American Airlines Had No Real Choice In Deciding Whether To Move To Revenue-Based Earning

I would expect that sometime in the next few weeks we’ll get definitive confirmation the rumors about AAdvantage program changes are real.  So, while they aren’t definite, we’ll discuss them like they are. A quick recap of what’s rumored to be coming:

  • Elimination of EQPs (elite-qualifying points) and a quicker path to elite status with bonus EQMs for purchasing higher fares.
  • Executive Platinum members (EXPs) will receive 4 systemwide upgrades (SWUs) instead of 8 when they qualify for EXP in 2016.
  • Gold and Platinum members will earn free domestic upgrade certificates more slowly.
  • Starting in late 2016, American Airlines will award redeemable miles to customers based on how much they paid for their ticket, with a bonus multiplier based on their elite status.

Revenue-based earning.  3 little words, to some the dirtiest words in loyalty.  But, they are the new reality.  And, it’s not just Delta and United.  Southwest has been there for a while.  JetBlue as well.

Those of us in the miles and points community like the current structure as it allows us to earn miles cheaply on “mileage run” fares while redeeming those miles for premium cabin flights all over the world.  With American’s move to revenue-based earning next year, the “mileage run” for RDMs will effectively be dead with the US programs.  So, why did this have to happen?

It didn’t, even though I just said that American really didn’t have any choice.  Here are some reasons why:

  • It started with Delta, who was the first of the big 3 to convert to revenue-based earning.  They also released clunky mechanisms to earn status with qualifiers for revenue.  United followed suit.  Theoretically, at this point, American felt like it “had” to move to a revenue-based structure, because they were leaving money on the table they could use for other things.
  • Wall Street has been waiting for this move.  In their most recent conference call, there were a few comments about how other airlines were more successful generating revenue than American.  Wall Street didn’t force American to make this move, but they played a big role in it.  When you manage quarter-to-quarter (one of the downsides of running a public company) what your competitors do is very relevant to whether your stock price goes up or down.  While American did a great job navigating the merger with US Airways, analysts want to know what American plans to do next quarter in order to continue their positive outlook on the stock.
  • The legacy airlines, rightly or wrongly, have long thought that they needed to offer similar products to compete.  Whether it was rolling out a ton of new planes and new service to say, “We fly there, too, a lot!” or by offering similar amenities, it’s long been a “me too” industry.  So, while AA has a choice, they may feel like they need to have a program very similar to Delta and United, not because they necessarily want to offer those specific benefits, but because they think their customers aren’t preceptive enough to understand a different value proposition.

Whatever the reason, it appears American is poised to mimic the revenue-based mileage earning portions of Delta and United’s program.  And, that means that some people will come out on the losing end, though maybe not huge losses depending on your fare mix.  View From The Wing takes a deeper look at earning in different scenarios under the rumored new structure.  As expected, it’s worse for some, and more worse for others.  But, the bottom line here is that flying shouldn’t be your primary method of earning miles and points.  Credit cards, online shopping portals and other bonuses should be a part of your repertoire if you’re playing the full miles and points game.

Delta has figured out a way to navigate the dangerous waters of employee representation mostly without unions for quite some time.  They do so through a number of different means, including partly a recent effort to remove seats from planes to afford flight attendants more space.  This is not to condemn American or uphold Delta as the wrong or right way to proceed.  But, it is to say that different paths can end up at similar places of progress and profitability.

Still, I don’t think American had much of a choice here, if even because of the path they had already put themselves on.

8 Comments

  1. Of course they had a choice. Revenue-based earning is not clearly better for the bottom line. This past year they bonused premium cabin spend with big earn bonuses.

    The 3Q earnings call references to frequent flyer centered around only two things: United and Delta re-upping their co-brand deals in the last year and thus having year-over-year revenue bump from that while American’s deal had already been renewed and runs through 2018; and basic economy fares and getting frequent flyers to buy up from those.

    In fairness some changes were pretty inevitable (though they did have a ‘choice’) –Platinum bonuses were always going to shrink, because American was more generous than competitors there. They probably don’t need to be.

    1. Gary, the airlines definitely believe it is better for their bottom line. And, I believe to some degree Wall Street does, too. Part of the call was about Scott saying they needed to “innovate” in the loyalty program. They made this choice years ago and just forgot to tell anyone.

  2. They definitely had a choice. Half this argument sounds like a conversation between teenagers; ‘well everyone else was doing it…’ By being the only non-rev player they would’ve kept a larger ff base who would buy tickets at deals that are usually further out in the future. This results in higher loads with high rev passengers paying more than they otherwise would. I think this will backfire as now people will only care about price.

    1. Tyler, half of it is a conversation between teenagers. The airlines long ago decided to copy each other, whether explicitly or implicitly. Now, it just seems like second nature that they all find the same rabbit hole. I think AA (Delta and United as well) believe that with capacity discipline, they don’t need to sell as many of those cheap seats. This is the first time I can ever recall the airlines maintaining discipline when it comes to capacity. If they continue to do so, they may be right.

      1. I disagree. They are already starting to get DOJ attention for collusion to keep fares high. The timing is perfect for gulf carriers to come in and grab a bigger market share. And after the the big 3’s ff devaluation, I’m all for it

        1. Tyler, Qatar won’t be competing on JFK-LAX anytime soon. The airlines used to lose money on many domestic routes due to any number of reasons, too much capacity being one of them. They’re getting attention from DOJ, but proving collusion is going to be very tough (absent Doug Parker continuing to be crazy and write down stuff in e-mails that no executive ever should). With almost no capacity growth planned for 2016, planes will continue to be very full, giving airlines a lot more control over pricing than we want them to have. Not sure they can continue to maintain that discipline, especially if oil stays cheap. Honestly, continued cheap oil strikes me as one of the worst things the airlines have going for them. They don’t have to be as disciplined to make money (making tough choices) and all their unions want to renegotiate to get a bigger piece of a pie that’s bound to spoil when oil prices go up.

  3. I didn’t know why but read your first reason#1 of ” no choice” makes me very angry. Of course they had choice. I don’t understand your logics at all. Gary has better points.

    1. Shannon, it’s a different way of saying they didn’t make the choice this week. They (and their counterparts and Delta and United) made those choices a long time ago and just didn’t decide WHEN they were rolling them out. And, while I have a ton of respect for Gary and agree with him quite often, I think the argument is much more nuanced than his philosophy that it’s always right to build incentives for customers at the margin. Sometimes, it just isn’t.

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