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?
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