With business travel not returning any time soon, American Airlines Senior Vice President Vasu Raja explained to the airline’s pilots at the end of last week a new strategy for the carrier – and a change in how they think about the business.
Right now American is seeing most of its business in the Southeast and the middle of the country, and not on the coasts. He says, “We can’t even begin to describe how small total net bookings are to and from New York City.”
At the end of July and early August “net bookings were 75% down, revenues were maybe 20%-25% of last year at best” now “systemwide net bookings are down 65% – 70%” but “almost all of that improvement is driven by the sun belt, and even though [Covid-19] case growth has been higher…total bookings have continued to rise. in those hubs they fly our biggest load factors..around 11 o’clock in the morning Charlotte looks like a fully functioning Charlotte..same with Dallas Fort-Worth right now.”
And it’s not just New York’s quarantines, because “even for things like the [Boston-New York-DC] shuttle which is not as impacted by quarantines there’s just a real absence of demand either going to New York or exiting New York.”
There’s a shift in demand overall. Right now it’s regional but it’s also away from business travel and towards leisure travel. And American Airlines isn’t going to remain a business travel airline with no business travel customers. Raja explains,
[T]he same thing we tell our director and above team…we’ve flown 85% full in Februarys and Septembers. Our problem was never generating demand. so much of it was generating demand at the right fares so that we can go make money as an airline.
For 20 years from 9/11 through the [American-US Airways] merger, we were able to do it because
- we were really good at putting seats on airplanes, so we could spread all our costs over more seats, and
- we built huge networks and revenue management systems..so we could match everybody’s low fares and still make money.
So average fares never really grew from the time of 9/11 to the time of the aa/us merger, but our profits went from negative to positive across the whole industry and a big part of that was business travel. 10% or 15% of customers were producing 40% of revenues across the industry.
Raja is right that business travel made up a disproportionate share of revenue, but that’s not what changed and drove profits. Business travel was big when airlines were losing money too (except for blips during recession). In fact, American’s share of frequent traveler business has been shrinking since the US Airways merger.
Instead what turned airlines from losses to profits with flat ticket revenue was low fuel and richer credit card deals.
Still, American Airlines was a high cost airline and that only worked attracting high business fares. And they aren’t keeping their business the same just waiting for those business customers to return. American isn’t “forecast when these customers come back, we have to make our reality, and the reality is that right now we’ve got to think more like a $2 billion startup than a $45 billion airline that lost a lot of stuff.”
Raja wants an airline for the customers that are out there today,
[T]here’s a segment of customers who is traveling right now, they’re the ones filling flights to Florida and Mexico. They’re the reason charlotte airport and DFW looks like that. And we’ve got to be as easy as possible to do business with for those customers and a number of things we’ve done in the past, for different reasons, the structure of our basic economy fares, the way we’ve had any number of fees and other structure, may not work for those customers…that may change our network, that may change our fare product, that may change our loyalty program, those customers are there now and we got to go and bring them in and figure out a way to win more of their business.
Since Raja now oversees the AAdvantage program as part of his portfolio his musings on coming changes to AAdvantage make my ears stand up. However he’s also talking about being a friendlier leisure travel airline too. Perhaps we’ll see American match United’s elimination of domestic change fees (which excludes Basic Economy fares).
One thing we do know that’s changing for American is more routes the airline would never have flown in the past, such as “flying point-to-point routes, flying 30 or 40 routes into Caribbean or Mexico that don’t touch a hub.” Indeed, American just added a number of unusual routes to its schedule, some very seasonal and even just Saturday service. These include:
- Miami – Portland Maine, Rochester, Milwaukee, Dayton, Lexington
- Cancun – Indianapolis, Columbus; Kansas City; Raleigh
- Cabo – New York JFK, Sacramento
- Phoenix – Tulsa
Sacramento to Cabo non-stop!
Update: they’re also adding Cancun – St. Louis, Charlotte – Puerto Vallarta, and Phoenix – Calgary, Billings, Bismark, and Nashville. (HT: @IshrionA)
Following Raja’s comments though CEO Doug Parker chimed in that he doesn’t see fundamental changes to demand, and business traveler drying up long-term – he even sees Zoom meetings, which he thinks are awful, adding to business travel demand rather than detracting from it.
Parker does say though that they’ve “done things to the product” and they should “only add back what makes sense.” They’ve eliminated costs in the crisis, and they’re re-thinking the product going forward.