During the American Airlines third quarter earnings call on Thursday, Cowen and Company’s Helane Becker asked what percentage of customers were actually paying for premium cabin seats. This is important for analysts to consider as American grows its long haul premium cabin seating by 46% over the next four years.
Chief Commercial Officer Vasu Raja answered somewhat ambiguously at first, but then gave numbers for their domestic route network.
- The percentage of customers paying to sit up front is much higher than it’s been historically
- That “changed a lot between July and September”
- And they’ve been making changes to the airline’s upgrade programs, where they “used to have a lot of different cottage upgrade concepts, that could be had through different certificates, loyalty program” and they’re making it “simpler for customers.”
They now “offer more fare products for customers” which makes it easier to just buy the seat. And here’s the kicker, domestically “60% used to be paid” but their domestic paid premium cabin load factor is now “closer to 80% or so.”
My sense when I began flying for business 25 years ago was that around 10% of domestic first class cabins were filled by passengers on paid first class tickets. Delta reported that when they began upselling to first class their paid load factor was just 11%. As recently as 2011, it was still only 11% but they’d grown it to 57% by 2015.
Delta’s goal at that time was to hit 70% by 2018 (while selling 50% of extra legroom coach). That was widely seen to be the end of upgrades for most flyers. They hit just 60% that year and American was still playing catch up.
To learn though that American is selling 80% of domestic first class seats is incredible, though also certainly consistent with experience. They’ve acknowledged that they don’t have enough first class seats to sell on their Airbus A319s. Raja complained as far back as 2018 that the airline’s 787s were configured without enough business class seats.
I’d add another couple of factors,
- American has become much more aggressive with post-purchase upsells, often at a discount to the price difference at time of booking. Sometimes when I’m considering paying for first class, on a flight that isn’t full, I’ll buy coach and expect to be offered a first class buy up at a discount. I still have 24 hours in which to cancel my ticket if I don’t get the offer! The only downside is that this extra spending doesn’t earn additional Loyalty Points towards earning status with the airline.
- The change in business travel has made upgrades tougher. Traditional business travelers (who buy the most first class seats, have the highest status, and take up the most upgrades) no longer travel mostly Monday morning and Thursday evening. Travel demand has fewer peaks and valleys than it used to. To be sure Saturday evening my American Airlines flight was sold out in back but went out with empty seats up front, but that’s rare and.. Saturday night. Even Wednesday afternoons have more competition than they used to.
During the journalist Q&A at the end of the call, CNBC’s Leslie Josephs asked a related question – how the airline will handle competition for upgrades, and keeping members engaged in the AAdvantage program, when growth in the program and growth in card spending outpaces growth of the airline amidst these full premium cabins.
Raja immediately recognized the importance of AAdvantage mileage redemption – the loyalty program reports up to him – stating that “burn begets earn.” Members who successfully use their miles demonstrate the value in the choices they’ve made to accrue the currency, and accelerate their engagement in the program.
He pivoted somewhat, though, to note that they are “mak[ing] status more rewarding and more meaningful,” as well as offering “more ways of using miles,” and noted that the airline “experimented with ways of expanding availability for redemption and found that the take rates were promising.” If any of this expanded availability involved international business class, though, it was a small enough test to not really be noticed by members – AAdvantage international business class redemptions on their own flights are nearly impossible at non-Delta SkyMiles pricing.
Raja hinted at more opportunities coming for redemption with American and with partners” and this is presumably non-flight redemption. So perhaps we’ll see low value opportunities to burn miles instead of cash to cover fees not just on American Airlines but on close partners as well (such as when flying on an American Airlines ticket or codeshare on JetBlue or Alaska).
CEO Robert Isom added that adding premium seats helps make “sure we have ability to serve customers,” and that investing in product will keep customers engages as well. He argued, quite hyperbolically, that the New York LaGuardia Admirals Club is the “best domestic lounge in the country.” He was on firmer ground arguing that this will “be beat when we open the new DCA lounge [on October 25].”