Why Profitable Airlines Will Probably Suck for Consumers

I read a fantastic piece by Brian over at The Gate the other day and thought I’d chime in as well.

Let’s go back to November 29, 2011.  AMR, the parent company of American Airlines and American Eagle, filed for bankruptcy.  Things looked bleak.  The company had lost almost $1 billion in 2011 alone.  Faced with mounting fuel and labor costs, they decided to take part in the Bankruptcy Cycle of modern airlines.

Here’s a picture of an American Airlines jet desaturated, to illustrate the bleakness.

All bleak and whatnot

All bleak and whatnot

What would happen?  Would they liquidate?  Of course not.  I tell you what they did do though: locked in their elite customers by offering double elite qualifying miles after their bankruptcy was announced.

American needed its elites.  They needed the revenue, and miles/status were a cheap exchange for the cash needed to get them through the bankruptcy process.  They didn’t change the award chart much, and, aside from a really nasty sudden removal of two very-loved awards about a year and a half ago, have left most things in place.  As an American Platinum flyer and general fanboy of American in general, I appreciated this, especially in light of Delta and United changing their models significantly.

Fast forward to April 2015.  American Airlines announced a first quarter profit of: $1.2 billion.  In a single quarter.  Delta and United also posted record profits.  Doug Parker, CEO of American, had to be swimming in a pool of gold coins like Scrooge McDuck ecstatic.  Newer, fuel-efficient planes, capacity being at record highs, and the rebanking of DFW and ORD airports played a big role, sure, but the massive reason for the profit was that oil prices dropped.  When the price of oil drops, the price of jet fuel drops.  All of a sudden all of those routes that needed full planes to barely break even are suddenly making money hand over fist.

Why will that be bad for consumers?

Looking at the facts without any sort of bias, there’s not much that separates the Big 4 carriers (American, Delta, Southwest, United) from the Low Cost Carriers (Spirit, Frontier, etc.) in the US, except for one thing: loyalty programs.  The legacy carriers typically have more of an installed user base of loyal customers than the LCCs.

I was in Atlanta for an event last Wednesday and was chatting with an unnamed Delta executive about why loyalty programs are so “sticky” from a consumer standpoint.  He pointed out that with a credit card, if they change the program too much, no big deal, cancel it and get another one.  But you can’t exactly do that easily with an airline with which you have a high level of status.  It’s particularly difficult if you’re stuck in a fortress hub, like I am (DFW with American).

American and every other US airline will be tempted to take their loyalty programs for granted.  Make no mistake, it costs money to maintain a base of incredibly loyal customers who will voluntarily spend more (guilty) to travel on a particular airline.  If making drastic changes to a loyalty program costs you a few million in immediate revenue, does it really matter when faced with $1.2 billion net profit?  I hope it does but let’s be honest, probably not.

What I hope will happen

I hope the US legacy carriers continue to invest in their loyalty programs.  American has a big devaluation coming up once they complete their merger with US Airways.  Nobody knows the specifics, and we’re all hoping it’ll be evolutionary and not revolutionary, but there’s almost universal agreement that one is coming in the next year or so (which is why I’m mileage-running for Executive Platinum status this year).  American has a system that rewards every flyer, not just the one who spends an outrageous amount on their tickets (like Delta and United) and I’d like to see some version of that continue.  Loyalty programs are one of those most successful marketing innovations in all of history.  Now is the time for airlines to take aadvantage (pun intended) of the good times and invest with the customers that will stick with them during the next Bad Time, because inevitably there will be another bankruptcy someday (I think Southwest will be next, for the record).

I’ll put it this way: a roundtrip from DFW-LGA during the business week will run $800-1000 with alarming regularity, in coach.  On those flights, the gate agent says “boarding will begin with our highest level elite customers”, after which 90% of the plane stands up for priority boarding, leaving the remaining 10 customers to board at their leisure.  The plane will be absolutely full of elite customers.  Contrast that with a trip I took to LGA a few weeks ago on Virgin.  I left from an airport that was closer to my house and office, paid 1/3 of the price for a flight in a similar jet, but when the gate agent asked for elite customers, no one got up.  Messing with loyalty programs too much will turn a loyal customer into an agnostic one who will fly based on price alone.  This will be a nightmare during the next round of bankruptcies.

I was going to type out what I think will happen, but I’ll choose to remain optimistic on this one.  American has done a great job of listening to its customers as the merger has progressed and I’m really hoping that remains the same when they announce the new AAdvantage program in the next 12-16 months.

Actually, ok, here goes…

What I think will happen

Airlines will try to maximize profit when they can get it and cut the crap out of their loyalty programs.  Many customers will complain but ultimately will stick with whatever airline they fly anyway, which will sort of prove the airlines were right all along.  Chiropractors will continue to make billions off the compressed spines of frequent coach flyers.

What can you do about it?

Prepare.  Have alternatives.  I’ll go over what I mean in another post this week.

2 Comments

  1. Are you shooting for EXP via EQM or EQP? I’m pipe dreaming about hitting EXP this year myself, but I don’t have a clear plan for hitting it, as of yet.

    Reply
    • EQM, at 55k so far this year.

      Reply

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