Four years ago when I was covering the American Airlines pulldown in New York I argued that they were missing an opportunity, and – in effect – ‘doing the accounting wrong’. They viewed themselves as too big to completely walk away (a lot of valuable slots, and a dedicated terminal at JFK) but too small to compete. And they weren’t making money on their flights.
However if they aren’t relevant as an airline in the New York City market, they aren’t relevant with their co-brand credit card in that market.
- New York is one of the most important spend markets in the country.
- Their cobrand card product is the most profitable thing they have. The AAdvantage program has a 52% operating margin and the airline is making money even while their cost per seat mile remains greater than revenue per mile of flying.
American’s strategy in New York when US Airways management took over was to be the airline that brought people to New York, rather than an airline for New Yorkers. They pivoted to a ’boutique operation’ that did transcon and London Heathrow flying well, along with a handful of other markets, and in my estimation mostly squatted on slots beyond that.
But with the JetBlue partnership they finally found a way to make New York work for them, becoming big enough to compete with United and with Delta. And what they are seeing is precisely what you’d expect: relevance for frequent flyers, and increased card spend.
At an internal employee meeting earlier in the month, a recording of which was reviewed by View From The Wing, Chief Commercial Offer Vasu Raja shared that:
Loyalty Points, where most activity with American AAdvantage counts, is the new way to earn status. It recognizes that the most profitable customers aren’t necessarily those that just fly the airline. They earn significant and high margin revenue from transactions with their partners, and rewarding that activity with status and not just miles goes a long way towards encouraging more of those transactions.
In addition, while those who have traditionally qualified for status just on flying may not like to be competing for upgrades with customers that do not fly as much, members who earn status but do not fly as much do not cost nearly as much to service. They don’t take up as many upgrade seats. They don’t get as many free checked bags. They don’t take as many free extra legroom seats in coach, or free drinks and snacks when seated in back.
And for the customer chasing status is no longer just a function of how much you spend on tickets, so it becomes a fun game again. And frequent flyer programs are supposed to be fun while also driving changes in consumer behavior in ways that benefit both the customer and the airline. The customer transacts more with American Airlines partners, earning more revenue for American, while receiving more of the benefits that they value.
The huge turnaround in the New York market is a big deal for American Airlines, and data like 65% of new elites in the market earning status from card spend is doubly so.