When Will American Airlines Become Revenue-Based?

Hard to believe, it’s been over thirty years now since American Airlines introduced their frequent flier program. With a tailwind of success, the other airlines quickly joined in and the Frequent Flier program doors were opened. The industry actually changed a few years earlier with the Airline Deregulation Act of 1978. With carriers suddenly competing on fares, the carriers felt it was necessary to offer some incentives to keep their passengers coming back. Today we usually refer to this as loyalty.

American AirlinesOf course, we are talking about the legacy carriers of which only three remain – American, Delta, and United.

Delta Air Lines was the first to switch from a mileage-based award travel program to revenue-based. This makes sense since Delta was also the first to go through bankruptcy and merger. United Airlines followed in lockstep, even copying nearly all the changes that Delta made. The final piece of the New Triad, American Airlines, was the last to file bankruptcy and the last to merge. Naturally, their program’s frequent flier changes would be the last to take effect.

Why should American change? After all, they will attract more fliers who will get more award miles.

Fair question, but the answer will be disappointing to some. It really comes down to simple economics. According to an article a couple years ago in The Wall Street Journal, the airlines claim that 70% of their revenues come from just 25% of their passengers. Previously, IATA said that first- and business-class passengers make up only 8% of all fares but account for 27% of the revenues.

Delta and United realize that the majority of their passengers come up on the short end of a revenue-based program. However, they also realize that those who pay more for their fares will come out ahead. Very simply, they will take redeemable miles (RDM’s) from the low-revenue passengers to enrich those who pay the most. Of course, each airline hopes that this will encourage high-value (really high-cost) travelers to book with them because they will earn the most award miles.

But this doesn’t mean American also has to change.

Sadly, it does. CEO Doug Parker has been in the industry a very long time and knows which way the wind blows. Yes, he could attract more passengers who appreciate earning lots of miles from bargain fares but this is exactly what the airlines don’t want because these miles cost them money. Also, failing to change to a revenue-based model might mean the very best American passengers – those paying the most for fares – might bail to one of the other carriers because they can earn far more RDM’s.

The most compelling reason for American to change is partly self-serving. They know their bonuses are tied to performance so profit is king. While management looks out for themselves first, they realize it is necessary to support their stockholders, too. After all, carrier employees are usually owners of the stock as well. Management does not want to create a situation where investors seek out other airlines that are more profitable. Sad to say but true, the frequent flier members rank very low on the list with airlines.

Stockholders demand higher returns so an easy way for American to deliver is develop a revenue-based award travel program. Like the others, it will have two impacts – retain the high-value customers with improved benefits and try to get the other passengers to pay higher fares. After all, it will be less painful as long as you are earning more miles, no?

So when will American follow the others and move to a revenue-based award model?

I still say most likely for their 2016 program year but an outside chance they delay it one more year, particularly if the integration of the US/AA frequent flier programs takes longer than expected.

What do you think?

Comments

  1. Miles DO NOT cost the airlines money. They make ten of millions of dollars selling miles to banks, credit card companies, car rental agencies, retail establishments, etc etc. Frequent flyer programs are one of the biggest profit makers the airlines have. Consequently, when those miles are worth less to passengers, their cash cow will die. The truth is the exact opposite of the argument you make.

  2. I mean…it makes sense. I’ll you this much: if United didn’t have the partners that it does, they would really be screwed. Between United and Delta, Delta is the far superior in terms of operations. If I spent $30k-$50k per year on airfare, I would jump ship in a hot minute. I laso think that the somewhat bad reputation that Air France and KLM get is undeserved. I’ve flown +80k but-in-seat miles on them over the past two years (in business and economy), and all of them have been pleasant. Not that I want more competition as a lowly platinum medallion, but…sticking with United for Singapore, Lufthansa and ANA just might not be worth it.

  3. It’s sad, but I think I’d be better off on a rev program. I fly a lot of last minute regional trips that currently net me 2k per rt. with the fares at 800-1000, I’d net a lot more miles on the same flying. Alas I’m about to qualify for CP/ExPlt, so I’ll stay with AA/US for now.

  4. American was the first revenue-based program, they offered revenue-based qualification for elite status long before either Delta or United via their points-based qualification. It wasn’t a replacement for mileage-based status qualification, but rather a parallel track.

    American may well do something here, in fact they probably will, though:

    1) the timing of bankruptcy has nothing to do with it, Alaska didn’t go through bankruptcy and was a candidate to be the first revenue-based program (but Delta’s attack on Seattle has forestalled that) and in fact US Airways was in bankruptcy before Delta or United and didn’t go revenue-based (but looked at it)

    2) stockholder demands has nothing to do with it, since the programs themselves are profitable. full planes have a lot to do with it since they don’t have to incentivize butts in seats with the level of marketing spend they had in the past.

    3) rather than going revenue-based the programs could probably better-please wall street by engaging amia and doing a loyalty program spinoff. but that would take *real* work (and would probably be worse for flyers)

    4) if/when American does it that doesn’t mean it would look like the Delta/United version.

    It’s going to be an interesting next couple of years!

  5. Although the reason cited for not switching to a revenue-based frequent flier loyalty program at this time was to concentrate on completing the integration of US Airways with American Airlines, I would not be surprised if American Airlines was waiting and seeing how Delta Air Lines and United Airlines do first to see if the revenue-based model actually works…

  6. It’s way to early to tell if revenue based earning even works for legacy carriers. There are a few things that could backfire.’Those with such deep pockets buying the most expensive fares don’t have much use for loyalty programs anyway. Sure the airlines can throw more kickbacks at them but that may not make them loyal, just slightly less profitable. Its also a leap to just assume that the average frequent fliers behavior won’t change. Many of them stuck with the legacies because of the great return in miles. But now that the mileage earning is on par with some of the newer entrants they may be less inclined to tolerate the bad attitudes and general crappiness of the legacies.

  7. Nobody ever needs to go full revenue. Give 25 percent mileage to o fares, fifty percent for discounted economy and double for international first class and you basically have the same thing.

    The technology is already there with tiered mileage based on class of service on partners.

    Many Asian and European and air Canada already do this, and it acts as pseudo revenue without needing the investment

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