Schedule and Price are Table Stakes, Customers Now Choose Airlines Based on Brand

After deregulation the federal government no longer told airlines where to fly, how much they must charge, or protected their profitability. New carriers were launched, and legacy airlines had to respond.

  • First they found a way to compete on price
  • Then they found a way to differentiate their product

Right on the cusp of deregulation American Airlines launched a huge ‘branded fare’ initiative — the super saver fare. The insight was that they could compete with discount pricing on the same planes they were already flying. They had extra seats taking off empty and they could sell those seats at a discount to match the fares of their new competitors.

  • They could do it with lower costs, since they didn’t need to start a new airline to offer these fares. This was new revenue at the margin for them.

  • They could keep these cheap tickets from undercutting the expensive fares they were selling with restrictions, things like 21 day advance purchase requirements and Saturday night stay rules that business travelers wouldn’t be interested in.

Major airlines could compete on price, but when they were offering the same prices which would a customer choose? The frequent flyer program was born. This was the most successful marketing innovation in history.

Initially meant to just get customers to stick around for a less convenient flight out of loyalty to a brand, the programs became profit centers in their own right. Most companies see marketing as a cost, but the airlines have turned marketing into their highest margin business. All they needed to do to make sense, though, was to turn a commodity product (an airline schedule) into one customers had a preference for.

Ultra low cost carriers eventually threw a monkey wrench in all of this. Airlines lost their pricing power when competitors started selling their cheapest fares without Saturday night stay requirements or advance purchase. That’s where basic economy comes in, it’s the newest attempt to separate business travelers from leisure travelers in the fares airlines offer.

The other major differentiator was the loyalty program. The former head of oneworld frequent flyer program Malaysia Airlines Enrich warns that frequent flyer program devaluations are driving customers into the arms of low cost competitors. Airlines need to differentiate themselves, then, on product and brand because they aren’t going to win at a game of simply low fares.

Spirit Airlines and Frontier are going to have lower costs than American and United. American and United need to earn a revenue premium for their product.

American has a premium revenue problem and no wonder why — their President Robert Isom explained in a closed session with employees that their domestic product aims to mirror Spirit and Frontier.

[T]oday there is a real drive within the industry and with the traveling public to want to have really at the end of the day low cost seats. And we’ve got to be cognizant of what’s out there in the marketplace and what people want to pay.

The fastest growing airlines in the United States Spirit and Frontier. Most profitable airlines in the United States Spirit. We have to be cognizant of the marketplace and that real estate that’s how we make our money.

We don’t want to make decisions that ultimately put us at a disadvantage, we’d never do that.

United’s President Scott Kirby, meanwhile, believes the schedule is the product and simply offering fights will attract business (he refers to adding flying and attractive United’s ‘natural share’).

What they are missing is that the conventional wisdom that passengers only care about schedule and price turns out to be wrong.

British Airways shared at the beginning of November that 25% of the consumer buying decision is based on brand. Their brand has been decimated, so they see this insight as giving them upside.

Delta, at its investor day on Thursday, revealed that they believe brand is key to the revenue premium they’re attracting — and also key to growing their co-brand credit card. Delta isn’t offering a valuable frequent flyer program, but customers have been sold on the brand which entails friendly employees, reliable flights, and a marginally better inflight product than U.S. peers.

Three slides from the airline’s deck make this point clearly.

And by the way JetBlue founder Dave Neeleman plans to run his new startup airline differently as well though in his case I’m a bit more skeptical than most about the overall model.

Legacy airlines can’t out-Spirit Spirit. They shouldn’t try to be Spirit. Delta attributes their success to developing a strong brand that attracts customers — premium customers, and future premium customers — and that matters because any airline can offer schedule and price for a period of time, so that cannot be the competitive advantage of anyone but the low cost provider of seats.

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 »

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Comments

  1. While I’m in wholehearted agreement that American and United trying to out Spirit at the low cost game is a losing strategy it can also be tricky relying on branding. By their very own metrics they are showing that Millenials are also extremely fickle. If Delta flight attendants go on strike could that crater their brand? Be careful when relying on people’s perceptions. They can change in a blink of an eye.

  2. @K – Grow up.

    @Gary – It’s no wonder that the LCC’s are the fastest growing companies, since AA (among others) is driving off their customer base into the arms of Spirit. Let’s use a car rental as an analogy. You can rent a small, less than desirable car from a shady company for cheap, or you can rent a better car for a bit more from a reputable company for a bit more. Some people will always pick the cheapest, but lots will go upmarket. Delta is the latter, while American is vying with Spirit to be the former.

  3. Gary, the note about “brand” and how the employees treatment, social responsibility (ie ME3), animal welfare/pet treatment, etc. is super important to the Millennials, and I think the airlines are going to have to wake up to that fact sooner rather than later, especially in the US. My daughter is a very well-traveled Millennial who has stayed in everything from the Ritz-Carlton to backpacker hostels. She has flown First on BA and cattle class on RyanAir and Frontier (the latter two, “never again”) but will give a reluctant nod to EasyJet. This demographic is educated and aware of their rights as both consumers and global citizens. As consumers they demand a minimum of humane treatment and expect a certain amount of reciprocity from corporations. On top of of that, they have grown up with a sense of entitlement. When they pay more they expect more.

    As a forementioned example, my daughter will pay $10 or $15 more to fly EasyJet over RyanAir, both LCCs, because EasyJet “at least serves food” and “the crew is friendlier and more professional” and “I am treated like a human being” and “they don’t have a bad reputation for stranding passengers”.

    Will be interesting to see what the next decade brings in terms of how the Millennials can affect product development.

  4. “Ultra low cost carriers eventually threw a monkey wrench in all of this”

    Yes especially on their one-way fares between USA and Europe

    “Malaysia Airlines Enrich warns that frequent flyer program devaluations are driving customers into the arms of low cost competitors.”

    My option to return back to USA in early January a week before fares hit rock bottom was to use 22.5k or 30k AA miles plus $53 and sit on an ancient 767 from Milan or fly from my choice of 3 airports and pay Norwegian under €190 from those airports and fly on a new 787.

    Delta wanted OVER €200 just for the privilege of using my SkyPesos.

    Guess which I chose? And I’ll bring my own meal, thanks Norwegian.

  5. @Gary, speaking as an illiterate troglodyte who failed an IQ test due to an insistence on completing all forms using crayons whilst attempting to approximate Wingdings, I am highly jealous of your lofty IQ of 85.

  6. @KimmieA: Your daughter is an anomaly.

    “my daughter will pay $10 or $15 more to fly EasyJet over RyanAir, both LCCs, because EasyJet “at least serves food”

    EasyJet does not bundle food into the ticket price. It is à la carte, same as Ryanair. It has not been shown that Millennials as a group make different choices than non-millennials about choice of airline. The fact that Ryanair is by far the largest airline in Europe (by passenger count) suggests that they don’t.

    The vast majority (maybe 90%) of people choose on price. That is why the Chapter 11 carriers in the US are apeing Ryanair, and why Southwest has never implemented “First Class”. It is also why first class is full of “non-revs”, as they are euphemistically known, on domestic flights.

  7. As much as I want to find fault with Delta’s presentation, they clearly have done their research about trying to retain customers going forward.

    AA & UA, on the other hand, are trying to create their own research by reinterpreting past results. AA, in particular, does not seem to care how their employees treat customers or how their poor maintenance affects their end results.

    It’s easy to say that AA and UA are poorly managed but this made wonder. Would Delta suffer the same poor results if one of the former US Air Management Cancers became CEO at Delta? Let’s say that Parker left AA and joined DL as CEO. Would the Delta of tomorrow become the AA of today?

  8. I am glad that DL feels it is worth spending lots of money on brand analysts. I know you love this stuff, too. I also know that the people who run airlines like Frontier, Spirit, American, United and Southwest are a little more skeptical of this marketing mumbo jumbo. As I am. We tend to think millennials are pretty much like all other travellers when it comes to picking airlines. We doubt a company’s “social responsibility” ratings will sell many seats (and, besides, I see zero real-world difference in the “social responsibility” of the 3 major USA airlines, except perhaps that Ed Bastian sees himself as being hipper than Parker, Munoz and Kirby — and that those executives are perfectly fine with that!). Just look how incredibly successful Virgin America was in being the hippest and most socially responsible airline in America. At SFO, no less!

    I am certain that DL’s competitors would much prefer that airline focus on their branding and not their operation. Just like Russia would prefer the US military to focus on global warming challenges and not weapons development! The reality, of course, is that branding matters, but other things matter more. Like keeping your costs competitive, flying where people want to go, and running a good operation.

  9. @chopsticks: How much did traffic/fares on routes go down when they lost their Virginity (i.e. became Alaska)? Alaska is only about as hip as a hip replacement part. You are apparently the first person to have evidence on this!

  10. @ L3 — You’re completely missing the point. Even though Alaska paid an astronomical price to buy Virgin America, they valued all the hip branding initiatives at Virgin to be worth exactly ZERO. They quickly dismantled all of it. That’s pretty much what their brand was worth, as they achieved almost no financial success during their existence. It’s why so many executives in the industry are far more skeptical than Gary about the value of airline “branding”. I don’t think most people are looking to “love” their airline. They’re not likely to be focused on how hip and socially responsible their airline is. They want their airline to be friendly, to treat them reasonably, to get them where they need to go as quickly as possible, on-time and with their bags. at a price they want to pay. Everything else is pretty much feel-good nonsense that won’t pay the bills.

  11. @chopstick:
    ” they valued all the hip branding initiatives at Virgin to be worth exactly ZERO. ”
    Did they? Do you have a scrap of evidence?

    and you didn’t answer: How much did traffic/fares on routes go down when they lost their Virginity (i.e. became Alaska)?

    Don’t you have any evidence on that either?

    You are just a windy bag of unsupported opinions. I will nominate you for one of Gary’s ‘Flatus Awards’.

  12. @RF — You are making a typical “armchair airline analyst” mistake. Doug Parker (and Oscar Munoz and Ed Bastian) aren’t trying to “out-Spirit Spirit.” They are trying to retain enough customers so that they can continue to operate their business model.

    The modern Global Airline business model — which currently produces billions of dollars in consistent annual profit for AA, DL and UA — is premised on providing air transport to many different groups of travellers. Most of the money is arguably made on business travellers who generally pay high fares. But there aren’t enough of them. You need to fill the planes with leisure passengers who pay less. If you lose all your leisure passengers to ultra low cost carriers like Spirit, you don’t have enough passengers to cover your costs. Your entire hub operation becomes unprofitable. This is why airlines like AA fight so hard to keep the ULCCs “in check” at their hubs. You simply can’t convince many of these passengers to pay more for more service and roomier seats. They will fly Spirit if it’s cheaper. AA (and DL and UA) have to offer a product that can be provided at a cost relatively close to what Spirit can offer it’s inferior product. If that product is not offered, American Airlines goes out of business.

  13. Social responsibility, bah humbug! I won’t pay a penny more or one inconvenience more for “social responsibility”. What I care about is schedule, good service, and a reasonable price for first class or DeltaOne. We are retired and we fly to Southeast Asia several times a year and domestically 2 or 3 times a year to visit family.

  14. I love the line that one cannot “out Spirit, Spirit”
    So true. I’m not sure when AA will have done enough to cut my loyalty but when they do in confident it will be for good.

  15. 1st, a real illiterate has an IQ of 185.
    2nd, the real airline to compete with is Southwest. Alaska air may be the dark horse in this race. Spirit, frontier, and allegiant, do not have the stable reputation to save $100 or $200 per family at the risk of the flight delaying or cancelling before an expensive vacation.
    Business trip? Who cares, reschedule. Tickets for Disneyworld? Miss day one, for a family of 5, that’s a $500 hit between park and hotel. Going on a cruise? You may miss the boat. Southwest companion pass=free airfare. Better than ULCC.
    When AA, DA, UA offer companion pass, brand loyalty will increase.

  16. I still associate Delta’s brand with having a more comfortable flight product/seat experience in the main than AA. That leads me to default to choosing DL before AA ever since AA has gutted the value I get out of the AA frequent flyer program. But the key thing is that the flying experience in the main cabin on my most flown carriers has become so much more uncomfortable than it was a decade ago that the airline loyalty program is but an afterthought in my picking which airline to fly since my program earnings from flying are generally way worse than they were a decade or so ago.

    When AA’s providing an in-flight experience that is about as bad as Spirit and Frontier, why choose the AA brand except for schedule and price?

    The airlines are not getting enough of what they deserve from customer disloyalty.

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