American Airlines caused plenty of consternation amongst frequent fliers last week when President Scott Kirby indicated that “innovations” are coming to the loyalty program and that new frill-free fare options are coming to the sales channel. In many ways he managed to piss of just about everyone during that earnings call. The investor analysts are convinced the company is giving away the farm with walk-up fares which are too cheap (CEO Doug Parker even had to step in at one point with the quip, “Scott’s going to get angry eventually if people keep suggesting we don’t know what we’re doing”) and reaction from the frequent flier community was swift, decrying the collapse of the program and demanding that the war against loyalty be curbed. And all of this happened without any real details of what the changes will be.
— helenhandbasket (@helenhandbasket) October 24, 2015
The fare discussion precipitated from the statistic Kirby offered that 87% of passengers in the past 12 months representing 50% of the revenue were one-time customers, “for whom air travel is largely a commodity, and I wish it wasn’t that way, but it is.” Of course, those who are not in that group believe that the 50% of the revenue they bring to the table is the more important half; after all, they’re flying the carrier repeatedly, usually by choice. To the company, however, both halves of the revenue pool matter. And there are essentially two ways to approach that split. The “airline within an airline” model has failed far too often in the US market for anyone to think that’s a good idea and so the other option – complimentary but differentiated products on the same plane – becomes the approach of choice.
As for what it means to customers, well, that’s where things become challenging. Kirby described it as, “a product that has less frills, comes with a really cheap price.” Those who want the full service option latch on to this part of the discussion and, if behavior on forums and message boards is any indication, freak the hell out. But that’s mostly because they stopped listening before Kirby finished the thought. In that same answer on the call he also offered up that:
[M]ore frequent travelers who want the premium product and who want to pay for the brand, and who want a better experience, we’re going to be able to give them the choice of having that.
Later in the Q&A he reiterated the plan,
And for that 50% of revenue and 87% of the customers that are up for grabs, it will allow us to offer them a product that’s competitive on price with ultra-low-cost carriers. But also, for our customers that want a better product and our frequent flyers that want better seats on the airplane, we can give them the choice of not paying that fare and getting a better product.
No specific details yet, obviously, but every indication thus far suggests that these are going to be similar to Delta‘s Basic Economy fares. Probably no seat assignment in advance. Probably no flexibility, even with a $200 change fee. Possibly even no frequent flier points earnt. It is the legacy carrier equivalent of the wholly unbundled fare options offered by Spirit and Frontier. And far from an affront to the 13% of passengers who actively choose to fly on AA on a repeat basis. Mostly because those customers have already chosen typically to pay more to fly on their preferred carrier and these “low frills” fares are the cheapest, not the ones passengers pay extra for. The only way they lose is if they’re actually just buying on fare, even though they claim to be buying by brand loyalty. And the numbers are much less likely to lie than the people are.
American can also offer up some theoretical benefits to the “no-frills” passengers in the form of operational performance better than the U/LCC competition. With far more flights, interline agreements and other options available there is a very real chance that American can offer a more reliable operation to travelers, even on the cheapest fares. Of course, I say theoretically because the numbers American has been showing this year are less than stellar. Still better than Spirit, but a long way yet to improve.
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