American Airlines President Believes to Make Money, Give Customers Less

American Airlines President Scott Kirby spoke at the Bank of America Merrill Lynch 2016 Transportation Conference Tuesday.

The single biggest area of interest among institutional investors, and naturally the very first question Kirby got, was about revenue per available seat mile. Ticket prices are falling. The airline is hugely profitable thanks to low fuel prices, but profits have gone up even as revenue has fallen.

Kirby believes that higher fuel prices will mean higher ticket prices. But there are things they’re trying to do to drive revenue. Interestingly many of the items he focuses on are about the AAdvantage program.

Kirby is banking on moving AAdvantage to a revenue-based program as a driver of higher revenue. However Delta says their revenue-based program does not drive increased revenue.

And he says that their next credit card deal will mean “2-3 points of RASM growth.” Since they’ve got two banks that are presumably bidding for the business (both Citibank and Barclaycard have large installed AAdvantage co-brand cardmember bases now) they’re likely to get a big deal. It may be one of the last big deals.

They’re selling miles to the banks for more, and those miles are worth less. Ultimately that’s not a sustainable model, though the consequences aren’t likely to be felt before American closes its new cobrand agreement.

Kirby sees premium economy and basic economy as important — the segmentation of basic economy will be a ‘really really big deal’ worth hundreds of millions or hopefully billions in new revenue, he says.

    American Airlines Premium Economy

He thinks basic economy is “great for customers” because they can choose what they want. That’s an interesting way to frame it because it doesn’t mean cheaper fares than are offered today. American already matches pricing of the ultra low cost carriers. Instead basic economy means charging customers more for things that they get today at the lowest prices. Put another way, it means giving customers less than they get today at the same price.

Premium economy will likely affect upgrades and redemption but more directly because the segmentation of Basic Economy is all about taking away benefits from AAdvantage elite members in the hopes that those members will spend more on tickets to avoid takeaways.

As a side note, Kirby says he believes “leisure demand elastic at about .7,” so higher fares will lead to more revenue from leisure passengers but fewer leisure passengers.

In a previous presentation, American’s Chairman Doug Parker was much maligned for asking investors to ‘take a leap of faith’ that their stock had become a long-term industrial play. Kirby here seems to be taking his own leap of faith that tweaks to AAdvantage will improve his airline’s revenue even though Delta’s says their similar changes did not and that American will offer better customer service and this will translate to revenue.

And he’s making a leap of faith that essentially charging elite customers more for their benefits will drive revenue, rather than chasing many of those loyal customers away.

This is the direction that Delta has gone, and it’s the direction United is expected to go as well. So Kirby may think, “where are they going to go, when Delta and United are going to be doing the same thing?” The simple answer to that question is, though, that when you ask people to pay for exactly the product they want they’re going to buy exactly the product they want from whomever is offering to sell it the cheapest.

That’s very different from being willing to pay more to buy a seat from one airline than another because you believe you’ll get a better deal over the course of the year.

Kirby knows that in matching pricing of the ultra low cost carriers that American Airlines is selling some of those seats for less than some customers would pay. His strategy though is to reward higher prices on individual trips, rather than the total value of a customer’s business over time.

American plans to take their least price sensitive consumers who are willing to pay more to stick with their airline and tell them they should make decisions solely on the basis of price for a given trip.

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, 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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  1. No doubt in my mind Suzanne Rubin is leaving because she doesn’t want to see the destruction of the program she helped to build and preserve.

    Will frequent fliers roll over like they did for UA and DA destroying their programs and turning them from real rewards to tiny scraps being thrown after each flight?

    As a 40 year customer of all of those airlines I have made my voice heard and taken my monthly flights to where I get the real miles flown for each ticket. But time and again I hear that no one else has made their voice heard, except Gary.

    Since AA is on this course no matter what, we need to vote with our dollars so that when they need customers again they will enter a bidding war for fare-based miles per dollar. It may be only this way that these programs get revalued. Until then support Alaska for full miles and no last-minute award fees.

  2. Every time I hear Doug Parker talk, I feel more and more like moving from DFW to DAL for travel. Sometimes, I think he forgets that most of his big markets are also SWA markets. As a 125,000 mile, $25,000+ flyer, seems like a waste to chase me and others like me off. They keep saying, “You’ll love these changes!” But all they keep doing is driving price and taking away benefits.

  3. I have been AA EXP for over 6 years and wanted a ticket DFW-NYC but was too expensive to I settled for DFW-DCA-LGA for $175 roundtrip and bought it in March 2016 and departs tomorrow. I went online to see if I can do same day standby and nothing was open. I wanted to see if I could get a DFW-NYC non-stop. I called and they said rules changed April 29th. I said no one told me. They said when you buy the ticket and click the box that says I agree to terms and conditions, it is in there. Any ticket after April 29th cannot do DFW-NYC if you are holding DFW-DCA-NYC. I said check with rate desk. She checked with rate desk and came back and said OK, since you bought the ticket prior to April 29th, you can go DFW-NYC and there is a flight at 10:55AM that shows availability but it is only 8:30AM so check back at 10:55. I checked back and new agent said no, not possible. I said check with rate desk. She checked and came back and said rules changed in February and you cannot change it to DFW-NYC. I called a little later and talked to another agent and same thing, you cannot change to non-stop DFW-NYC. I told her, one more thing you are doing to alienate your best customers. I bust my chops to fly 100,000 miles EVERY single year and I am loyal to one airline and you continue to stab me in the back by (1) changing a rule like this, (2) reducing my SWU from 8 to 4, (3) when earning miles, I fly 20,000 miles but will only get 2,000 miles since you changed to fare x 11 (8 or 7 or 5), (4) when redeeming miles, changed 67,500 miles to 110,000 miles one-way, (5) and you continue to cut this and cut that. Then I see someone posted today Executive Platinum 35,000 targeted promotion, what the heck? I bust my chops to fly 100,000 miles and all some yahoo has to do is fly 35,000 and they get EXP? How do you think, Mr. AA president, that makes me feel? Mr. AA president, you really know how to piss off all the EXPs.

  4. @greg
    you are 100% correct
    I got a call from AA last week and they asked me about how I feel about changes to program, we spoke for 30 minutes as she was trying to give me examples of how i will be better off, and yet every example did not hold water…I have been EXP or PLA for the last 10 years, but NO MORE…
    I live in YVR and so miles will go to alaska now, and will fly AA or LAN or whatever, based on price and schedule and as long as I can credit to Alaska mileage plan I am fine, and of course will try to actually fly Alaska as much as possible
    AA needs to hear and feel this…

  5. @ David Gonzalez:

    You mean you’d want to fly Southwest, which already has a revenue-based model for earn and redemption that they regularly devalue, in order to protest American’s moves in that direction?

  6. “American Airlines President Believes to Make Money, Give Customers Less”

    Gary, they are already doing this. Just following the path laid out by DL.There is only one solution – go free agent. Fly non-stop – no more connections for loyalty for me. Throw away tickets – hell yes! Hidden city – bring it on. Buy what’s important to you. 3 hour flight departing at 7:01 pm with no meal service – no problem, I’m not buying up for that flight. Friday evening transcon – might pay up for a nice ride in front. Everything will be MY choice

  7. 1) I get your point; it’s a little more complicated than that. But your apples-to-apples comparison in general is a fair one.
    2) DAL is a lot more convenient for me personally at this point, easier to get in/out of as well.
    3) No change fees. (I never check a bag)
    4) Rev based or miles based doesn’t make that much a difference to me. I fly so much that it’s about the last thing I want to do for fun (although I love planes and travel, so maybe I’m discounting this in my head b/c I just flew with my 4 year old twins to SNA and went to Disneyland with two four year olds).
    5) I’ve cared more about flight benes, being comfortable, etc. If that goes away, companion pass plus #2 above may have more value to me.
    6) More than anything, I hate them trying to sell the changes on being ‘beneficial’ for me, when they clearly are great for the company and worse for me. Just stop lying when you know you’re lying, Doug Parker. Especially when there is no evidence that rev based rewards systems are accretive vs mileage based. Maybe they have a plan that’s better than everyone else’s yet, but there’s no sign of that to date. That’s all.

  8. what really matters is what our employers will bear. I have to use the corporate TA for booking my flights, which means I don’t get to choose when to spend more and when not to – they will just book, robotically, whatever their policy says they can. There’s no trade-off I get to make when the discounted F fare is only $50 more. There’s no trade-off I get to make when I have to fly full PE TATL when discounted can be half the price. I just don’t see it.

  9. “Put another way, it means giving customers less than they get today at the same price.”

    Here’s the thing – the fares today were never going to be around forever. American’s price matching of ULCCs is unsustainable. They’re losing money on $41 tickets and the only reason they can do it is because of the low fuel environment subsidizes the strategy. So they’re trying to figure out how to compete with ULCCs when fuel goes back up – the answer was to unbundle their product. So will fares go up and will you get less on a now $81 ticket? Yes, but fares are only going up because the base 2015 fares were at laughably low prices. Relative to 2013 when fares were high, you’re still getting a great deal assuming you’re willing to lose out on benefits for that deal. How it’s been messaged (and yes even to Wall Street) is that basic economy fares will be lower than standard coach fares of 2013 but have less benefits. Their goal is to get normal main cabin fares back to 2013 levels (of which they are currently far far below).

    And I know you’re a big proponent of the “I’m not my fare I’m my loyalty” view, but these fares were never designed to be bought by loyal customers. If we were in 2013 and American offered a lower ticket price basic economy and left main cabin fares constant, most of us would view it as just creating something for ultra price sensitive passengers and go about our lives buying the ticket we had always bought. But the issue, like I’ve said before, is that since prices were low for a year people feel that they are entitled to a $41 fares forever and don’t realize that those were here to stay.

  10. At the end of the day, the only money that airlines seem to make from their frequent flyer programs are from selling miles to banks and others. The loyalty aspect is, at best, small potatoes. Pretty much anything that the folks who read this blog will like in a frequent flyer program won’t make an airline any money.

    And that’s why they’ve been changing to be less generous. Not because the airlines want to be mean, but because it makes good business sense to make these changes.

    The changes being made to match the fares of the low cost carriers yet also try to upsell customers travelling on these fares also makes sense. Heck, the Spirits and the Frontiers of the world have to upsell on these fares to make money, too!

    Anyone who isn’t picking their flights based on convenience and fare these days are likely being foolish. I think this is probably better for the consumer because they get to travel more affordably and more efficiently. Indeed, I’ve been amazed at some of the cheap “walk up” fares I’ve been able to buy this year. These fares used to cost an arm and a leg. I’ll take affordable, convenient fares over a few hundred extra frequent flyer miles or the slim chance of a future upgrade any day.

  11. I’ve stopped being loyal to AA after many many years as exec plat.

    1. AAdavantage is borderline fraud. The program rules let them change the program anytime they want to. The new “earning” tier paired with the “new” award chart makes awards 10x harder to earn. Then when it comes time to cash in an award – “we’re sorry sir, no seats are available in the next 90 days.” There is zero regulation.

    2. It’s easier and cheaper to fly direct. JetBlue has a nice product with many direct flights.

    Once upon a time loyalty and perks trumped product and convenience. Not any more. See ya AA. Goodbye AAdvantage credit card.

  12. They aren’t giving customers less they’re simply better segmented customers and rewarding more valuable customers. Amazing as someone who has business accumen can’t see that. Sure it may not be a positive move for you as an individual, your blog or your readership at large but AA isn’t catering just to you. Besides didn’t you only recently switch your allegiance from UA?

  13. Many current and recently “ex” elites have made the decision to stop being loyal to one airline and pay a ton extra to earn perks. They have decided to simply book the cheapest fare even if it isn’t their preferred carrier and travel that way. Why pay thousands more in a year in order to attain a status that is degrading every year? It doesn’t make sense. DL has been selling reasonably priced FC seats and “cheap” FC upgrades for a year now. Unless your local airport is only served by one major carrier and that’s the easiest to use, book on price and stop overpaying for the small perks. Unless your Global service or Concierge Key, don’t bother being a top tier elite. They don’t really care about you anyway.

  14. The race to the bottom continues. Doug and Scott won’t be satisfied until they match Spirit as the worst airline in the USA. Why would any elite in their right mind fly 10-across 777s and have to pay to get anything better? Yes, SWA and Jet Blue are going to continue their rises to the top, while the look-alike legacies continue to seek sub-basement status.

  15. Why should AA care about loyalty?

    1)Loyal fliers (usually) provide “above average” returns for a carrier/company -after all, they are willing to pay more for extra services. How many (loyal) AA pax actually “game the system”?
    2)Its easy to not care about loyalty when “times are good” but what happens when the inevitable “the economy takes a turn for the worse” and revenues go down? Who will they rely upon?
    3)Once a company loses a loyal customer, many times its difficult to get that customer back – at least to previous levels.

    As an example, a few FTers (Flyertalk) have mentioned they don’t plan on being loyal to AA anymore in the future. This might happen with me as well. Now the “problem” for AA (at least as it concerns me) is I’m a loyal AA flier and since I started being a loyal AA flier, I’ve gotten married as well as have two kids. AA right now has two loyal fliers (Mrs.777 and I) and would/could have gone from 2 to 4 loyal fliers (at least until my kids are old enough to purchase their own tix). Now guess what, AA might not get anything from me/my family in the future. I’m probably not alone here.

    Even with the current way AA offers promotions, miles (both earned and redeemed), they are still making billions in profits.

    Why not be different than UA and DL?

    If that’s what Parker, Kirby, believe is a sound and good business decision then I really don’t have much to say.

  16. @Josh G – I disagree, I do not think they are rewarding more valuable customers more at all, just applying cuts less severely. And the plan is to value revenue from an individual trip over revenue across a portfolio of trips. That’s the opposite of loyalty.

    I’ve been an Executive Platinum with American for 5 years.

  17. As I understand it, premium economy is a separate class of service. Once PE is installed on domestic aircraft, will that mean complimentary upgrades from economy will only be good for PE because comp upgrades are only good for upgrading to the next class of service? Also, will SWUs allow international business class travel only if a PE ticket is purchased? Finally, has any one heard an explanation for the conclusion that a revenue-based ff program will increase revenue?

  18. @Carl in the comments shows why changes are needed. American turned an unprofitable customer buying cheap seats into a pain-in-the-a$$ entitled snob who’s further damaging AA’s profitability by pestering them (reservation agents aren’t free) with an epic tantrum. Oh the horror–flying the flights that one has purchased!! And the removal of the benefit he feels entitled to is most likely because people like him made a habit of abusing it — so everyone loses thanks to Carl.

    However, I couldn’t agree more with him that AA’s lack of communications about changes is criminal (and the law people should do something about it).

  19. Good that they’re doing this. Reinforces my decision to fly the ME3. Company had a surge in international business in Asia and flew Emirates the last 7 trips. Way better product than the US3 at a cheaper fare.

  20. This is hilarious. For a couple of years Gary could not find anything bad to say about AA because it was the last airline to go to revenue based earnings. Now as many of us predicted back then they are rapidly headed to the bottom of the heap (though will be hard to catch Delta). It is a bit sad from a historical perspective as AA was hands down the best from the 2000-2006 period. Easy e500 upgrades, easy Gold/Plat challenges, MRTC, advance exit row for Golds, huge saver aaward inventory and credit card miles that counted towards million miler status. All gone now. Clearly UA is ascendant – best mileage program, best partners, good elite program – all they gotta do is fix the reliability and I have confidence in Oscar.

  21. It makes me so happy to hear that even 7 years after the Bush era, and the more recent departure of Senor Cruz from Boot Hill, TEXAS still thinks it’s entitled to control the entire United States.

    Hmmm. Texas. Southwest, American and United all offering deep discounts to Texans versus the rest of us. Shaddup already.

  22. There is no more competition, thanks to our government, so the airlines that remain don’t give a damn about losing customers. They all know the math. Each of them will gain and lose customers at the same ratio, so it’s basically a wash. The last of the big three liars still hangs on at AA, but I hope he will be gone one day soon.

    A pox on them all!

  23. Low value EP for five years…what an accomplishment! I bet you’ll cite your MM status next when AA had by far the most liberal MM status counting all RDMs until 11/2011…

    Like I said it’s only recently you became interested and flew AA.

  24. @Josh G – what makes you think I’m a ‘low value’ EP? I don’t hit Concierge Key but I’d certainly put my spend up there with primarily domestic EPs that the airline wants to retain

  25. It’s so funny someone who has *never* worked in the industry or for AA thinks they’re such an expert. You’ve made many “forgone conclusions” that haven’t panned out, you go around posting misinformation and irrelevant things like your whole discuss ok about the UA AFA and tying TW and their MX operations. Doug, Scott and Derek are consumate, experienced airline professionals with hundreds of others facilitating their analysis and decision making. Stick to reviewing lounges and hawking credit cards.

  26. @Josh G
    no doubt you are paid by one of the big 3 as PR COMPANY
    You don’t have to agree with everything that Gary says, but not only Gary, thousands of customers, who are not less smart than your idols dougie and scott, evaluated the changes and correctkly realized that the purpose of all the changes are solely to the benfit of the airline and not the customers, you don’t have to like that, but it’s not debatable
    What your boss is doing is no doubt with the best interest of the airline’s bottom line in mind, but not for the benefit of the customers, and that is all Gary is saying, and many smart people agree…
    Now go try to defend them in another blog and leave this one for those who know what they are talking about….

  27. @Josh G – what exactly do you disagree with in this post?

    As for the issue of United flying a 787 domestically as a result of their failure to integrate their workforces so many years into a merger, resulting in the inefficient deployment of a $100 million aircraft, I will call that a problem and a failure – and a costly one.

  28. @Josh G You may not be a shill for the Big 3 (then again, maybe you are), but you obviously don’t understand the internet today. These blogs are made for conversation like the one we’re having, and if you don’t like Gary and the rest of us talking about it, you have the right to stop coming to the site and whining that we continue our discourse. It’s rude, doesn’t further the discussion and is frankly juvenile.

    Doug is obviously good at running a shoestring airline and doing deals. He saved Cactus and engineered a deal with USAir. He kept USAir alive and engineered a deal with AA. What he hasn’t done yet is show that he can run a mainline airline, maintain corporate/high traveler loyalty and patronage and innovate strategically to win. Thus far, his strategy is to mimic Delta in everything but equipment, which renewal was already underway when he got involved.

    He’s continually tried to sell EXP members that his changes serve them when they obviously do not. Delta at least admits it; I’m not sure whether Parker gets what they/he are doing or not. They’re effectively trading loyalty for a rebate program. But when everyone is giving the same rebate, it comes down to price and total time of flight/convenience. That’s a rough place to compete every day on every flight. Eroding benefits is probably more detrimental in the long-term for high value customers than eroding the value of a mile, but he’s managing to both in tandem.

    Personnel seem happier on AA right now, but maintenance seems to be getting worse and the front cabin and MCE flyers seem to be restless. Doesn’t seem like a winning strategy for the long term.

    As for our qualifications, Gary thinks about airlines literally all the time. Not just lounges and flight experiences, but strategy and positioning. I happen to do the same. I’m not in the airline industry today, but I have been. Have you? I’m part of a management team that strategically thinks about customer experience, relationship and loyalty/reward every day. Are you? I’m a finance professional who reads P&Ls, thinks about strategic, long-term growth and short-term sale and expenses every day. Are you?

    Focus on what you know, not your suppositions about others on this blog. Or leave; that seems like an okay outcome too.

  29. @david gonzalez
    I do suspect Josh is on the dime for being dougie’s attack chihuahua

  30. I wouldn’t call the 787 domestic flights “a failure”. Mine are always packed, and I am sure there are many customers connecting to international C/F from SFO IAH. Those customers are going to be much happier with lie flat C than those cruddy domestic F seats that you find for most domestic flights.

  31. I will say that I go out of my way to fly domestic 787, 777, 767 flights on American. Not sure why they aren’t used more on routes that can handle the capacity.

  32. Who can blame the airlines? Didn’t AA release a study showing that 75% of their fliers only fly once a year and probably booked the cheapest ticket on a travel website? Business travelers often fly not by choice but by corporate contacts. Loyalty is overrated unless you pay up. No free lunches anymore.

  33. The way airlines are acting about their increased profit margins, and steps to keep the party going (i.e. Reduction of loyalty benefits et al) seems highly reminiscent of a market bubble. They all seem to be placing the bet that cost pressure will stay subdued and that restructuring and re-commoditizing fare class/ cabin schemes will help position them if oil rises against them again. They’re all doing it their own way but it’s curious they’d take the bet against the customer.

    Why create a price loyal market as opposed to a brand loyal market? Why not offer price point range but also benefits to create a brand loyalty that now captures everything from the cheap traveler to the suits?

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