American Airlines is going to start offering the ability to spend miles as a form of payment for upgrades starting next year. That means upgrades will be available to AAdvantage members much more often. But you may not like how much it costs.

Airlines Want Loyal Customers, But They Don’t Want To Give Away Upgrades

Airlines love their most frequent customers. During the third quarter American Airlines earnings call on Thursday, CEO Robert Isom reported that 72% of premium revenue came from their AAdvantage members and that during the quarter the percentage of premium seats that were paid for – not upgrades or employees sitting in the seats – was up 4%.

But what keeps these frequent customers loyal? Elite status that’s part of the mileage programs. And the most coveted perk of status is upgrades.

For the past 10 years, Delta Air Lines has been on a quest to eliminate upgrades to first class entirely. They were ahead of the curve monetizing those seats for any amount, rather than making them available to frequent customers as upgrades. United was on top of this years ago, too, showing a willingness to sell first class seats to customers already sitting in coach for ‘tens of dollars.’

They’ll take most any cash from a once a year traveler, instead of giving away seats to customers spending a lot over time.

Cheap Upgrades For Sale Frustrate Frequent Flyers

Customers have been promised upgrades as a benefit of their status, and mileage members have been promised the ability to use their points to upgrade. But when airlines have gotten so good at selling all of the premium seats – and have been willing to offer those seats for very little money in order to do it – there just aren’t many options left to upgrade.

Recently I wrote that you might as well forget about regular upgrades and instead focus on taking advantage of the opportunity when the airline offers to sell you the seat for as little as $40.

• It’s a problem for the airline when this removes the incentive to remain a frequent customer – you might as well just buy the seat on whichever airline is most convenient rather than spending more money to stick with one carrier.

• And it’s a problem for the airline when mileage members can’t use their points for upgrades – because that removes the incentive to earn the points, and in particular to use the airline’s co-brand credit card which is the most profitable product they have.

  After all, Delta generated nearly $7 billion from American Express last year. American borrowed $10 billion against future revenue to AAdvantage program during the pandemic. And American reports that selling miles generates a margin greater than 50% even as they aim for single digit margins at the airline overall.

American Leaked Their Plan For Mileage Upgrades

After each earnings call, American Airlines CEO Robert Isom takes the stage to speak with employees, and take their questions. Toward the end of the most recent “State of the Airline” event, one question was asked about customer frustration over being unable to use their miles for upgrades when other passengers “skip the line” with the option in the app and on the website to “upgrade now for $80 more.”

Isom turned the question over to the airline’s Managing Director of Revenue Engineering Marcial Lapp. Who explained a new strategy to address this that they’re planning to announce in January.

And it did not make Isom happy that this cat was out of the bag – he pointed out that they weren’t planning to make that announcement yet – and he cracked a joke about ‘wishing he could get the last five minutes back.’

The Current Approach To Mileage Upgrades Makes No Sense

What’s backwards about current upsells is that mileage upgrades are far more lucrative to American Airlines than the incremental cash they’re often generating.

• For most members, a domestic upgrade using miles costs 15,000 points plus $75. That’s real value to the airline of ~ $150.

• But they’ll frequently sell the upgrade for less than $100 and not allow the use of miles. They may even sell it for less than $75, turning down the $75 plus miles.

Paying For Upgrades With Miles Means Upgrades Are Available, But Miles Are Worth Little

American’s solution to the upgrade dilemma is to treat miles as cash, letting customers buy upgrades with miles like they would with money. That means upgrades become available using miles, but at a low value of miles.

In offering members the ability to pay for upgrades in coach or miles, they follow Delta – and it seems likely that as at SkyMiles, AAdvantage customers will be able to use miles at about 1 cent apiece to cover the cash cost.

According to an American Airlines spokesperson,

We’re always looking for ways to give customers more certainty with their upgrades, including the option for an instant upgrade using miles as a form of payment, which we intend to offer in early 2025.

The new problem American is going to face is that the mileage program succeeds when it lets members buy something they value far more than it costs the airline to provide. The traditional saver award and upgrade were seats that would have gone unsold, so they were nearly free to offer to the customer.

Now that the airline sells most of the seats, though, it’s no longer free to offer. The opportunity cost is the cash they can sell the seat for. Making it available with miles means turning the miles into a lower value currency.

This will mean greater availability of upgrades using miles. And it often will mean upgrades are available for fewer miles than it would cost today. For instance, a $40 upgrade might cost 4,000 miles – instead of 15,000 miles plus $75. On the other hand, this $640 upgrade from Dallas to Las Vegas would run about 64,000 miles:

This Will Help American Monetize Their Growth In Premium Seats

American is about to have a lot more premium seats on their planes – retrofitting Boeing 777-300ERs with more business class, adding new dense business class Boeing 787-9s, taking delivery of Airbus A321XLRs and adding first class seats to smaller Airbus A319s. That’s more premium seats to monetize, and they’ll be monetizing them with miles as a currency.

New Business Suites, Credit: American

The hope is clearly that members will feel they can use their miles, and get upgrades, while still monetizing premium cabins – not only not giving up revenue but generating incremental revenue for the product. That’s a long way from the days of elite members getting upgraded into unsold seats for free, certificates, or a small fixed number of points.