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.