American Airlines Chief Commercial Officer Vasu Raja spoke at the Raymond James Diversified Industrials Conference on Tuesday, and he offered several interesting insights into who is traveling now and how American Airlines is thinking about generating revenue from customers going forward.
- He describes travel as “getting back to normal” but this is the new normal. In the past it was clear who was a schedule-driven business traveler and who was a price-driven leisure traveler. Now the group that can’t be easily classified one way or the other has gone from 25% to 50% of passengers.
- There are also more “blended trips” that mix work and leisure (the idea of bleisure that pundits always wanted to be real finally is). Business trips might be a one night Dallas to New York in the past but it’s become much more common to do out Thursday back Sunday, mixing work with an extended trip. And that might mean returning on Sunday with a spouse.
That’s a different itinerary than one airlines are used to selling, but “increasingly businesses have been willing to go off platform” to get employees to travel. Even business trips can be sold at AA.com instead of Concur.
Two and a half years ago AA.com hit several $60 million sales days. This year the airline has been hitting its biggest sales days ever.
- The business traveler was price insensitive, they’d pay whatever the going rate was. The leisure traveler would only pay the cheapest fare. But now half of passengers can be upsold a product that they value more.
- About 70% of American Airlines website transactions involve buying something other than just the lowest fare. The airline hasn’t fully “leaned into the technology yet,” but customers can see a range of choices and “make selections” (be upsold). I’d add that departing CFO Derek Kerr has been an impediment to the IT spend the airline needs in the past, and that has American lagging in its ability to fully monetize the eyeballs on its website.
- How American thinks about ancillary revenue is changing. Customers often come to AA.come from metasearch, where they’ve found the cheapest fare, but that doesn’t mean they buy the cheapest fare. Ancillaries are no longer just change fees, seat fees, and checked bag fees.
- Getting customers to enroll in the loyalty program (still not possible while booking a ticket online…!) means continued marketing and revenue from partners who buy miles.
- Customers also “want to be able to use miles to buy more things at the airline (or use stored credit to do that)” and when they’re spending miles or stored travel credits they don’t treat it as carefully as money.
- Cabin may a bigger deal now, for instance on blended trips where someone travels out alone for work and returns with their spouse at the end of the trip
- Getting customers to enroll in the loyalty program (still not possible while booking a ticket online…!) means continued marketing and revenue from partners who buy miles.
- He notes that “every dollar of redeemed credit brought 20-25 cents of incremental cash,” that all of those accrued credits from the pandemic weren’t treat by customers as thought it was “real money,” and customers spending credits were therefore more likely to buy up to premium cabins. This suggests that premium cabin spend may dip (pandemic credits gone) but that the end of change fees on most fares – indeed, for those who aren’t the most price-sensitive buying basic economy fares – could be more beneficial to airlines than some might expect.
- Raja believes “customers should be able to have a 100% digital experience” though American is nowhere close. I still have to call reservations for systemwide upgrades, mileage upgrades, and business extraa upgrades (which frequently fail online). While Raja is correct that a lot of the challenge “relates to legacy technology” with systems built on systems that are in some cases 50 years old, United is actually better here, and their tech was quite bad a decade ago.
- He explains the success of a hub is measured by “profitability, it’s actually super simple” and yet American operated New York hubs for quite some time when they weren’t profitable, and Chicago O’Hare has never been a strong performer. He notes that “some things are beyond your control like the cost structure of the hub” that is “inherit[ed] over decades” of capital projects. He points to the geographic benefits of Dallas and Charlotte noting that being close to the places people want to fly means those trips involve fewer planes, pilots, and fuel. He argues that gives them a cost advantage, though they also are flying more small planes which have higher seat costs.
- Rajas sees opportunities for further simplified fleets. That’s why I expect American to drop first class from premium cross country flights starting in 2024. They can eliminate the “A321T” subfleet, add seats, and use the new Airbus A321XLR not just for short transatlantic flying but also cross country flying with the same cabin layout.
- He contends that adding seats to planes – meaning less space per passenger – is good for passengers. The claim is that “when you add a row of seats to a 737…that is 6-12 more people who get to go to New York… without changing the cost structure of the airline.”
American put out a video, featuring Raja shortly before the pandemic making this case unpersuasively.
- Finally he noted that they plan to “expand premium seats” on aircraft. I noted last fall that they’d like to add first class seats to Airbus A319s and that Boeing 787-9s will go from 30 to 51 business class seats.
American could do a lot more to upsell customers, and they certainly make offers now like never before (this trades off with upgrades by the way). Raja knows customers want to spend more for a better experience, whether miles or money, they should offer better buy ups in lounges (a la Delta’s premium drink offerings) with decent mileage redemption as payment. He’s always viewed the schedule as the airline’s product but now sees value in a better product people will pay for. Maybe we’d get better food up front if they sold food in first class…
If AA were to sell food in first, it would be the same stuff they sell in economy.
It’s never a good idea to hold back technology spend. CFO Derek Kerr has left turd bombs in his wake…..
UNITED rising – they started implementing the larger premium cabins over 3 years ago
AA does have the best domestic meals right now – they should push their lead further – with more first class being discretionary spend vs corporate contract there will be more discernment on this front from the incremental buyer
Pre covid I would have happily paid for the charcutier meal. Its lagging a bit compared to what it used to be, but it beats the ragu and dry chicken every day of the week.
“American lagging in its ability to fully monetize the eyeballs on its website.” This is a reason they made award wallet remove all AA accounts. They want to get eyes on AA.com and not just behind the scene updates.
I wish they’d stop telling me “it’s what I want” and “the customers benefit” to justify squeezing my seat and lavatory space to Middle Ages torture dimensions! Please don’t insult my intelligence while justifying your greed!
Adding 6 more seats to a 737 ISN’T Good for the passengers as it makes the aircraft MORE CRAMPED – therefore leading to continued hostility and anger towards other passengers and the crew!
Another fluff piece eh? My how your tone has changed since becoming CK.
@Joe – I literally call out their CFO for starving their IT budget, highlight how they’re upselling customers (and making upgrades harder) flag that they fail to even let customers enroll in the mileage program while booking a ticket (!) and suggest Raja is unpersuasive in arguing the customer benefits of adding seats to planes – as well as highlight an historical underappreciation for the importance of customer experience and the need for better food.
So I’m somehow giving AA a pass or writing a fluff piece?
He must only fly with his family in regular coach since it’s better for the customer and when flying he’s the customer.
Amazing how the Delta fanboys (let’s be honest… Delta employees at the analyst level in ATL) launch on literally anyone when the slightest positive piece on AA is released. The amount of insecurity in their airline is impressive..
And this isn’t even really a positive piece about AA.
Calm down fellas; your Passport Plum kool aid will show up soon enough. And you can go back to your airline that started the 30″ pitch retrofit amongst the big 3, Delta. Take a look at https://www.delta.com/us/en/aircraft/overview
Delta’s retrofit program is the originator and standard-bearer of densified economy and lower legroom in nearly every first class narrowbody product vs AA Oasis.
I think my favorite thing about Delta is Ed Bastian stating “our minimum legroom is 31″ as literally every 739 and A221 rolling off the factory line came out with 30″ pitch. To say nothing of their retrofits also ongoing that rolled out with 30” pitch and a subpar first class legroom product in the name of density.
AA had the same issue with a lower first class legroom in the first row but they did an entire retrofit to fix it. Where’s delta’s fix?
Amazing this Vasu Guy, just amazing. He’s the epitome of greed and cynicism all in one suit. Just revolting!!
Go back to old livery.
“He contends that adding seats to planes – meaning less space per passenger – is good for passengers. The claim is that “when you add a row of seats to a 737…that is 6-12 more people who get to go to New York… without changing the cost structure of the airline.”
Yes, when he non-revs he should be assigned the middle seat in the last of the cabin…eat your own cooking.
Just flew cross country in first class on an AA A321T – the ‘Asian Veggie’ meal entree was 60% white rice, 40% tiny diced veggies with no seasoning, like what you might give to a toddler. Gross.
With all due respect, I listened to the call, and the overall tone was quite a bit different than your characterization of it.
What is so difficult about eating a meal BEFORE you get on the plane? Or bringing food with you?
I just need a lay flat seat, wine, and to be left alone!
AA doesn’t have a mission, a commitment or motto. It’s throwing shit to the wall and seeing what sticks.
When I worked for AA, it was a train wreck every day. While I certainly dont wish for AA to go under, this dog and pony show dressed up as an airline is going to destroy the company more than it has already.
DL- focuses on customer experience
UA- focuses on technology
WN- focuses on customer friendly.
AA focuses.. on..? fitting a square peg in a round hole and wondering why it don’t work….
Don’t even get me started on the blocked promotions running rampant thru the company.
@DesertGhost – I don’t think I am characterizing ‘the tone of the call’ I am sharing the stuff Vasu said that I found interesting from the call
Given free reign by departed Disaster Doug, this clown has singlehandedly destroyed American Airlines., Until he and those who support his wakko ideas are sent packing, it will continue to descend and take the No.1 position in the indukstry…..as the all-around bottom feeder!
Currently there is a DOT comment period on seat sizes. There is no way that passengers want these small seats. Raja can say whatever he wants but that doesn’t make it true. Obviously AA and its management are very out of touch with their customers.
Airlines used to be run by CEO’s (yes, I know Vasu isn’t the CEO) who were equal parts bean counter and visionary (think Herb Kelleher) but unfortunately today’s airlines (and many other companies) are run by solely by bean counters who can look no further out than the next earnings report.
As I’ve often said previously, I try to avoid flying UA, DL, and AA. The problem is that I am now in the oneworld universe via AS, the only airline with which I organically have status due to actually having my butt in a seat.
Never liked USAir. Never liked Doug Parker, and like Vasu Raja even less. Every time he opens his mouth, he makes me wish I had status with United or Delta.