Before the pandemic American Airlines was losing money flying planes – the sale of frequent flyer miles accounted for its profit.
During the American Airlines first quarter earnings call Stifel analyst Joe DeNardi asked CEO Doug Parker whether he realized how profitable the AAdvantage program is, and why he doesn’t devote more time during the earnings call to discuss it?
He offered that “in 2019, your loyalty program generated roughly the same amount of EBITDA as Marriott did” and wondered “”why don’t you allocate 40% of the time on these calls to the loyalty program” given its importance?
Parker responded,
I don’t think it’s possible to separate the EBITDA – the AAdvantage program from the EBITDA airline. They’re inextricably linked, and you can’t have one without the other. So anyway, that’s what I believe. So the – and therefore, we talk about running the airline, which what we do every day.
And again, the AAdvantage program does indeed – is an incredibly important part of that. Our – because we do such a good job of running an airline, people want to have miles in our loyalty program. People want to have credit cards that allow them to earn miles as they spend to earn miles so they can fly more on our airline. Those are all good things. But you can’t have one without the other, and I don’t think it’s right to try and separate one P&L from the other.
It’s true that American can’t really ‘cut out the middle man’ and just offer a credit card without flying planes. It’s the allure of travel that they’re marketing. One of their co-brand card issuers, Barclays, really just acquires customers inflight. They wouldn’t have that partnership without flying planes. And without flying planes they wouldn’t be a oneworld member with access to award travel on partners, either. Their cost to offer travel would be much higher, too, since they wouldn’t have excess unsold inventory to sell at a discount to AAdvantage members in exchange for their miles.
Nonetheless there are implications to the relative importance of the mileage program compared to actual flying planes for generating profit,
- The airline business is worse for American than is often believed. They aren’t doing as good a job making money flying planes.
- They’re probably not calculating the profitability of routes correctly. They have long believed that New York is a loser market for them, though they’re addressing that through their JetBlue partnership. But pulling back on New York means giving up on New York money for their co-brand. The airline needs to be relevant to New Yorkers to attract their transaction volume, and they need to fly in and out of New York to acquire New York cardmembers inflight.
- The same is true for other important financial centers where they’re weak, like San Francisco and the Pacific Northwest, which is why the Alaska Airlines partnership is so important for them.
Now that American has raised $10 billion secured by income from the AAdvantage program and provided significant disclosures about the program to the SEC I don’t think DeNardi can argue any longer that the market doesn’t understand the value of the loyalty program, is undervaluing it, and that therefore the stock should be worth more.
As I’ve suggested the assumptions that make the loyalty program’s valuation as high as DeNardi believes are unrealistic, there’s not nearly the opportunity for earnings growth that he sticks into spreadsheets and spinning off programs isn’t a way to unlock their value.
Nonetheless the world more clearly understands now – in no small part due to DeNardi’s relentless efforts – that the loyalty programs are incredible drivers of revenue. Commentators used to suggest that if given the option airlines would turn back the clock and never offer frequent flyer programs, believing that since every other airline had one too they didn’t provide an advantage and merely represented a cost.
In fact frequent flyer programs are the most successful marketing innovation in history. For almost any company marketing is a cost center, not a profit center. Airlines have created marketing engines so good that other companies pay to rent out their brand and marketing currency in order to sell their own products. And that’s amazing.
American Airlines is celebrating the 40th anniversary of the AAdvantage program and Parker likely doesn’t have a mental model that places sufficient importance on the program, even though it was a credit card co-brand deal that financed the acquisition of US Airways when he led America West. Yet speaking to employees after the earnings call he didn’t even seem aware of the anniversary milestone.
"We've had the AAdvantage program since 1980 or something" – American Airlines CEO Doug Parker to employees today.
— gary leff (@garyleff) April 23, 2021
The more airline and hotel programs devalue the less value they have to the consumer and the incentive program becomes less valuable to those paying the freight (banks). You could say that AA is just a discount travel provider for the banks that controls them. Banks would never buy an airline company (financially incompetency) but they certainly will take advantage of their desperation without any risk or lose if/when they fail.
When you put an amphibian in a pot of water and turn up the flame they will stay until cooked. Normally a mammal will figure it out and jump out of the pot when the water gets hot. Some consumers are mammals and some amphibians. Most of the mammals are moving on to cash bonuses and rebates as we watch the frogs slowly cook.
IMO: Burn the miles from both ends and bank the cash!
Parker = B U F F O O N
Well said, Gary and Paul.
So yesterday (4-22) I’m returning from Antigua to Miami and 30 mins prior to touchdown here comes the Barclays spiel. (Disclaimer: I’m semi- unconscious after spending 7 days at an all inclusive). I thought I heard “just buy a pack of gum and get 60k miles”? What? As a CITI Bank Exec card holder I was tempted to grab an application.
I feel like I missed something.
MIAZiggy, the flight attendants get $50 for each approved card they peddle. The company and Barclays hate it when the FA’s deviate from the approved script with comments like “…just buy a pack of gum” and fail to mention the annual $99 fee.
If the two programs are inextricably linked then Parker should have no problem spending a lot more time discussing the profit engine that keeps the airline in business.
The “because we do such a good job of running an airline” part is a bunch of hooey. I don’t think that AA is exactly the pride and joy of the international passenger aviation community that everyone looks up to.
@paul — You’re right that it’s better to get cash rebates rather than points in nearly all cases, although getting those big initial signup bonuses on rewards cards is usually a favorable proposition (at least for the first year).
Seems like everything Doug Parker touches turns to a clod of dirt, so maybe better he doesn’t focus his attention onto AAdvantage.
Unless he wants to trim its overbloated personnel who have far too much time on their hands sitting around dreaming up ways to disappoint its members.
The only association I have with AA is AAdvantage to buy miles and fly QR/EY/CX. And that will stop too with the next devaluation. I stopped flying AA years ago.
Customer service because they have none. Don’t fly, two cancelled flights and three delays later. I had to miss work, stay extra days and no reimbursement.
And BA is a pension asset manager that happens to fly planes.
How to become a millionaire running an airline, start with a billion..
Parker said,”we do such a good job of running an airline”. I think most of your readers would disagree with that statement. When will the Board of Directors wake up and fire Parker?
AA is definitely the worse airline available, I got bumped off the flight because they overbooked it and nobody volunteer to get the bouchers they offered. I was forced to take a different flight one hour later and to a different destination, 1.5 hours away from home vs 15 minutes. The boarding staff was unprofessional and tried to blame it on me, by saying that I didn’t come up to the podium, when in reality I came up to them a few times and I did no move from there. On top of all I had to pay an uber home when I had the car parked at the original destination. So please do yourself a favor and avoid flying with them, if you do be aware that it can can happen to you and it’s extremely aggravating.
How much did they get from the taxpayers in covid relief to maintain jobs? They have the WORST customer service. I was unable to speak to a human for a rather simple problem. I gave up after 6 hours of waiting for callbacks and then being hung up on by a COMPUTER when the prompts would not go through, Repeatedly. Full disclosure, my son is an AA pilot.
Not only a bad airline but contrary to what they claim, i believe that they prefer to hire young people rather than older, experienced and more reliable people.
Ai was traveling lax to Ord trust me worst customer service agent working she has extremely long nails I asked the manger is she allowed to work like these long nails he replied yes, than boarding agent he is touching and pressing the bag to check sizer when I approached him he would to touch my bag ib stopped him he started threatening to me will let me to board I told him there is a sizer I can put inside
Boeing is a management company that builds planes.
I was a pilot for American for over 32 years. I was hired in 1987. I’ve watched this airline go from first to worst in my 30 plus years. The airline is concerned about everything but flying airplanes and customer service! AA hasn’t had a decent CEO since Bob Crandall stepped down in the early nineties. Management spends more time fighting with employees than the competition. AA. Beat me out of my first month pension due to their ineptness. Always said AA makes money despite their best efforts. Embarrassed to have been an employee of this sorry company!
McDonald’s is a real estate company that has a side gig serving food. Even so, they know that they have to pay some more attention to the food side than the real estate side if they want the real estate side to be profitable.
The estate of how sector 5 works is openly complicated when the temperature tonight of the day is about 52 degrees lower than usual lol.
The Alaska Airlines partnership is important to them? This Alaska Airlines customer will have nothing to do with American after one trip with American.
Alaska Airlines cares about customers and American does not. Big mistake for Alaska to partner with such a terrible company.