American Airlines seemingly spends an awful lot of time talking to employees about my blog posts whether it’s Vasu Raja responding to what I write about New York JFK or Doug Parker getting defensive about the 737 MAX.
The airline is clear in its financials though that they lose money flying planes and all their profit is accounted for by the sale of frequent flyer miles.
Their cost per available seat mile is greater than passenger revenue per seat mile. Indeed costs are greater than passenger revenue plus cargo. And the total profit made by the airline is less than the marketing component of the sale of miles which, as the airline acknowledges, doesn’t have 100% margin but is close.
When asked about the issue I’ve identified by other media, the airline doesn’t dispute it and simply argues that they wouldn’t be able to make money from selling miles if they didn’t fly planes.
American spokesman Josh Freed did not dispute that assertion last week, but he noted that the carrier’s credit card business is inextricably linked to its flying.
“Certainly the credit card business is an important part of our revenue,” Freed wrote in an email. “Customers find it valuable because they can redeem miles for travel. You really can’t separate them.”
This misses the point of course, no one is saying American Airlines shouldn’t fly planes and should just sell points (the way The Onion once said they’d eliminate flying to focus on their core American Way magazine business). Instead it underscores how they aren’t managing the airline business well.
American is telling their employees not to worry though despite the way “some online commenters have tried to oversimplify” the airline’s financial results:
Saying flying is ‘the core’ of their business doesn’t mean that flying itself is profitable. They cannot deny CASM > PRASM, it’s in their SEC filings. Saying passenger revenue increased in 2018 doesn’t deny that they lost money flying planes, either. And saying they’re focused on running a safe and reliable airline in the year ahead is a complete non-sequitur.
Is it really my discussion of how accounting rules changes inflate American’s passenger revenue figures that’s oversimplifying, or the airline’s message to employees?
“American Airlines seemingly spends an awful lot of time talking to employees about my blog posts whether it’s Vasu Raja responding to what I write about New York JFK or Doug Parker getting defensive about the 737 MAX.”
Yes, they are definitely responding directly to your blog posts and not the continual discussions everywhere on the internet about both of those topics, which didn’t start with your blog posts.
You’re both right. The core business is a loser and they make it up selling miles. But Amazon is the same. Selling their own inventory is a big loser, they make money on fulfillment of other people’s sales and web services.
But no doubt AA still runs an inefficient, low service, unreliable and generally unpleasant operation. And what does being the safest airline mean? Death and injury in US commercial aviation is virtually nonexistent. Maybe they’re going to resurrect people.
Sooner or later the gravy train will end on selling miles. I am actually wavering over paying the $99 for my aviator card to get the last $10k anniversary miles, because I’m not sure I can extract a penny a mile. Wait till card holders try to use their 60k card signup bonus and discover it won’t cover most domestic round trips – let alone the 2 they claim
Actually @Ben in the instances cited they have been responding to my posts, that is not speculation.
It will be interesting to see what the effect is on AAdvantage profitability if QR/EY discontinue their relationship with AA.
The main reason both are considering it is the dropping of codeshares with them. It would be ironic if that is the final death blow to Doug Parker. Potentially, even Bridget Blaise-Shamai as AAdvantage has been gutted since her arrival.
If CASM is calculated based on the cost of flying the whole aircraft, don’t you really have to compare PRASM+cargo to see if a flight is profitable?
In effect AA is selling airline ticket futures. But with the bothersome contractual obligation of delivery.
@Gary
You must be a hit ( or should I say a target..) when you connevt in DFW…
I’m surprised you were never poisoned by AA on one of their meals
LOL People actually buy AA miles? Given their total lack of award space, I’d say you are better off burning that money to keep warm – you’ll still get better value than purchasing AA miles.
Gary – I really like your articles, but it is no surprise that you’ve caught the attention of AA given the number of articles you write about American relative to other domestic U.S. carriers.
“Total lack of award space” is not a situation I’ve encountered. I’ve easily booked award tickets to destinations near and far, including Mexico. That said, I’ve not tried to book a premium class award ticket to Europe, Asia or deep South America. It’s just that “total lack of award space” is exaggerating the situation. At least, in my experience.
@Tom – how true. What little award space is available for overseas travel is dominated by British Airways and their scam-charges.
After having to use 230k miles to do a r/t to Europe, I’m not thrilled with AA. For the average flyer, saving points/miles for vacations needs to be worth it to pay those annual fees and there needs to actually be REDEEMABLE space. They make it such a pain in the ass to redeem, 3 or 4 connections when direct flights are available, etc. it doesn’t take long before most people decide it isn’t worth it with AA. I just product changed my Citi Exec card yesterday to a no fee card and am looking at other changes. The Aviator has only really been good for a continual offer of 0% balance transfers for like 18 months offers so I’m strongly considering dropping it too. Yes, flying planes is a necessity if you want folks using your cards to earn miles…The Delta card has an offer out now the boards are pushing…but you earn 70k miles, I went to look at redemption rates and I saw why they call them Sky Pesos, no point in wasting time with them.
I am starting to feel like AA is the same way, less value for the miles, can just about save the annual fees and fly on Wow Air. That $450 Executive card annual fee buys a European r/t on Wow Air, it may not be in biz class, but you can barely find biz class redemption space on AA, and if you do, it is ridiculously high. For cattle class, it is apparent AA doesn’t care about them at ALL… child size seats,no in-flight entertainment and sucky wifi. No thanks.
This is why everyone should consider affiliate marketing.
American must be flying some profitable routes. The management really needs to take a look and see which flights are making a good profit and which ones are not. Surely some routes are for the benefit of elite members who either connect to a profitable flight or will spend money on a high revenue long haul flight later. American can see who flies on their planes and I bet 25% of the routes are unprofitable and the gain from those elite members flying on those routes and their later spend is negligible. American actually has a great business hard product for long haul flights. It really does. Premium economy too. If domestic is what gives it problems why not cut back 25% and cut the low yield low connect routes that drain company resources. Surely other low cost airlines are better equipped to run those routes because they don’t have the union issues American has a legacy carrier (even despite the bancruptcy) and its size.
Cramer on Mad Money says “Bulls make money, Bears make money, Pigs get Slaughtered”. Say what: How does this relate? Suppose we define the following:
(1) “Bulls make money” as riding the profitability and liquidity advantages of selling miles by expanding offerings.
(2) “Bears make money” as protecting the company against a decline in miles sales.
(3) “Pigs get Slaughtered” as increasing the margin on miles by selling gobs of them and then devaluing the hell out of them.
Item (2) is somewhat of a stretch, but item (3) is totally on point. Once the airlines get rid of the value equation of miles, it is just a matter of time, before people/banks stop buying miles. Maybe Ma and Pa Kettle will take 10 years to realize that miles are have de minimis value, but the clock is ticking.
American Airlines sent me an offer to buy Gold Elite (I think it was for like $600). I was thinking, you should be paying me to be Executive Platinum (EP), because if I was EP then I might waste my money on your sorry ass airline.
I just got a renewal notice from Barclay’s AA Aviator card, which gets rid of many of the benefits of owning the card next year. I am thinking about cancelling the card. Just a wild unsubstantiated guess, Barclays is not making as much money on their card as they expected. Second wild unsubstantiated guess, Barclays will not buying as many miles next year as before.
Makes its money selling miles. Even for your headlines that is pathetic.
Fixed cost allocation.
@Garyleff
“Actually @Ben in the instances cited they have been responding to my posts, that is not speculation”
“American Airlines seemingly spends an awful lot of time…”
I think @ben’s point was that AA referencing two of your columns does not constitute an “awful lot of time.”
Obviously, I don’t have nearly the marketing data they do nor the information about card usage that they get from their bank partners. The issue for me is not which is more profitable. Profit is profit.
The issue that I would have is which is more exposed. Building a great and profitable airline that people want to pay to fly is sustainable if you constantly tend to it. Building a portfolio on selling miles is shaky, because as your mileage inventory increases you have to keep devaluing to keep it working. That devaluation can come in many forms, and AA already is pushing the envelope in terms of award availability. It just seems like a bit of a house of cards. Why, at this point, any sane person with a dollar to spend would do it to earn an AA mile instead of a different currency is a difficult question to answer. The barclays companion pass? I doubt it. It used to be that I would put up with it for EQMs and EQDs but they are on the road to extinguishing that, and the 10 percent benefit that justified my annual fee is now also going away.
You can’t rely long term on customer irrationality.
You can complain about the BA charges, but at least they do have award space. In fact, that is where a lot of my AA miles go.
Do you have any more of the town hall meetings you can quote where they answer questions from employees? I love hearing the executives blabber nonsense.
@ Gary — I wonder how much worse their results will look after the recent serial devaluations of their credit card benefits? I closed my card a few months ago when the AF came due, and my spouse is about to close his when his AF comes due. We would have kept them open if not for the devaluations of the EQDs and the annual mileage rebate. Without these benefits, their card offerings (except the Executive card for Admiral’s Club access) are worthless to us.
“Instead it underscores how they aren’t managing the airline business well…”
This is the ENTIRE point that AA’s shareholders should realize and fear.
AA is an underperforming stock because AA appears to be run by its management (ALLEGEDLY) as a money-losing airline.
Fuel prices are not high. That is one of the biggest expenses for an airline. I suppose their fleet upgrades are hurting their bottom line but they are necessary as most US Air A319/20/21s they gained were beat up and had no amenities to boot.
If airlines simply managed their fuel prices, and their fleets, and treated customers like people instead of cattle, they would be 90% of the way there.
@Patrick is correct. Sales of miles to banks are a form of advance ticket sales. That revenue should count against the cost per seat mile.
part of the sale of miles is booked as a liability for future travel. i am not counting that part at all in my analysis.
i am talking only about the aprt of the sale booked as ‘marketing revenue’ which is payment for things like use of the airline’s brand and marketing lists
So what’s the end game? Lower expenses? Increase income?
For all the belly-aching here about profits, AA is consistently making billions of dollars every year (any way you slice it) and the CEO yesterday reaffirmed that it expects profits to increase by about 40% this year. I don’t think they’d do better paying more attention to Gary Leff and the posters on this board.
@chopsticks. “…CEO yesterday reaffirmed that it expects profits to increase by about 40% this year….” LOL. You lose all credibility when you believe a CEO who said almost three years ago stock would be trading at $60/share at this time.
@chopsticks – saying American is making profits doesn’t change that those profits are entirely from the sale of miles and not from flying
Dear American Airlines,
Keep reading Gary Leff’s posts about your failing business. They are all pretty much spot-on.
And here’s a simple way to increase profits: dump Parker, Raja, and everyone in the C-Suite pulling down 7-figure salaries. Cut management’s salaries in half, and replace them with your loyal employees who have suffered under American Airlines mismanagement over the last decade. And get rid of your Board of Directors, who have run a once-fine airline into the ground. Your current business model that abuses your customers will bankrupt your company once again.
You must be like an airline messiah. i wish the airline industry revolved around me