Why Struggling Airlines Need To Invest Even More In Their Product

Airlines have cut back on onboard food offerings both to promote social distancing and cut costs. However there are great ways to offer food safely – the way airlines continue to do already on longer flights.

I’ve often ordered kosher meals from American Airlines. These come frozen, prepared weeks in advance. The packaging process isn’t going to spread the virus. And the meals are presented in their full wrapping, the entree item is even heated in its packaging and presented still inside. Tray setups now come with sanitizer wipes.

We’ve heard airline executives tell Wall Street analysts that they’re going to focus on rebuilding their balance sheets before investing in product again. They’re borrowing unprecedented sums of money to keep afloat during the most challenging times they’ve faced. Don’t expect the pipeline of new club lounges to turn back on, though American Express is in a different boat and just announced an expansion of its Las Vegas lounge.

Back in March I wrote about the American Airlines turnaround plan from 2003. It involved $1.5 billion in employee concessions. When the airline began performing better financially, executives were rewarded, while employees who had sacrificed were not.

Arpey invoked the slogan “Pull together, win together” and talked about shared sacrifice. So employees felt burned, and they didn’t trust management to bargain in good faith for more concessions outside of bankruptcy.

But this was only one element of the turnaround plan that I focused on. It was actually a four-part plan,

  1. Lower costs to compete
  2. Fly smart: give customers what they value
  3. Pull together, win together
  4. Build a financial foundation for the future

Even with employee concessions, American – resisting bankruptcy – wasn’t able to get its costs down as low as other airlines that were going through bankruptcy. And there were revenue problems, too, especially with the international route network.

However there’s one element of this plan that’s most often overlooked: “give customers what they value.” American realized it had been a mistake to cut investment in the product during tough times. That meant they were no longer offering a product that would attract premium business.

A key point for turning around an airline, or any business, is delivering a product customers will pay for. And when you’re not the low cost provider in the industry, you need to earn a revenue premium, and the details of the product therefore matter most.

That begins with delivering a product customers feel confident in buying. That means air transportation is safe – including safe from spread of the novel coronavirus. It also means delivering a product that isn’t miserable to experience. And with airport concessions shut down, traveler stress high, and with airports advising passengers show up even earlier travel isn’t as much fun right now. That places an even greater burden on the airline to sell a high quality product, too.

It’s going to be important to keep investing in product. I’ve frequently heard complaints on investor calls that stockholders are getting paid last (although the volume of share buybacks over the past decade would suggest otherwise). Paying shareholders last is literally the way it’s supposed to work.

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. Sounds idyllic Gary, and I agree – but any “investment” short term is likely to only be on cleanliness initiatives (which are very YMMV). Otherwise it’s going to be cut cut cut cross the board.

    Nor is there a chance in hell they make their rewards programs any more rewarding – will likely keep circling the drain.

  2. @Gary, I think we might agree that where the “big-3” US airlines are concerned, the road to Hell is likely paved with good intentions.
    The inclination with their execs is they will seek to maximise revenue and minimize cots. If you are a shareholder, laudable goals. If you are a passenger, not so much, since I expect you will face Chinese coronavirus cleaning fees (aka fuel surcharges) while receiving less in-flight service, the CCP virus being the excuse.
    A lot depends on what passengers do the airlines want? These days I am a long-haul flier, LHR, HKG and similar airports. (Go figure how that works right now) I fly business or better. I will be balancing the value proposition between how much the airlines want to charge versus what service in-flight and on the ground service I might expect. Clubs are important to me. I follow my own agenda now, not a business one. Honestly, Qatar is looking like a good choice now if I can pick it up from the UK.
    I am Key on American with an AIrpass (don’t think the renewal options are that generous but then they’re holding a bunch of my money since I couldn’t fly)
    We’ll see how things work out but my single opinion post-CCP virus is that loyalty programs are going to take a huge hit. As airlines try to do the best for themselves, travelers will do the same.

  3. Why is AA stupidly steaming ahead with Project Oasis?
    Doug Parker is still an idiot and should have been fired.

  4. The joke here is that there really is no ‘on-board product’. Face the reality that you’re getting on a bus and just fly SWA already. My last ‘PAID’ first class seats on AA were met with surly checkin staff, checked-out onboard staff, no pre-flight beverages, no reserved overhead storage, no seat back entertainment, etc. They need to just own ‘the bus’.

    I see the next pilot announcement, ‘Today, we’ll be flying at an altitude of -12,000 feet, and accelerate our race to the bottom.’

    Good grief.

  5. Actually, Gary, right now it’s pretty obvious that airlines need to focus on conserving their cash. I think we can say that’s Business 101.

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