American AAdvantage Plans To Go More Revenue-Based, “Simplify” Earning Elite Status

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. It’s amazing how freeing paying for the best F seat that fits my schedule has been. That and a good travel agent.

  2. @Jon. I agree. Travel is now so chaotic that simply paying the extra $150 is well worth it.
    Simplify life. It has a value.
    I’d rather pay for nice travel than a silly big 85″ tv that everyone seems to own/ big SUV truck all seem to have.

  3. The most outrageous comment from the episode was when Baldanza endorsed industry wide collusion to ban those deemed “bad behaving passengers” and share lists industry-wide with no due process. He went off the rails comparing it to felons who steal from donut shops but it’s a slippery slope to permanently cancel people. Would that mean a shoplifter should be banned from buying food anywhere ever again? While the Airlines Confidential got better when the last co-host left (it devolved into slapstick) the new direction is too myopic defending the industry (the fine or whine segment is decided based on whether the passenger followed the t&c’s to the letter)

  4. Rana is trying to skin the golden goose and actually thinks that it’s a good idea. I must have missed the “Pissing Off Your Best Customers Is A Great Business Practice” class in college but he must’ve aced it.

  5. Hopefully they do this soon. I’ve spent enough this year to requalify for Platinum Pro, but have less than enough miles for Platinum. So crazy.

  6. I have about 236K AA miles. I hope the Covid situation stabilizes enough so I can use them for 1 or 2 trips to London in J before they devalue. I was supposed to go in 2020, and have had to put it off 2 years in a row now.

  7. This is my 18th year as a EXP, but every year it gets harder to care. Today I was the first on the upgrade list, and two seats went empty in F. No one cares anymore.

  8. AA thinks they have a captive audience and large enough market share. Good luck with the changes!

    I for one think it’s a terrible idea vs. some of the hybrid models (money spent and miles flown) we have been seeing these past years. But hey, have at it and let’s see if it works.

  9. Sure. I can’t convince those who pay for my work travel to pay for a different class of travel; I can choose which airline I travel on, and the predictable added time of a connection or long layover is usually worth it, if the airline handles that well.
    But then again, if given a choice, who would fly American?

  10. Mr Raja is assuming AA has a hard/soft product that is worth paying the base fare to fly. If Raja wants to “pretend” this airline is going to get enhanced premium revenue for its current product, and a few will take the bait, good luck. Premium stations (JFK, LAX, SFO,DFW) can withstand more price gouging but the remaining hubs suffer with an far inferior product. But perhaps that is the intention, AA will service premium passengers only, the rest can eat cake. AA will take the less premium from point A to B but with a far inferior experience. Reminds me of “white only” mentality from the past.

  11. Not having Raja and his ilk agree to industry wide reforms (such as an EU-261 equiv) will be looked back upon as a huge lost opportunity. They’ve made out like bandits.

  12. Whoever believes that frequent flyer points differentiate between airlines is high on something.

    Airline service is hugely differentiated, and will never take an American (or Frontier or Spirit) flight when my other choice is Delta with clean planes, screens and humane service.

    American managers have been total fools to invest in a frequent flyer program (which is actually completely undifferentiating, since I can get points and elite level from multiple alliances) while ripping out screens and cramming people tight-tight-tight and flying filthy dirty planes (all very visible differentiations — for the worse, of the “you can’t believe how bad my flight was” dinner conversation kind.

  13. Because they haven’t been making money for the past 30+ years they want to adjust this and feel that “frequent flyer programs haven’t gone far enough moving to revenue-based models.” Spoken like someone that doesn’t understand loyalty. I’ll use Southwest as an example from my little world. I used to fly them at least weekly for business years ago when you flew X number of flights and got a free one. It was simple and rewarding. The minute they moved to revenue-based I took my business and moved to other airlines, American mostly which is ironic. I guess an MBA grad that is a “revenue” officer would say such things and think it’s great. It’s like Biden telling us that taxes haven’t gone far enough”

  14. It’s amusing to hear such nonsense. Obviously the airline wants more people paying for first class or main cabin extra, but what benefit does elite status have for the customers who are already doing this? Bonus redeemable miles in a devalued system? Literally none of the elite benefits are of any practical value to a traveler paying for international premium cabins, but this seems to be the only profitable customer they want.

  15. As a multiple year platinum AA flyer based in DFW, I continue to fly the airline for just 2 reasons, one of which is directly grounded in my AA Advantage status, and the other not – (1) from DFW, AA flies more daily flights to and from the destinations I have to travel to than SWA does, allowing me greater flexibility & fewer nights away from home, which is important to me, and (2) I can pick my own main cabin seat (and those of my travel companions) without a multi-layered extra cost system. In every other regard that matters to me as a traveler, AA falls short – the staff at every level are predominantly rude, or at best indifferent; flight cancellations and delays seem rampant and the airline’s response to them infuriating, and the actual flying experience worsens in every regard with the passage of time. If AA either makes it harder for me to stay at platinum level FF than it already has, or eliminates the privilege of main cabin seat choice at no extra cost, I’ll be down to just one remaining reason to choose AA over SWA – that may well change the math.

  16. I have a basic rule, which is that when someone starts speaking in jargon and gobbledygook, they’re hiding something. And that something is they really don’t know what they’re talking about and are spewing BS. Like a lot of US business executives, he’s good at playing the politics game, he isn’t good at doing his job at running whatever he’s assigned. It’s punch your ticket and move to the next position before something breaks and you get blamed.

  17. If they want to simplify things, why not just base elite status on dollars spent, which is the ultimate goal anyway. $2k for silver, 3k gold, 5k plat, 8k plat plus, and 10k exec plat (I made up those numbers, but they could be set at level equivalent to earning current status). If they want to throw in some dollars/points as incentives for their credit cards or anything else that brings in revenue, that would be a plus for those that participated. For redemption, instead of a chart, assign each point a redemption value, the same way credit cards do (somewhere between one and two cents per point; maybe a higher redemption value as you move up in elite status). Get rid of segments, EQMs, expiration dates, etc.

  18. I bolted AA a long time ago and am happily a UA 1K. Initially, expectations were not high for UA. But they have been consistently better than AA. And I fly out of DFW!

  19. If American thinks I’m gonna take extra connections or wait hours to choose *American* they are sadly mistaken.

    There isn’t enough differentiation between AA, DL, B6 and UA to select my flight by anything other than price and schedule.

  20. This will be the third year in a row (and I believe it has been in place three years) where this combo platter of dollars and miles has me scrambling at years end. I have already spent enough for Executive Platinum but will be short on miles. Every seat I purchase is business or first. Most are domestic with the occassional international flight to Belize. My miles usually hit with a December trip to Australia but last December and this the quarantine situation puts that last mile threshold out of reach. It is frustrating that I pay top dollar but the math has me making milage runs of old at years end. They will get my cash on top of what I spent. I applaud this move to my dollars spent. My hard earned cash plus loyalty should get me something. If i spend more with Buffalo Wild Wings for example I get more freebies. That is how most loyalty programs work. You spend 20 bucks a month at the yougurt shop you get something. I could very well spend an extra 4k on milage runs or pay another 1K for the “buy up offer” you get in December. That would be on top of the 12k I have spent all in first. How does that gouging your loyal customer make sense? It I spend 12K I should get that level.

  21. @Daniel Vaughan – AA still has LAX-MIA flights on 777s available for $49 or just above each way through the end of the year. At just over 2 cents a mile, I can’t see why you’d need to spend $4000 on mileage runs.

  22. @ DaninMCI — Last time I checked, federal taxes have mostly moved in one direction for 20 years, and that is down, not up. The US government needs to raise taxes AND lower spending. It is called living within your means. The existing problem is primarily the fault of the Republicans, but the hypocrites love to blame the Democrats for the disaster they have created.

  23. @Gene – And you would be wrong. Rates are not revenue. From 1950 onward, federal tax receipts have pretty much ridden a range between 16 and 18 percent of GDP, occasionally higher, rarely lower. (Stock market booms can send revenues above the range, drops tend to drop revenues blow the range.) But spending has been on a long, slow steady rise from 15% of GDP to consistently in the 20-22% range. One would hope that last year’s outlier of over 30% was just that, an outlier, but someone seems to insist it’s a new normal.

    Source: St Louis Federal Reserve.

  24. I am a butt-in-seat frequent flyer. I’ve rarely had the opportunity to spend more for tickets, but I do have the chance to pick my airline and my routes if it’s within reason. This allowed me to obtain Plat Exec status on AA for many years in a row. As AA moves away from miles to revenue I no longer care about flying AA – period. I’m back on Star Alliance and United at this point (not all that much better) simply due to convenience for where I am stationed. I do understand those who can pay for upgrades and business… But, if one can just buy a business class seat to begin with, then status – in my humble opinion – carries minimal benefit. Sure, there are few useful items, but generally a paid-for business ticket gets you the same perks as you would get with Status. And, if one can buy F and J class, well, pick the best route, enjoy and status seems like it carries less relevance. At least it would for me…

    Time will tell, but I was a very loyal AA customer. I still prefer AA over United (and Delta over both), but I no longer have much incentive to try and fly AA. My loyalty has been systematically lost (after 1.6 million miles of AA/OneWorld flying). I wonder if there are other cheapskate, butt-in-seat, economy class (who enjoy the upgrades) warriors like me… I think there are. Quite a few.

  25. Anytime an American Airlines executive says they are planning changes to “create more value for the customer” you can bet it has absolutely nothing to do with creating more value for the customer. Just like every other AA scheme to get two cents more out of every passenger every time this is simply about making more money. It is about time to re-regulate the airlines. Let’s start with the airline having to pay customers every time the airline makes any change in a passenger’s flight schedule…just like you have to pay when you make a change, regardless of the reason.

  26. “We need to find a way to tame and or weed out these overly entitled elite bottom feeders” They are no longer needed
    Heard at an airline industry function by an executive

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