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.
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?