American Airlines has said that they believe their path to profitability is doubling down on their current approach which hasn’t worked so far. They should be changing their approach to invest in better service and a better product, especially domestically and in economy, and to build up their route network in key business centers, because that’s how they’ll grow the key profit center of their business – co-brand credit cards.
American Earns Money By Selling Miles, Rather Than Flying
I’ve written in the past that I believe American Airlines does their network accounting wrong. The airline doesn’t make much money – if any at all – from flying, they make most of their money selling miles to Citibank and Barclays.
That doesn’t mean they should ‘cut out the middle man’ and stop flying. It means they should be focusing their flying on maximizing credit card revenue. That means they need to attribute the credit card revenue to their markets.
- Downsizing their operation in New York, becoming less relevant to New Yorkers means giving up the lucrative New York spending market
- They are weak in the Bay Area. Walking away from their Alaska Airlines partnership makes them even weaker, when they should be going after Bay Area spend.
American Is Focused On Price More Than Product
When you realize the source of the airline’s profits, that has implications for their product as well. Remember that American’s President Robert Isom is chasing Spirit and Frontier,
[T]oday there is a real drive within the industry and with the traveling public to want to have really at the end of the day low cost seats. And we’ve got to be cognizant of what’s out there in the marketplace and what people want to pay.
The fastest growing airlines in the United States Spirit and Frontier. Most profitable airlines in the United States Spirit. We have to be cognizant of the marketplace and that real estate that’s how we make our money.
We don’t want to make decisions that ultimately put us at a disadvantage, we’d never do that.
Delta’s Co-Brand Card Succeeds Because Of Its Brand
I believe that American’s AAdvantage program is better than MileagePlus and SkyMiles, yet which airline’s co-brand card is punching above its weight?
It makes zero sense to spend on Delta co-brand cards unless you’re trying to use that spend to earn elite status. If you want SkyMiles you do better with other Amex cards, that earn points faster, and transfer to SkyMiles as well as giving you other (better) transfer options. Sure, get the card for free checked bags, but that doesn’t require spending on the card. And yet American Express and Delta keep growing their portfolio and growing spend.
Delta shared some details on the growth of their card portfolio at Thursday’s Investor Day.
And the only explanation that makes any sense is brand, it’s why people get and use the weak Apple card.
Scott Kirby has suggested a better domestic route network would give them the credit card portfolio he wanted, that the airline’s size alone determines its credit card success and yet 18 months to two years later Kirby still found himself unhappy with his credit card deal.
What’s the issue here, and the difference between American and United on the one hand and Delta on the other? Delta offers the least valuable card proposition to the median member of the three airlines, yet it’s seeing huge growth.
The only answer that squares the circle is brand. Delta has even revamped the international coach experience with hot towels, cocktails, and flight attendants who say thank you and new amenity kits.
Ed Bastian said at Investor Day that they’re giving customers loyalty by engaging them, a brand customers like, rather than making them feel trapped. In other words, customers used to stick with the loyalty program in spite of the airline, now they are loyal to the airline (and, I think, stick with the loyalty program because of the airline rather than because the loyalty program is any good – except in terms of treatment of Diamond members).
The Delta Lesson Is Grow Credit Card Profits By Improving Product And Service
If American wants to grow its card portfolio and spend volumes sit should be taking a lesson from Delta, investing in better service (which means making work rule changes a priority in flight attendant negotiations) and better inflight product especially in coach because most passengers sit in coach and most international business class passengers buy coach domestically.