AMERICAN AIRLINES — WINNERS, LOSERS & MORE LOSERS

AADVANTAGE PROGRAM CHANGES

American Airlines this week implemented Phase 2 of “Operation DevAAluation (aka “Let’s copy Delta because we can’t think for ourselves)”.

I covered Phase 1 (Elite Program Changes) in this article which you can read here.

Let’s now have a look at the effects of Phase 2 (Award Chart Devaluation) which was implemented this week, and Phase 3 (Revenue Based Award Miles) which is due to come into effect later in 2016.

It’s important to make a distinction at this point between:

  • the Award-Mileage Program (which awards passengers with “miles” which can then be redeemed for free flights, these miles can also be earned via credit cards, hotel stays, rental cars and so on); and
  • the Elite-Status-Program (which rewards an airline’s most frequent and premium passengers with recognition and benefits such as free baggage, lounge access, upgrades, and VIP treatment).
The distinction between the two programs is a critical one that is often lost on some observers that only focus on a single dimension of the program such as award miles, whilst failing to recognize that an airline’s top customers are also rewarded by the provision of elite benefits.

So if there’s ‘nothing wrong’ with awarding miles based on fare paid — why is American making a mistake?

In my previous article, I stated:

There is nothing wrong “per se” with switching award miles to a model based on fare paid rather than miles flown;
BUT…..The Delta/United model is flawed and American is making a strategic mistake if it blindly copies it.

The method an airline elects to use to award “miles” or “points” to its passengers is an arbitrary decision for the airline. It can choose to award miles based on distance flown, number of flights taken, fare paid, or even the color of a passenger’s hair. It truly does not matter.

Likewise — an airline can set the level of “miles” or “points” required in order to redeem a free flight (or other reward) at whatever arbitrary level it chooses. Again, it truly does not matter. It’s all “monopoly money” at this point.

If we were to believe the spin and propaganda from American (and Delta/United) — and clearly many in the industry do — then we would believe that American is simply reallocating the distribution of award miles from those who spend less to those who spend more, so that high-value customers are better rewarded.
If only that were true.
American’s own published figures demonstrate that in fact — as Gary Leff demonstrates, they expect to issue far less award miles in total, not just reallocate them from less valuable customers to more valuable customers.
So whilst there are always some “winners”, many above-average spenders will still lose-out under the new program.
Alaska believes only 5% of flyers would earn more miles under a revenue-based program. 79% of flyers do better under their mileage-based system. In other words, 79% would do worse with revenue-based
Gary also shows that Alaska ran the numbers and found that 79% of flyers would be worse off under revenue-based earning (under the American/Delta/United model).

But how many more (or less) miles you earn is far less important than whether your reward goal is easier or harder to achieve

Earning award miles is only half the equation. The cost of redemption is the other half. It is pointless to examine mileage earning without considering the total reward proposition.

The reward proposition is what drives customer behavior — if customers desire points and miles as a vehicle to achieve their reward aspirations — then that motivation can be translated into increased revenue.

The reason customers sign up for airline rewards programs is because they want to realize their aspirations for a vacation, honeymoon, exotic adventure, first class luxury experience or other travel desire.

If customers no longer view points and miles as a realistic vehicle to achieve their reward aspirations — then the airline has only succeeded in decreasing customer loyalty.

So… Who are the winners and who are the losers?

Let’s take a look…

In order to assess the effects of American’s changes to its mileage earning and redemptions, I have analyzed three domestic routes of varying distance:

  • Los Angeles — San Francisco
  • Los Angeles — Chicago
  • Los Angeles — New York

This analysis was conducted back in November 2015 when the American program changes were first announced. I selected 3 flight dates in the future (30 March, 30 June, 30 September) and took the cheapest Coach, and Business/First Class fares that were available on the chosen dates. The cost of the fares was then averaged, and the mileage earned was compared between the old and new systems.

In order to measure the reward proposition, I included a metric called “Reward Value”.

This is simply a measurement of the “reward power” or “earning power” of a flight towards the redemption of an aspirational reward. In these graphs — “reward value” measures the increase or decrease in a flight’s progress or earning-contribution toward the redemption of a First Class Award Seat from North America to Australia.

Short-Haul — Los Angeles to San Francisco

Curiously — in this example, non-status members receive an increase in miles, whilst those with elite status (who already fly American regularly) will all receive less miles. However — even with more miles for some passengers — the Reward Value shows that all passengers are worse off, with rewards made harder to earn. For example — a Platinum passenger will now be 121% worse-off in their efforts to save for a first-class award.

OK… but First Class passengers should be better off right??

In this example — despite everyone receiving more award miles, Gold and Platinum members are actually worse off. Executive Platinum members are 8% better off, meaning that they only need to fly this fare 53 times (instead of 58 previously) in order to earn a First Class Award to Australia.

Medium-Haul — Los Angeles to Chicago

This chart is pretty easy to read — want to fly between LA and Chicago in Coach? Everyone loses.

OK… but First Class passengers should be better off right??

“Wait! I thought American said it was rewarding customers for flying First instead of Coach, I’m confused?” To some commentators that believe airline propaganda, these results may come as a surprise. But to American’s passengers (and Delta’s and United’s) they understand perfectly clearly that even being a top-status First Class customer is no protection from being shafted.

Ok, so what about trans-con flights — surely they will reward customers better right….??

Transcontinental — Los Angeles to New York

The further you fly in Coach — the more you lose…

Ok… but surely paying way more for Business Class would earn more right?

Even when paying 4 times as much as Coach to fly Business Class — only Executive Platinum members come out ahead. That 9% improvement in reward value? That means an Executive Platinum only has to fly this fare 11 times (instead of 12 previously) in order to score that First Class Award.

Ok… Ok….but what about First Class on American’s Flagship A321T premium domestic route??

Finally! We found a fare which rewards all passengers more under the new system. That 35% improvement for Executive Platinums — 8 flights now score a First Class Award instead of 12 previously.

SUMMARY

There will always be winners and losers in any program change. But as our analysis shows — there are lots of losers, especially when you factor in the devaluation of the reward chart.

Don’t take my word for it — even American’s own figures show that there are more losers than winners.

American has voiced concern that 87% of its customers only fly them once per year or less, and are trying to directly compete with Spirit at the bottom end of the market on some routes.

These program changes show that those who benefit the most — those that pay top cash for uber-expensive fares — are probably not the ones whose behavior is most motivated by the marginal increase in reward proposition (employer paid fares, contracted agreements, too much time away from home already, more than sufficient miles already being earned etc).

These passengers are also already rewarded with top-level status benefits including lounge access and VIP status. Award miles are a small component of their elite benefits package.

Those that lose out the most — who now see the reward proposition as so unreachable that they probably view it as unrealistic — are the very 87% of customers who American claim they want to target.

This is where the disconnect occurs between management cost accountants and the real world.

For the bean counters — miles awarded to passengers cost money (it’s monopoly money — but the accountants take monopoly money very seriously). Whereas miles earned through credit cards, hotels, rental cars and the like actually generate revenue to the airline.

The problem is that by ignoring the aspirational attraction of the loyalty program, then the points currency itself becomes worthless if customers no longer desire it. That means they have little interest in co-brand credit cards, or engaging in the more profitable partner earning opportunities.

The reward proposition is what drives customer behavior.

David is a Loyalty & Reward Program Expert and can be contacted here

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