11 Fascinating Facts About Today’s American Airlines, From Chief Commercial Officer Vasu Raja

American Airlines Chief Commercial Officer Vasu Raja spoke at the Raymond James Diversified Industrials Conference on Tuesday, and he offered several interesting insights into who is traveling now and how American Airlines is thinking about generating revenue from customers going forward.

• He describes travel as “getting back to normal” but this is the new normal. In the past it was clear who was a schedule-driven business traveler and who was a price-driven leisure traveler. Now the group that can’t be easily classified one way or the other has gone from 25% to 50% of passengers.

• There are also more “blended trips” that mix work and leisure (the idea of bleisure that pundits always wanted to be real finally is). Business trips might be a one night Dallas to New York in the past but it’s become much more common to do out Thursday back Sunday, mixing work with an extended trip. And that might mean returning on Sunday with a spouse.

  That’s a different itinerary than one airlines are used to selling, but “increasingly businesses have been willing to go off platform” to get employees to travel. Even business trips can be sold at AA.com instead of Concur.

  Two and a half years ago AA.com hit several $60 million sales days. This year the airline has been hitting its biggest sales days ever.

• The business traveler was price insensitive, they’d pay whatever the going rate was. The leisure traveler would only pay the cheapest fare. But now half of passengers can be upsold a product that they value more.

• About 70% of American Airlines website transactions involve buying something other than just the lowest fare. The airline hasn’t fully “leaned into the technology yet,” but customers can see a range of choices and “make selections” (be upsold). I’d add that departing CFO Derek Kerr has been an impediment to the IT spend the airline needs in the past, and that has American lagging in its ability to fully monetize the eyeballs on its website.

• How American thinks about ancillary revenue is changing. Customers often come to AA.come from metasearch, where they’ve found the cheapest fare, but that doesn’t mean they buy the cheapest fare. Ancillaries are no longer just change fees, seat fees, and checked bag fees.
  • Getting customers to enroll in the loyalty program (still not possible while booking a ticket online…!) means continued marketing and revenue from partners who buy miles.
  • Customers also “want to be able to use miles to buy more things at the airline (or use stored credit to do that)” and when they’re spending miles or stored travel credits they don’t treat it as carefully as money.
  • Cabin may a bigger deal now, for instance on blended trips where someone travels out alone for work and returns with their spouse at the end of the trip
• He notes that “every dollar of redeemed credit brought 20-25 cents of incremental cash,” that all of those accrued credits from the pandemic weren’t treat by customers as thought it was “real money,” and customers spending credits were therefore more likely to buy up to premium cabins. This suggests that premium cabin spend may dip (pandemic credits gone) but that the end of change fees on most fares – indeed, for those who aren’t the most price-sensitive buying basic economy fares – could be more beneficial to airlines than some might expect.

• Raja believes “customers should be able to have a 100% digital experience” though American is nowhere close. I still have to call reservations for systemwide upgrades, mileage upgrades, and business extraa upgrades (which frequently fail online). While Raja is correct that a lot of the challenge “relates to legacy technology” with systems built on systems that are in some cases 50 years old, United is actually better here, and their tech was quite bad a decade ago.

• He explains the success of a hub is measured by “profitability, it’s actually super simple” and yet American operated New York hubs for quite some time when they weren’t profitable, and Chicago O’Hare has never been a strong performer. He notes that “some things are beyond your control like the cost structure of the hub” that is “inherit[ed] over decades” of capital projects. He points to the geographic benefits of Dallas and Charlotte noting that being close to the places people want to fly means those trips involve fewer planes, pilots, and fuel. He argues that gives them a cost advantage, though they also are flying more small planes which have higher seat costs.

• Rajas sees opportunities for further simplified fleets. That’s why I expect American to drop first class from premium cross country flights starting in 2024. They can eliminate the “A321T” subfleet, add seats, and use the new Airbus A321XLR not just for short transatlantic flying but also cross country flying with the same cabin layout.

• He contends that adding seats to planes – meaning less space per passenger – is good for passengers. The claim is that “when you add a row of seats to a 737…that is 6-12 more people who get to go to New York… without changing the cost structure of the airline.”

  American put out a video, featuring Raja shortly before the pandemic making this case unpersuasively.

• Finally he noted that they plan to “expand premium seats” on aircraft. I noted last fall that they’d like to add first class seats to Airbus A319s and that Boeing 787-9s will go from 30 to 51 business class seats.

American could do a lot more to upsell customers, and they certainly make offers now like never before (this trades off with upgrades by the way). Raja knows customers want to spend more for a better experience, whether miles or money, they should offer better buy ups in lounges (a la Delta’s premium drink offerings) with decent mileage redemption as payment. He’s always viewed the schedule as the airline’s product but now sees value in a better product people will pay for. Maybe we’d get better food up front if they sold food in first class…