The things that were most interesting to me about American’s earnings call weren’t falling airfares and weakness in South America market; the Zika virus; or American’s record profits, whether it’s fair to say that they had the most profits of any airline in history (or whether Delta ‘excluding employee profit sharing’ is higher, since of course those are wages and as Doug Parker pointed out the difference in profits between the airlines is Delta’s big losses on fuel hedging, something American doesn’t do).
I think what matters to customers is fares, operational reliability, product experience, and frequent flyer. There wasn’t a lot of discussion of product experience, but fares, operational reliability, and frequent flyer got more than cursory mentions.
The audience for the earnings call was mostly financial analysts. American was getting beaten up on, despite its profits and margins, for low fares. The critique was, why don’t they do more, actively manage to find ways to keep more of the cost savings from lower fuel? However there’s always some important tidbits that matter from a customer perspective, and to understand the direction the airline is going and what matters to its leadership. So here’s what was most interesting to me, that will be a different emphasis from mainstream financial reports on the call:
Basic Economy Fares Will Arrive in the Second Half of 2016
I listen for updates on things like Basic Economy fares, which American revealed last quarter would be how they plan to compete with ultra low cost carriers like Spirit – selling fares that don’t include some of the things that current fares do. We don’t know what things are excluded yet, like advance seat assignments or frequent flyer miles. And we don’t know what elite benefits might be excluded either.
In October American clearly suggested frequent flyers will need to ‘buy up’ to get at least some of their benefits. Airline President Scott Kirby said “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.
On today’s call American President Scott Kirby said that it would be some time in the second half of the year before Basic Economy rolls out, and 2017 before there’s a meaningful effect on revenue. But he sees the change “as significant as the change to ancillary revenues in the 2008 timeframe.”
AAdvantage Frequent Flyer Program is an Important Financial Driver for the Airline
American repeated again more than once that they don’t have a new credit card deal at higher revenue the way that United, Delta, and Southwest do on a year-over-year basis. They re-upped a 5 year deal in 2013 with Citibank, and of course that will get renewed or replaced sometime over the next 24 months.
That’s one the differences they point out as to why they’re not improving performance at a faster rate relative to competitors (analyst Jamie Baker had suggested their not outperforming peers suggested there really aren’t integration gains). The other explanations were the huge increases in capacity in Delta and American’s exposure to Brazil, which was over 6% of revenue at the time of the merger and is now down to 2%. But the credit card deal…
American is banking (heh) a lot on its credit card agreements. Which means the value of the AAdvantage program matters. A lot.
They describe revenue-based frequent flyer program as ‘upside’ for the airline. It’s cost-savings. The award chart is going to be cost savings. Revenue-based earning is going to mean fewer miles awarded going forward than under the status quo program. American admits that (they argue that mileage-earning will be the same as it was under the old program before the premium cabin earning bonuses).
The new program won’t be doing more to put butts in seats, help them sell more miles, etc. Delta went revenue-based in an environment of increasing fares when they didn’t need to spend on marketing. United copied Delta because United copies Delta. American is taking the plunge after the revenue environment has turned. Their program isn’t going to be worse than Delta’s and United’s (although award availability isn’t as good as United with its Star Alliance partners), so they may not lose too much business by doing so. But talking about it as through it will drive revenue upside is either delusional or disingenuous.
American’s Operational Reliability is a Lesson in How to Annoy Customers
American sees the key metric for operational reliability as “D=0” – pushback exactly on time (or before). It’s an “important metric, indicative of where we’re headed.” And the way they’re getting there is anathema to customers (see American’s Goldilocks Problem).
Of course operational reliability is important and leaving on time contributes to arriving on time (which is what matters most). But American gets there by starting the boarding process earlier than the printed time on boarding passes.
Passengers can’t just adjust for that and American doesn’t print earlier boarding times e.g. 40 or 45 minutes before departure instead of 30 minutes. Sometimes the aircraft isn’t on the ground or ready to board.
So you get variable, unpredictable boarding times. Customers either have to waste a lot of time at the airport and gate earlier (or stopping work in the lounge early to go to the gate) or wind up gate checking their carry on bag and wasting time on arrival at baggage claim.
Given the focus on ‘D=0’ I expect unpredictable boarding and gate chaos to continue.
I for one would love to see some of these “low fares” – $1900 in coach to CLT-LHR in December (the plane was about 1/4 full, many rows with just one person). $922 CLT-SEA. I know CLT is higher in general but fares around here are, to me, higher than they’ve ever been…
When I redeem aa miles for a first claas seat that costs 10k, who is losingoing the money?
American “buys” the ticket for me?
The other airline gives away the ticket for free.
The price of the ticket was not 10k to begin with and the revenue pax pay more to subsidie the free loaders that are flying on ff miles.
Nothing is given away for free. Points are treated as revenue and expense. While I can only speak of my experience working in hotels, I would assume it would not be drastically different for airlines.
For every redeemed night at the chain that I worked for, we received a predetermined amount of revenue, which is based upon the hotel category and the room type booked. When occupancy reached a specific threshold, I think it was 90%+, we got a higher amount determined by a calculation based upon our ADR (average daily rate).
This revenue was counted towards our daily revenue on the books, but was treated as a credit for our property on our monthly payments for the points that we had to pay for. To make it more clear, each property pays for the points that are earned by the guests staying, and you get to deduct any redemptions against the payment that you make for your points.
The cost of points to the property is negligible, which is why it was always my go to for any type of compensation for guests. I could give away 5000 points and still come out positive in the transaction of the stay.
All that is lost is margin, which is why we are seeing first class products disappear internationally because they are not getting enough paid customers to make it worth it. But they are certainly not losing (in the red) money on redemptions.
Gary – I really appreciate your thoughtfully written pieces that is not always about fluff related to trip reports. You create a nice balance!
Alaska also starts boarding at T-40. They keep winning awards on customer satisfaction. Of course, they actually ARE on time better than American.
D=0 is one of a few reasons I have stopped flying AA (even though I am LPLT.) In the previous world (pre-Parker) AA would hold a flight for connections if the conx were on the ground and last flight of the night. US/AA will push a flight EARLY if they do not think a connection will be on time.
Strand me once shame on me.. Strand me twice… hello Delta!
@eponymous coward – but they print t-40 on their boarding passes
There were zero questions from analysts on the ff program changes. President Kirby briefly mentioned it only in response to a question on merger synergies and cost savings. Kirby included ff changes with basic economy fares and premium economy as initiatives and normal running of the business that AA could now turn to once the merger-integration process had completed.
The failure of any analyst to mention (on this earnings call anyway) AA’s ff program changes or to follow up on Kirby’s unsolicited comment about it seems to suggest that they do not view these changes as being material to AA’s financial performance.
D=0 does not bode well for those of us who value PDBs. If that is their key statistic rather than on-time arrivals, FAs will feel justified in foregoing this service to avoid any impact on D=0. Of course, PDBs do not impact the time it takes to board because passengers are merely waiting in a different place (at the boarding door) while PDBs are served rather than standing in the aisle.
If you go back to the AA 3Q earnings call, it is interesting that to forestall any concerns about price decreases and capacity increases stemming from low fuel prices, CEO Parker took pains to point out that the airline industry had “dramatically changed” since 2005, and he specifically cited five big mergers as being key to the industry’s current price and capacity discipline. He also took what was probably the pre-call advice of his attorneys to claim that the airline industry was still “intensely” competitive.
@John-nice contribution. Thanks. I confess I nearly spit out my coffee at ‘intensely competitive! “
Yes, it’s the on-time arrival that matters most. But you quickly get to the fact that 95% of what you must control and can take action on in order to achieve on-time arrival is to make on on-time departure. Once a flight is in the air, the timeline is largely set except for weather. So they are right to focus on on-time departure. But I agree that published boarding time should be adjusted. The root problem now is that AA senior management does not believe that flights are boarding early to any significant extent.
John, is “price and capacity discipline” a euphemism for price fixing?
@Joe Ruf, price and capacity discipline is at least the kind of anti- competitive behaviour that goes hand in hand with an oligopoly industry structure.
D=0 is a nice metric, but what about Info= accurate? AA 963 dfw-gru on 1/26 showed flight on time with on time gru arrival. Of course this was not correct when HKG-dfw aircraft departed 7 hours late due to a crew issue. only after checking flight aware was this revealed. nothing in aa systems for either passengers or agents. although turn around was quick we still left nearly 2 hours late. what do think my passenger metric was? give accurate information and let agents and passengers consider alternatives.