During last month’s earnings call American Airlines revealed that while costs are going up at the airline revenue is flat. Their domestic revenue per available seat mile (‘RASM’) didn’t go up measurably, and total revenue per available seat mile is up just 2% year-over-year (and that even includes growth in credit card revenue).
At a meeting between American Airlines employees and airline President Robert Isom last week, a sim instructor asked whether – with higher fuel prices – there’s an ‘industry initiative to increase fares’ to compensate.
Isom immediately jumped in with “so I don’t go to jail, and no one else here goes to jail, there is no industry anything.” That was a good laugh line, though in June American agreed to pay $45 million to settle a lawsuit arguing they had illegally colluded with other airlines.
He goes on to explain though that American is lagging behind on premium revenue.
For probably 18 months going into 2018 we had outpaced the industry in terms of unit revenue performance, had really closed the gap compared versus all competitors and had months and months of outperformance versus the industry as a whole.
We’re still outperforming the industry as a whole which is great news but if you take a look at the first and second quarters our ability to keep up with some of the industry leaders like Delta has decreased. What we’re taking a look at is where are the performance gaps.
…We’re not driving in terms of premium revenue at the same pace as we had in the prior year.
Isom thinks that premium economy will drive higher performance, and that basic economy and segmentation will “offer our customers what they want to buy, trying to encourage that move up the ladder” and that this will fix things.
Of course these are initiatives that began in 2016 and in 2017, and expanded segmentation has happened while the airline falls behind its biggest competitors in premium revenue. Which brings to mind the definition of insanity, doing more and more of the same and expecting a different outcome.
I’d begin by noting a couple of things they’ve done over the last few years that make it harder for customers to spend more to fly American.
- Their frequent flyer program is no longer a reason to choose the airline over others While American’s operation and overall service has been a notch below Delta’s for some time, their frequent flyer program was a reason for customers to choose the airline over competitors. However they’ve given up that advantage by copying changes their competitors have made, while offering less award space on their own aircraft (they now have a goal as offering as much but not more space than competitors). A ‘me too’ offering isn’t enough to get customers to pay more and connect on a less reliable option in order to choose American over a competitor.
- Giving up on the most premium market in the country. American is number four in New York. They compete flying to LA, San Francisco and London but they’ve transferred some transatlantic flying to Philadelphia and dropped routes like crucial banking center Zurich. They fly regional jets to key US business markets while competitors fly larger planes. And they fail to serve key leisure markets. These combine to make it difficult to secure and retain corporate contracts and the loyalty of business travelers who are also leisure travelers.
American Airlines Terminal New York JFK
It’s always a helpful clarifying question to ask what’s different and since Isom identifies 2018 as being different from 2017 we should look at what may have changed year-over-year.
- Operational performance has degraded this year as even United outperforms American. Despite a relentless focus on exact on time departures no matter the customer experience consequence they’re not running an on time airline.
- Actively making the domestic product worse. American isn’t just shrinking the space between seats in coach and shrinking the size of lavatories, their new standard domestic product offers less legroom in Main Cabin Extra and even in first class. They’ll eventually even remove seat back video screens from planes that have it.
To date this interior is only on new Boeing 737 MAXs and on a couple of retrofitted 737s, however customers are increasingly aware of the direction that American is headed. Meanwhile I hear from customers all the time whose patience has run out on legacy US Airways planes that still don’t even have seat power and operating long flights like Charlotte – Los Angeles. American’s route network and passenger traffic is more heavily skewed domestic than United or Delta.
- Customer awareness of some of the changes. There’s a lag as not everyone is as focused on day-to-day and month-to-month changes as blog readers. Most frequent flyer program members don’t come to realize changes until it’s time to redeem miles, so there can easily be an 18-24 month lag.
American’s New Coach Seats
So will American improve its premium revenue going forward? There are forces working both for them and against them.
- Premium economy is growing but business class is shrinking. For instance to add premium economy to the airline’s Boeing 787-8 aircraft they’re removing business seats, that plane will go from 28 in business class down to 20. And in the name of standardization their Boeing 777s with 45 business seats will go down to just 37. Fewer premium seats will make it harder to grow premium revenue.
- They don’t just compete against Delta on the other hand while United’s operation has been beating theirs, a Scott Kirby-led United tried to eliminate meals from three hour lunch flights. There’s a chance that United will own-goal and drive some premium customers back over to American.
Boeing 777-200 Zodiac ‘Concept D’ Business Class
Ultimately my guess is that air travel demand will move with the economy and if we experience a slowdown — as one of the longest economic expansions in US history ends, as the federal reserve raises interest rates, and as the administration imposes tariffs — that unit revenue and premium revenue could fall.
However that would be an overall industry trend. As far as whether or not American can improve its performance relative to peer airlines, I’d simply ask: what reason is American giving business travelers to choose them over competitors?
- Better operational performance and flight reliability?
- Better service?
- Better inflight product?
- Better mileage program?
- Better schedules flying to the place premium customers want to go?
Premium economy is doing well, people want to buy it. United and Delta will offer it too. And at American it’s trading off with even more premium seat choices.
In order to earn a revenue premium over competitors American needs to make an argument how they’re unambiguously better than those competitors and it’s not clear they have initiatives to win along the dimensions that are important to customers.