a couple of hours ) . I know they only want us to see AA flights and pay double Miles due to lack of availability but if you wonder why people refuse to pay you a premium , this one little scenario /area is a good example of frustrating folks and driving them away . I could go on with known issues. such as PDB , Upgrade availability /transparency , priority bag delivery , timely delivery of bags to carousel ( I can’t even imagine how much their mileage liability would grow if they added a DL like 20 min bag delivery guarantee)etc etc etc .

  17. @Dug Parker – you forgot about mileage devaluations. Both directly (by increasing award tickets) and indirectly (by flooding the market with multiple credit card deals.) Quickest way to spruce up your balance sheet.

  18. The old AA had problems, starting with service and FA’s, particularly Chicago based. But who buys an arguably premium brand only to employ a strategy of flying it into the ground? Well Doug does I guess. If I ever find three unicorns on Qantas, or AA LAX -LHR in J, Ill blow my stash of miles and that will be it. Currently no longer earning miles on AA; no longer flying paid segments. From a lifetime gold.

    My fondest wish is that B6 could find a way to expand service on the WC, from LAX in particular. Second fondest wish is that AA would employ a B6 approach.

  19. Gary,

    You are correct in everything in this post! Oh how I wish AA would read, understand and act upon this information before it is too late!

  20. The only reason I’ll be keeping my EXP status this year is because of a couple of very long, expensive codeshare flights (not on AA) and, as much as I hate to admit it – the LAX-JFK transcon – their 1st product is the best in the air. That said, I have several (4) systemwides, that I won’t be using since they’ve pulled the availability to use them on most of their fights (including the transcon from I/J to F) so now, I’m happy to fly whomever gives me the best price. In most markets, none of the US carriers are particularly good and if I’m now forced to purchase the 1st class ticket anyway, it’s about the $$s

  21. The idea that the “old” AA offered a wonderful flying experience and the new AA is terrible is, well, absurd. By any standard — other than the typical over-generosity of a failing airline offering an overly-generous frequent flyer program — old AA was a bad airline.
    The idea that you can “turn around an airline” by introducing more customer-friendly policies is, unfortunately, naive. The most customer friendly airlines are usually the WORST financial performers. It’s not rocket science to understand why. Airline customers like more perks and better service, but are rarely willing to pay for it.
    If anyone doubts this reality (and I’m sure most travelers focused on exploiting frequent flyer programs for outsized benefits are predisposed to doubt it), consider the sudden financial turnaround at UA. Guess who’s leading that turnaround? Scott Kirby, who was Doug Parker’s right-hand man for almost 20 years and who is, undoubtedly, even more skeptical than Parker about offering customers additional amenities. I’m sure Gary has written dozens of posts about how Scott Kirby was degrading his airline’s services and leading his airline on a path to ruin. So much for that thesis.

  22. My guess is most of the execs at American (like some other businesses) have gotten to their positions by being masters of cost cutting rather than being innovative or strategic thinkers. They grew up in an industry where limiting losses was the main goal.

  23. @John — You are correct that the execs at AA started their careers when airlines were money-losing operations. But it was their vision that created the hugely profitable hub and spoke airlines that we have in the USA today. Before Doug Parker came along, the only airline that consistently made money in America was Southwest. Now, the hub and spoke carriers — which consolidated due to the efforts of Parker — are now more profitable than Southwest.

    This has obviously been a mixed-bag for frequent travellers — especially frequent travellers who try to game the system to get exceptional value out of their frequent flyer accounts. I actually think the “new regime” is better overall for these “gamers,” with the free travel now largely being paid for by the credit card companies instead of by the airlines themselves (another ingenious innovation from these supposedly incompetent airline execs). But others will always be nostalgic for the past.

  24. @Chopsticks. I agree with you. I really love both UA and AA. WTH, I used to be P at Continental. 1K at United, and EP at AA. I flew about 800K miles in about 15 years. With love in my heart, I took my unprofitable accounts, and stopped flying UA and AA. In fact, the rule is simple, the less I fly on them, the better they do. Therefore, I try not to fly both UA and AA twice a day, to increase their profits even more.

    FYI: Credit card points and mile runs are both not “free travel”. I almost never purchased the cheapest available tickets, because of my schedule. My travel comes 100% out of my own pocket. I could have purchased a new Range Rover for about $90K for all the money I spent obtaining free travel in the last 15 years. Or a well treated used Bentley for about $150K. I do not think I am quite to the price of a new Bentley. Actually, I am kind of curious what kind of cars other people could have purchased if they gave up their air travel. Anyone want to volunteer. In fact, I’ll bet some of you could have purchased top of the line Ferrari.

  25. @Chopsticks, the hub-and-spoke system came along before Parker. Delta began using it as far back as the 50s. Southwest doesn’t use the hub-and-spoke system but it has always been profitable because it is well managed and has had good labor relations. Taking out seat-back video, flying planes with no power, and testing the limits of human endurance with these new seats and bathrooms isn’t very innovative. Even though those are steps in the wrong direction for customers, AA doesn’t have to worry about much competition. The huge profits that airlines are making coincided with industry consolidation. If current airline execs deserve credit for anything, that would be at the top of the shareholder’s list.

  26. How to start? I have 4.5M AA miles and typically 600-700k on UA, Delta and fly SW quite a bit and fly internationally 8-9 times per yr. AA was unquestionably better than the other crappy US Airlines throughout the 90’s up to 9/11. I flew them all at Exec Plat level over the years. Of course, no USA-based airline biz class is remotely close to the Asian and some Euro airlines service quality level. AA had a higher quality of people in the cabin and on the ground and their planes were ahead for a while. They have let everything slip dramatically over last 15 years, slightly improved a few Admirals clubs except the BUS DEPOTS in CLT and PHL, started updating aircraft, but have not motivated their people. US Airlines simply do not understand Bedside Manner; they do not want to lower themselves to deal with serving their customers in a proper, elegant, sophisticated and friendly way. They look at us as cattle to be efficiently and safely herded from point A-B and nothing else. The cost to fix this is remarkably low, but they don’t get it and will keep promoting baggage handlers to be gate agents and not hiring FA’s for attitude and muddling through while congratulating themselves on cost control while the opportunity is created for the Southwests and Jet Blues to steal their biz. I only hung on to AA for the 8 VIP international upgrades at 100k which they have now killed! Zero differentiation now

  27. Just FYI ….when there is a delay, which is quite often these days your flight attendants are off the clock. That’s right folks, they may have been there for hours already, yet haven’t earned a cent. And, hey may lose income downstream due to th delays and have not earned a cent. So don’t be complaining that you didn’t get some service or your ”PDBs”. No one is being paid to serve them if they do.

  28. @Trace Long – that’s not really true, the union has negotiated a contract that calculates trip pay that way but that doesn’t mean it isn’t part of the job you’re being paid for.

  29. @gary leff: nope, in bw saw contract, its PENNIES, not dollars, 4 “ground/holding” delay, as they say … not 2 mention no pay 4 1:15 clock in before flt, and a bunch of other stuff BUT here’s the thing, they cant BOTH offer beverages etc on the ground + in the aire because their cost cutting loving, penny pinching management reduced on board supplies 2 bare minimum, u get it now but not later, u decide which u rather have… but they have to apologize 4 these management decisions… given some tablet 2 give miles 2 pax 4 inconveniences then told they r being “too nice” giving away ALL those miles … think alot of employees r embrassed + beat down by all these none stop changes + clearly bad corp decisions, bad rock 2 work on…

  30. @N.maldonado – you misunderstand. You are paid more for the actual flight which covers being off the clock during other duty time. That’s just how pay for your full duties gets calculated. It doesn’t mean that work is ‘free’.

Leave a Reply

Your email address will not be published. Required fields are marked *