The golden goose at American Airlines is its AAdvantage program, which generates the vast majority of its profits (and sometimes all of its profits) by selling miles to banks. And since a piece of American’s bread-and-butter flying is selling domestic connections, in markets where there are other options, the AAdvantage program is crucial to making that work too – encouraging customers to fly American over competitors.
But there’s a strong possibility that American’s plans for 2023 involve making the AAdvantage program less lucrative, and therefore less useful, to drive returns to banks issuing their cards (so those banks shouldn’t be willing to pay as much) and to allow American to service its substantial debt, including debt backed by the AAdvantage program.
American has said to expect ‘dynamic pricing’ of awards, which likely means making the currency less attractive to consumers – less attractive to collect for flights, and earning their miles less of a reason to spend on their credit cards. Here’s what we know:
- American will eliminate MilesAAver and AAnytime awards in 2023. It’s not clear when in 2023 these changes will go into effect.
- Partner awards will continue price based on an award chart ‘at this point’
- American “will maintain an award chart moving forward. What that looks like will be discussed further in 2023” according to the Managing Director of AAdvantage.
- American has not suggested these changes will make their miles more valuable
When American and United have devalued their miles that has held back spend on co-brand credit cards. Delta has been able to avoid that fate, but they’ve had a more aspirational brand and faced less competition, a position that they’ve managed to erode somewhat (it’s an open question how continued SkyMiles devaluations will fare).
- Remember that banks pay the travel brand for their name and access to customers, not just miles. The bank takes a portion of the rebate, whereas the most lucrative cards without a airline or hotel brand on it are rebating the full value of interchange to the customer.
- An American card is mostly earning one mile per dollar spent, which isn’t competitive. When that mile is worth only about a penny, that’s a low value redemption.
- Why would you spend money on the card, aside from status, when you can get a 2% cash rebate or better and use that to buy the tickets you want or other things?
American earns a 52% margin on its miles. That implies a cost to produce a mile of around $0.0070 – $0.0075. (The book a penny per point in liability for transportation for miles earned from flying, but sell miles to partners for more than that, about 6 years ago they were generating an average of 1.3 cents per mile but did a credit card deal that increased revenue.)
It appears they’re looking to reduce their cost to produce a mile, charging more miles for awards, as they’ve continually done by making little saver award space available on international flights and especially for their most motivating awards for big spenders like business class to Europe. That would increase their margin, but may reduce total revenue and profit. At best these changes would lead to members receiving more of an average value for miles, fewer chances at outsized value, even though it’s that outsized value which can make their miles better than using a 2% cash back card.
They want credit card partners and others to pay them more per mile, while spending less per mile.
- That will cost credit card partners charge volume, making the co-brand deal worth less
- And reduce funds available for American to service debt backed by the AAdvantage program
American has had a better loyalty program than Delta, and they have needed to. American hasn’t historically been a better airline to fly, nor have they operated in captive markets to the same extent. So the value of their marketing program matters more.
While there was much talk in 2021 about AAdvantage devaluations, they committed not to change their award chart as they rolled out Loyalty Points as a new way to earn elite status. Now the deferred chickens may come home to roost – risking the value of the AAdvantage program, the revenue streams for co-brand partners, and the quality of AAdvantage-backed debt.
They are making the decisions in the hopes of improving total profit, not with the idea they will reduce total profit while running at a higher margin.
What assumptions right or wrong do you think are they making to justify the moves will improve total profit?
The FAA through Congress should adopt regulations that legally prohibited carriers from devaluing miles earned. Passengers purchase goods and services using a carriers credit card relying on the advertised benefits of the card and program. Why should a carrier have the unilateral right to change the value of earned miles? Why should it have the right to alter its program?
Bret,
I am not eager to be an aadvantage shill, but the right to adjust terms and conditions, even unilaterally, going forward (as a condition for continuation of service) is more common in commercial relationships than you might think. Lessors can adjust rents prospectively. Credit card issuers can change interest rates prospectively, etc.
Rather, the best way to regulate this is to remind the airlines that they have the goose which lays the golden egg – one which is best left alone.
@Bret Lobner: Totally understand your position as I too hold millions of points/miles. However, remember we do not own the points/miles.
This reads like the situation we in the construction business face. What is good for bonding is bad for taxes (IRS). You walk a fine line.
You’re proving their point, Gary. If DL hasn’t lost revenue from AMEX after the most dramatic devaluations in the U.S. airline industry, why wouldn’t AA do so as well.
There isn’t enough loyalty/goodwill in AAdvantage for most people to leave the program in the way you’re suggesting.
I make zero effort — zero — to accumulate Skymiles. They are not in my strategizing equation at all. I make little effort to accumulate AA miles. The only points I do any serious planning around are bank points that can transfer to multiple partners.
AA’s credit card business is a major source of profit. AA will do something and we might not like it. But, AA will not do something that will inherently risk that major source of profit. Let’s not be dogmatic or talking from our wallets.
@Daniel
AA has finally bested UA for the bottom of the heap. I used to be a loyal US/AA flyer for decades but switch carriers due to horrible service. The loyalty programs, even devalued, are really based upon service provided in the air and at the airport. DL for example gives great service but their miles value is low but they keep attracting customers, even if their ticket prices are higher.
American Airlines is all too eager to Stab their customers in the back.
The AA Dumpster Fire rages on.
I would stay in your frequent flyer lane and not give advice to the airline’s debtholders. I recall you posting in July that AA risked bankruptcy. The reality is that they are extremely likely to make billions this year. Everyone has a bias, and your bias is to taking advantage of frequent flyer perks. That’s not a bad bias, but it isn’t one that’s particularly helpful to those with other interests.
https://viewfromthewing.com/why-american-airlines-could-face-chapter-11-bankruptcy/
American Airlines has studied consumer behaviour and knows that the great majority of their customers will not change their spending habits. The revenue they may or may not lose, will be offset by the changes in the program. I haven’t accumulated miles airlines for years nor do I have any particular loyalty to any one airline. Loving the freedom.
It’s time to pay off my American credit card and move to one like Chase Sapphire with movable points. Flying American isn’t worth it anymore by devaluating my points. Their service is terrible. Over 1M miles and an AAdvantage member since 1992. Loyalty means nothing and they forget it’s a 2 way street. Hilton Honors since 1989, have 1M points, and Hilton employees thank me every time, every hotel, for having been a member so many years.
@chopsticks
(1) I described a very specific scenario that could lead to bankruptcy I did not make a prediction of bankrupt
(2) making billions of dollars this year was in my base forecast, most of that will be from co-brand credit card revenue
(3) I’m simply saying that American faces a choice, which introduces risk into that multi-billion dollar revenue stream. See #1!
Does anyone have a view on the AAdvantage tie in with Barclays – specifically if it’ll continue? or are they going to streamline it and make it Citi only in ’23?
@Daniel – “If DL hasn’t lost revenue from AMEX after the most dramatic devaluations in the U.S. airline industry, why wouldn’t AA do so as well.”
Delta historically hasn’t lost revenue when they’ve devalued SkyMiles *while other airlines have lost revenue when they’ve done so*. Maybe this time will be different and they can pull a Delta, but Delta has historically had a brand halo, in part due to past operational excellence, and in part with captive hubs that American and United don’t replicate.
And I’m not suggesting people leave the program, just downgrade AAdvantage cards from top of wallet (most co-brand customers have more than one card).
This is unhappy news but not unexpected. I am a 1K and recently got ExPlay on a status match. Although I far prefer UA over AA, the convenience of AA is worth something, particularly since I’m based in the DFW market. After Covid-related flight schedule adjustments, some of my UA connections via IAH, ORD or DEN have become more inconvenient, either too short (45 min) to be practical or >2.5 hrs.
Regarding credit cards, I have the Citi AA Plat Select and recently got the AA Executive card in order to be “all in” on AA’s ecosystem. I need the charge volume to maintain ExPlat, at least until my international travel returns to pre-Covid level. It has become quite clear that my Chase Sapphire Preferred and Reserve cards are far more valuable overall, mainly due to more attractive travel benefits and flexibility of Ultimate Reward points. In fact, I used those points recently to purchase two tickets on AA for family members. And I like the Reserve card’s $300 travel credit, plus the Priority pass benefit which I use a lot.
Therefore it is with a sizable measure of regret that I’ll probably switch most of my flying from UA to AA in 2023. Poor ops at AA and terrible customer service of ExPlats is what drove me to UA back in 2017. I managed to put up with the inconvenience of UA connections, but it has become harder to do. Maybe things at AA have changed for the better, but I’m not optimistic. And Citi’s AA card products are vastly inferior to Chase’s Sapphire cards, unless I’m missing something.
Airline credit cards are worthless. Get a credit that provides immediate benefits. Accumulating air miles for future trips is a high risk. The unknown on how many miles will be needed and available seats. Remember there are no free lunches .
@Bob –Airline credit cards are EXTREMELY useful if you’re looking for transportation (not the perceived perks of flying int’ biz class). AA’s Barclay’s card is like free money if you qualify. You get real benefits (free checked bag and better boarding) and the 60K miles are worth more than $1000 if you use their award map function and game their discounted mile saver awards. Mind you, you’ll be flying in coach, so it’s not aspirational, but it’s extremely practical. And, these days, these award tickets are fully cancellable, which is very convenient.
Airlines, like governments, will continue to devalue their currency as long as they can. The US government piles on trillions in debt resulting in massive inflation in goods and services. Airlines devalue their miles by raising award costs to astronomical levels.They will continue doing so until something breaks. It’s the nature of the business.
I’ll just take my 2 cents per dollar and spend it where I want. For travel, forget status. Just buy what you need.
what’s the likelihood of another chance to transfer Thank You Points to AAdvantage?
I have totally given up on both the MileagePlus and AAdvantage programs. The only airline credit card I have now is the Citi MileUp, for the sole purpose of keeping my AA miles alive. It is their prerogative to kill the goose that lays the golden eggs, I suppose.
Some comments suggest Congress should get involved. Next step I would fear then would be to tax points earned. Like they do tax bonus Dollars for opening new bank accounts.
The consumers drive the profit and by expansion, the bottom line of these companies . If they wish to continue with increasing their market share they ought not disrupt the apple cart too much less it spills all over the floor. Instead they ought to judiciously review and ensure that customers are not misled and then disenfranchised based on their loyalty of choice.
This is what happens when management from a regional airlines “tries” to operate an global airline. UA just placed a large 787 order while AA does “seasonal” flying to Europe and a handful of Asia flights and then jockeys the wide bodies around domestics flying for a few months. There is no consistency and “Bobby” Isom is out of touch and over his head.
I’m out. With these changes it is credit card cash rebate for me.
Dear Citibank
Please close my AA branded credit card account
I’ll be getting a new card (not with Citibank) that allows me to redeem points across different airlines (i.e like Amex)
do you think if enough people cancel there credit card accounts with Citibank that things will change?