American Airlines Chief Revenue Officer Vasu Raja appeared on this week’s Airlines Confidential podcast hosted by former Spirit Airlines CEO Ben Baldanza. Among other portfolios, the American AAdvantage program reports up to Raja.
In his introductory remarks to the conversation, Vasu Raja shared that he believes frequent flyer programs haven’t gone far enough moving to revenue-based models.
With our loyalty program, where historically loyalty programs have been market share based programs and even though they’ve been evolving over time they’re still kind of market share based programs.
But we think there’s ways with the technology of today and the comprehensiveness of our network that we can do things for customers where they indeed find it easier and easier to fly us, to fly us and sell themselves up into higher value added services for them, all of which go and create financial value for American Airlines.
The Difference Between Wallet Share And Revenue-Based
A ‘market share’-based program is really a wallet share program, that seeks to influence a customer’s decision-making at the margin to gain more of the travel dollars that individual consumer has to spend.
Revenue-based programs reward total revenue to an airline. But the airline might have gotten that revenue anyway, either because of a corporate contract or because they have the only flight that meets a customer’s schedule. Spending more to convince those customers to choose an airline does nothing for the bottom line, in fact it is a waste of money.
What programs were originally designed to do was influence a customer’s choice of carrier where they had a choice. The programs create a differentiated product out of something that’s otherwise largely a commodity (an airline seat between two points). The customer preference, driven by the program, leads the customer to choose a less convenient flight than they otherwise would… they might wait a few hours for a later flight, take a connection instead of a non-stop, or accept a less appealing inflight experience. In other words, a program seeking to influence wallet share shift generates incremental business for the airline.
Raja acts as though American Airlines flies everywhere, and can meet every customer need already, so they don’t need to focus on share shift. Instead he wants to focus on rewarding more lucrative spend. Here he lays out the theory:
I’m really small in JFK to San Francisco, I’m really big in DFW to San Francisco. In order to go generate more market share I’m going to create a program that incentivizes you the more time you fly me out of San Francisco. Great, and that may have worked for the way that airlines were 80 years ago but that doesn’t necessarily work for at least where we see the airline today.
Today that’s a perfectly nice thing to go and reward but what we really want to be able to do, there’s people who go out there and fly us and when let’s say a basic economy fare is available they will go buy themselves up to a main cabin fare because they want to check a bag and they want to earn miles and things like that. When people are engaging in those kinds of behaviors they’re basically telling us that look even though you’re willing to sell the seat at $100 I want to pay something more. Give me something more for it.
We want to be able to reward that behavior by actually creating more benefits for the customer, make it easy for them to earn status. Reward them throughout the course of their journey, and also when they’re engaging in those behavior make it easy for them to redeem miles not just on seat inventory but whatever it might be, ancillaries, things like that. Because that’s really really value-added behavior for the airline and something that we want to go and encourage.
Expect rewarding miles for spending more for the same seat. Expect more spending points for seat assignments or checked bags, at a low value per mile. And expect moving even further away from distance-based (though they already reward miles based on spend for American Airlines tickets to travel on American itself).
He also talks about simplifying the elite qualification process so that customers can better understand it. Given the focus on revenue here, expect a greater focus on spend than miles flown.
Odd To Suggest AAdvantage Is Anything But Wildly Successful
Suggesting that somehow airline frequent flyer programs have gotten their business model wrong is somewhat bizarre when it’s the loyalty program that was driving profits at American, and not the schedule Raja was overseeing before the pandemic.
Indeed, American was able to mortgage its frequent flyer program for $10 billion last year against an appraised value of $18 to $30 billion which is far greater than the total market cap (but not enterprise value) of the airline itself.
What Does Raja’s View Mean For The Future?
When the most recent President of AAdvantage assumed his position he said AAdvantage would keep award charts. After 9 months reporting to Raja he changed his position and said to expect award charts to be eliminated. He’s already leaving after a long career at American.
We can expect Raja’s view to be followed at AAdvantage moving forward, suggesting a greater focus on using the program to drive revenue for the airline – even though the cash cow is revenue from banks, and even though devaluations at American and United in the past (though not at Delta) have led to clear hits to the co-brand portfolio.
Changes to the program seem likely to shift away from frequency and more towards revenue (remember – United awards elite status on spending and not miles flown) and to reward buying up to Main Cabin Extra or first class more than the program does today.