American Airlines CEO Pitches New Strategy In Internal Meeting — Revenue, Premium Customers, And Growth

American Airlines has switched its focus from cost-cutting to “revenue production.” For years they were chasing Spirit Airlines and Frontier, trying to compete on offering as many seats as they could at the lowest cost possible – just as consumers were switching to prefer spending more for a better product. They got the moment wrong.

Last year I first broke the news that American Airlines was pivoting to premium. The CEO’s messaging went from ‘never spending a dollar they don’t have to’ to rededicating themselves to customer experience. That’s a tough switch, and the airline still has many problems, but it’s also a clear change in messaging – not just to customers and investors, but to employees.

At the quarterly internal ‘State of the Airline’ employee meeting held right after their earnings call on Thursday (a recording of which was reviewed by View From The Wing), American CEO Robert Isom laid out first his excuses for why the airline lost money in the second quarter – but then laid out four focus areas for the company how they will turn this around. Those focus areas are no longer about cost-cutting. They’re about delivering value to customers. This matters.

Obviously fuel prices hurt, but they also generated more revenue from higher fares because of it. Compared to other iarlines, though, Isom offered that they’re financil laggards because:

• They spent more money on their fleet early, but other airlines will have to do this. It positioned them with too much debt coming out of Covid. (I’d note that they also borrowed $12 billion funding stock buybacks under their previous CEO.)
  
• They pay their employees more, because of contract timing, but other airlines will have to catch up. (American also outsources less.)
  
• Weather hit them harder than competitors. (American also recovered poorly.)

First, coming out of the pandemic, and because of all the work we did to renew our fleet, we have quite a bit of debt. We had to borrow money to make our way out of the pandemic. We have been renewing our fleet at a faster rate than others. We also came into the pandemic with debt, and obviously we had $54 billion of total debt as we ended the pandemic….

The second item is compensation and benefits. At some points in time, we will be higher; at other points, others will be catching up. Today, compared with United, 80% of our team members make more than their counterparts at United. They are going to catch up, and then we will negotiate new contracts.

Over time, our goal is to pay at the top of the industry. We are going to continue to do that, and I am sure United and Delta have the same philosophy.

Today, though, that is also a couple hundred million dollars of expense that we have, at least in comparison with United, that they do not have. If you take those two things into account, our results would have looked different. The loss we had would have been more than covered, and we would have been in the black.

During the quarter, we also had probably the largest disruption in our company’s history in terms of Fern and Gianna, which basically shut down Charlotte and DFW for the better part of three or four days, and then unfortunately Philadelphia, DCA, and the rest of the network. That was another impact we suffered during the quarter.

That’s when Isom pivoted, “But enough of that.” That’s when we got to the real key message everyone at the company needed to listen to, “What we can do, and where I think the biggest opportunity is, and the gap we can close the most, is from a revenue-production perspective.”

Failing to focus first on revenue is the strategic mistake American Airlines had been making since US Airways management took over the company. It takes time to change, but leadership gets that’s where they need to focus – they need to make investments that generate more revenue than they cost. And the rest of the employee session was focused around revenue:

That is why today you will hear about our efforts in customer experience; how we are investing in our product; how we are investing in reliability to make sure it is as solid as it can be and leading the industry. You will hear more about that.

Here’s American’s strategy:

• Growth: they need to build back Chicago and Miami and they’re going to build back Philadelphia and Phoenix. They need more long haul aircraft, though.

  You will also hear about us growing our network. This year we are growing the network by 5%. Other than immediately after the pandemic, that is more than we have done at any time. Five percent is a huge lift for us, and it will support us in places like Philadelphia, Phoenix, Miami, and especially getting back to where we want to be in Chicago.

• Premium revenue. That’s where their revenue is growing fastest.

  Another big piece is driving premium revenue. With all the enhancements we are putting in place in our product, how do we encourage customers to buy more and stick with us longer? That is the third pillar.

• AAdvantage. If United were to acquire them the biggest passenger loss would be adopting MileagePlus. AAdvantage is a better program. It’s been their own ‘advantage’ and they’ve continued to lean into it, even as they’ve devalued by eliminating things like upgrade award charts.

  When you get customers, put out a product they really want to use, and fly to the right places, our loyalty program kicks in. It is the world’s first and the world’s largest. We have to make sure it is maximized in terms of the value it generates for the company.

Isom believes that “not only will we be able to erase whatever gap we have in revenue production, but we will also be able to keep paying our people at the top of the industry and make real progress paying down that mortgage [debt].”

They are already “a premium global airline” although I’m not sure it’s a fair characterization given that they really haven’t extended premium to coach (even their buy on board food lags United and Alaska) and have far too few extra legroom seats, and their global network where they fly their own aircraft is much more limited to Europe and especially Asia than others.

Nonetheless “a consistent, elevated customer experience; growing our network; deepening partnerships and loyalty; and driving premium revenue” are important strategic directions and a meaningful shift compared to where the airline was focused two year ago. And Isom is not wrong that – if done well – “that will result in higher NPS scores, an engaged team, people who are proud of what they represent, and shareholders who are taken care of as well.”