As the year comes to a close, some travelers have already re-qualified for status for the year while others find themselves coming up short. In the past, American, United and Delta have offer incentives to drive business and improve margins in the fourth quarter, but this year is different. All three appear to be chasing incremental revenue as they always do, just the wrong kind of incremental spending.
Latest UA Earnings Call
United recently held their public earnings call and no one, at least no one that I could find, thought it went well. Bloomberg dedicated an entire post to just how awful it went. Part of the failure had to do with United CEO Oscar Muñoz not having a good grasp on his numbers, but the numbers themselves were bad as well. And when Wall Street analysts start talking about mileage devaluations, it’s clear that everyone sees less value for frequent flyers (and thus fewer credit card holders) as a negative, not a positive even if it’s meant to improve their financial position.
“How far can you push devaluations before customers don’t want the card?”
As Gary Leff points out in his excellent piece on the call, the response from United was not good. Even in the face of pressure from Chase regarding their credit card deal (a massive source of income for any major airline) the airline appeared to be delusional or at least wearing rose colored glasses.
The stock tanked when it was clear that not only did United not know their numbers but they couldn’t even make up plausible ideas.
Hunter Keay, Wolfe Research LLC: “Oscar, if we put aside any relative comparisons to your competitors, for your margins to go up next year with current fuel, your [revenue] has to be something like 40 or 50 basis points better than your [cost]. So I’m asking you now, will that happen?”
Munoz: “ … So as we head into 2018, one of the reasons we’re not talking too much about it is we are deep, deep at work with regards to that. How do we get the kind of growth that has good margin? And how do we get into the bowels of our cost structure and be sure that we make that?”
It seems like he is asking questions of the analyst more than answering them. The market agreed, the stock closed down 12% the same day.
Basic Economy Not Panning Out
If we look at the previous quarterly call, Scott Kirby, former US Airways then American Airlines executive now COO at United discussed in detail the coming threat from Frontier, an Ultra Low Cost Carrier. It was around this time that defeat was also admitted on United’s massive expansion of Basic Economy. Basic Economy was to be the very feature that scared passengers into giving United free money in the form of incremental spending from average consumers hasn’t been working out.
The concept was simple. United could both match the price of Ultra Low Cost Carriers (ULCCs) like Spirit and Frontier, but like those carriers, once United got them into the buying process the carrier would upsell passengers with carry-on and checked bags fees, priority boarding, etc. It allowed United (and others) to attract both discount shoppers to compete with ULCCs while at the same time holding on to their current customer base.
The problem is that they took away the competitive advantage they once had. Customers responded by shopping purely on price and schedule and have chosen United less often than the company originally thought they would. In essence, United (and the others) gave away the one reason that consumers would choose them to ready the carrier for a battle they weren’t equipped to win. For some companies this strategy wins, Southwest with their “bags fly free” feature have been successful touting what you get when flying them instead of what you don’t.
American Airlines reported that just 12% of their customers fly more than once per year. Scott Kirby has long-held the belief that many individual customers, in fact more than half while he was at American, will never fly American again anyway, so why bother competing on product if the customer doesn’t care?
[Kirby] said there are a lot of customers “who want a lie-flat seat to fly when they go overseas, and are willing to pay a premium for a better product,” but that doesn’t change the fact that 50% of the company’s revenue comes from passengers “for whom air travel is largely a commodity.”
What he ignored, but some analysts did not, is that just 13% of the customer base accounts for 50% of revenue. He has taken that focus to his new role at United as well. But the 13% are the very customers that not only care about the product they receive, but also have the purchase power and discernment to spend their money elsewhere if they so choose.
Yet United isn’t focusing on those customers at all. Backing off of Basic Economy on some fares hasn’t helped the airline to lower their costs and hasn’t given them a clue as to how to improve margins. When an analyst says that you should exclude competitors and disruptions to your largest expenditure (fuel) to outline how you would solve the matter in a perfect world, it means – cut the crap, how are you going to fix United, just United and no excuses.
Focusing On Elites
Of course I am deeply biased on the matter. I travel for work, sometimes by air but mostly by car and of course I would always like an incentive to book more business with a carrier to earn greater benefits. Not a single US international carrier is offering any of the traditional incentives to capture incremental growth from their best clients, you know, the 13% that account for half of all revenue. I would suspect that even a modest gain in the category would help protect remaining market share and improve margins given the size of the opportunity.
United, of all the carriers, should be particularly motivated to improve their balance sheet given that they have fared worse than Delta and American financially and face challenges at almost every turn. They were smart enough to back off Basic Economy (just as American jumped in with two feet) but have not been smart enough to focus on the customers that could make an impact for their numbers quickly and easily.
The margins for which they should focus their efforts are in premium cabins. I’m not talking about slashing prices to fill seats and lie flat beds on long-haul international routes – that would only attract new customers who are simply a different type of bargain hunter (which I for one happily am). Instead I am suggesting that they incentivize their current customers to spend more than they normally would through bonuses and incentives that drive purchases today and increase their incremental spend.
These are decision makers. These are high revenue customers that can turn revenue on and off for the airline. Providing an incentive to give United high value business will help and revenue is won at the margins and contributes to the margins. It’s growth without customer acquisition cost.
American has offered redeemable mileage bonuses for Asia travel out right now, but it incentivizes everyone the same. That is to say that non-elites and elites alike will receive the same bonus for the same purchases. If someone were a once per year flyer but had to take a one-off business trip to China, they would receive the same bonus as an Executive Platinum flyer that may choose other airlines because of service once they have re-qualified for the year. That doesn’t play to the loyalists, it plays to customers that might think they can actually redeem those miles – silly rabbits, redeemable miles are only good when you can redeem them.
If American offered additional upgrade instruments to elites, this might incentivize some. (The carrier does offer two additional eVIP upgrades per 50,000 miles flown over 100,000 up to 250,000/year.) For those that have tried to use them in the last two years and haven’t been able to confirm them in advance nearly ever, it probably wouldn’t encourage much additional activity. This example should illustrate that discernible flyers need a tangible benefit or they will simply take their business elsewhere, and have.
My Own Case
I rarely fly more than 20,000 miles/year for business. Most of my travel is of a personal nature or to build content for this very blog. I have a one-off trip coming before the end of this year. American, United and Delta all offer better prices than the direct on a foreign competitor but require three flights and two very long layovers. My company will approve either option because the US carriers offer a better price but they also know more transit time will reduce productivity so they will allow the direct booking too. When considering my options, I went with the better product for more money and the direct routing.
There was little incentive for me to choose otherwise.
I calculated the miles in advance – earning with any of those carriers would be about the same as what I will receive for booking the direct flight on their competitor. I have already re-qualified for American Airlines (who I intend to leave following this year) and have qualified for 1K with United for next year. I don’t need the miles to qualify for status – I am the definition of an incremental increase in margin.
But instead of chasing after me and the rest of the 13% that has the power to change the financial future of the carrier, they are chasing the customers they never expect to have back in their seats – and it’s not working. Is it vindictive of me to at least enjoy the fact that the very strategy of chasing away customers like me is causing them to fail to meet expectations?
What do you think? Has United (and everyone else) put their eggs in the wrong basket or is this just sour grapes from an elite who doesn’t feel appreciated?