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.
@tomkorocz @WandrMe @RunwayGirl not a fan of bare bones, but if they'll sell this to SDF, I'm aboard.
— 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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Re: The operational performance data in the chart, for the legacy carriers, is that only mainline, or does it also include regional operators?
Good post Seth. I think it will be interesting to see how this plays out.
“Earned” vs. “earnt”. Both are correct but the latter is 0.5% as often used as the former.
Well…if these fares are going to be like the DL’s E fare, then we *do* know a bit about them. What I’m not sure about, is how introduction of these fares is going to benefit me, a frequent business traveler who now consciously picks AA over NK to get a better product and enjoy flexibility that FF status provides.
One innovation we would all support: an improved, consistently good domestic First Class product, since their present product sucks.
Kirby / Parker are smart. This analysis is right-on from a business perspective, whether or not customers like it. And – sigh of relief that they know airline within airlines don’t work in the US!
Good analysis Seth. Currently, not too frightened by the announcements as it appears that if I want the full package & pay for it, I’ll get it, whereas, if all I need is a cheap seat for a quick flight, that’s available too. Until proven otherwise, sounds like a workable plan for both AA & me.
From the 87:13 ratio you can say the frequent flyer contributes about 6.7 times then the one time customer. But if the frequent flyer flies 7 times a year then flight to flight the frequent flyer is paying less per ticket.
If I weren’t able to use my GPUs to defer the cost of TPAC BF/GF travel for myself and cheap miles for TPAC BF/GF for my wife I wouldn’t be nearly as loyal to United.
Looking at American’s ratio of frequent to non-frequent travel is making me seriously consider giving them a try. I just don’t see/hear of American selling so many and so cheap of miles as United. At the same time if award tickets become harder or more expensive then this won’t be such a strong factor.
Yeah, but it is not a linear relationship there either.
Sure, its not a linear relation but we are dealing with averages and ratios which means a lot of the non linearities cancels out and we can bracket best and worst possible cases, right?
The top 3% of pax likely contribute ~20%+ of revenue. Similar numbers have been shared by other airlines in the past. Which means that 10% (not the 3% nor the 87%) are worth ~30% of the revenue.
Presumable a lot of the 13% who are not 1x customers are only 2x or 3x customers. And then there is the very, very, very small pool which are very frequent customers.
But, no, I do not think that a lot of the non-linearities cancel out. I think the curve on where the frequencies are and the revenue is holds its trend. And it is very much a curve, not a straight line.
Okay the article is about several points and my comments were talking about a couple of them:
With the 87% one time flyer information you can deduce that the percentage of frequent flyers on a plane is on average not that high. Especially if when as you try to say some in the 13% pool fly more than twice a year.
Loyalty to a program: The reason I am loyal to a plan is because given my spending it saves me money which is to say “brand” and what an airline calls “better experience” are not a value to me on a plane. Your in an aluminum or carbon fiber tube eating off a TV tray.
I can’t follow your logic that concludes 10% of the passengers contribute 30% of the revenue. I can understand that you were told 3% contribute 20% but I don’t see how it follows to 10% contributes 30%.
All of the 13% fly more than once else they would be a member of the one-time customers.
I don’t understand what frequency vs revenue curve you are talking about. You can’t really talk about times flown or miles flown or whatever vs revenue from the information presented. When we talk about the two groups: “one time flyers” and “not one time flyers”, it is true that every non-linear relationship existing between the two could cancel out. But any which exist in making my observation in the second paragraph above do.
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