American Airlines has been surveying changes to elite benefits, including whether systemwide upgrades become part of a ‘choice benefit’ that would allow members to choose something else instead (and could even extend this choice to 75,000 mile Platinum Pro elites, not just Executive Platinums).
Senior Vice President Vasu Raja, whose portfolio includes overseeing the AAdvantage frequent flyer program, offered a clue about the airline’s thinking on top tier upgrade benefits speaking to the Cowen Global Transportation and Sustainable Mobility Conference. He sat with President Robert Isom and CFO Derek Kerr, answering questions from Cowen’s Helane Becker.
Pledging AAdvantage As Collateral To The Federal Government
American expects to close on its $4.75 billion CARES Act subsidized loan by the end of September, paying Libor plus 350 basis points, secured by the AAdvantage program. United and Delta are using their loyalty programs to raise funds in private markets, but American says they’re happy with the money from the government because it’s cheaper. American, with double the debt load of Delta, may not have had the same options for unencumbered assets to secure the government loan otherwise.
The airline suggested that with Southwest declining to take subsidized CARES Act loans, more funds could be available as well.
Becker points out the airline will have $50 billion in debt, $1.5 billion in interest expense, and a repayment challenge as a shrinking airline.
Valuing A Customer’s Loyalty, Not Business Travel Loyalty
American thinks it benefits disproportionately from where travel demand is at the moment – with the Sun Belt, and in particular Arizona and Florida rebounding faster than the rest of the country. That’s because their network is concentrated away from the Coasts.
This is clearly leisure demand with business travel down 95%. The airline has “endeavored to preserve connectivity,” in Raja’s words, so while before the pandemic its most-connected Dallas and Charlotte hubs accounted for 40% of the airline now through winter that ranges between 55% – 60%.
The people traveling now are “under 40 with no (AAdvantage elite) status” in contrast to having earned “20 points of revenue” from customers over 40 on business travel in the past. The business travel they’re seeing is often a mix of business and leisure to leisure destinations.
Raja doesn’t see customer demographics changing back “until deep into vaccine penetration” which is when older coastal business travelers will return, so they “need to build a relationship with people who are new customers, graduating them to higher tiers of loyalty.”
That’s what’s behind the change to honor elite benefits on basic economy tickets.
Raja wants to “think about a customer as a customer and not a series of transactions” realizing that business travelers are leisure travelers and treating them well when they’re traveling for leisure is crucial to maintaining a relationship that brings their high value business trips. By “understanding the customer not just as a transaction” they can “better plan the network.” The “loyalty program will change for wallet share” which in many ways harkens back to how airlines thought about loyalty before devaluations that started about 8 years ago, becoming ‘revenue-based’ which really meant revenue on a specific trip-based.
Expect To Introduce Elite Upgrades On Partners
American offers reciprocal upgrades with British Airways and Iberia, but only using miles on full fare tickets. They talked about reciprocal upgrades with Qantas four years ago as part of introducing a new joint venture. But better integration of elite recognition across partners hasn’t happened. So what’s changing?
Raja says that since American is shrinking he “envision[s] a more seamless experience across partners” both with new partners Alaska and JetBlue and with “longstanding” partners IAG (British Airways, Iberia and others), Japan Airlines, and Qantas. He notes that while American will “be a smaller airline” the networks of partners are “strong in major business travel markets,” and so it makes sense to offer a “seamless benefit for Executive Platinums [in the form of] upgrades across the global network.”
British Airways First Class
Qantas First Class
Along these same lines Japan Airlines has joined American’s small business Business ExtrAA program as an earning and redemption partner, joining British Airways and Iberia which have already been added.