The Economics of Buy 2 Fly Free

 
Old Jan 21, 04, 4:03 pm
  #1  
Original Poster
 
Join Date: Jun 2001
Location: California
Posts: 124
The Economics of Buy 2 Fly Free

Please note my co-worker and I have been arguing this. He wants an answer, but doesn't want to set up his own account so I'm letting him use my login.

Co-worker asks:

I called AA and asked them if one could purchase tickets for 2 qualifying trips and earn the free ticket, without actually travelling. They said no.

Just to be clear, I was pretty sure they were going to tell me no. But the more I thought about it, the more I wondered what the motivation is for requiring people to travel.

AA gets my money whether or not I'm physically sitting on the plane. So why should it care which it is, as long as the company is making money on each passenger who participates? (Let's assume one can't cancel or re-schedule flights once booked). Theoretically, the more flight promotions it sells, the more it earns. In fact, AA might even save more money if people didn't fly, since they would have less in-flight expenses like beverages and food.

However, since AA doesn't let you buy 2 and get one free without travelling, one has to assume that the promotion itself isn't profitable for the company. It is actually important to AA that passengers fly to their intended cities. So, what, then, could be the purpose of that requirement?

My only guess is that AA may have partnerships and business arrangements with various vendors who expect AA to deliver people to their various cities to spend oodles of money. Perhaps hotels and car rental agencies kick back a certain percentage to the airlines for business flown their way.

Just curious if anyone has any thoughts on the subject?
mch710 is offline  
Old Jan 21, 04, 4:28 pm
  #2  
A FlyerTalk Posting Legend
 
Join Date: Jul 2002
Location: MCI
Programs: AA Gold 1MM, AS MVP, UA Silver, WN A-List, Marriott LT Titanium, HH Diamond
Posts: 46,889
I don't live in NYC or BOS, so this is all JHMO, but...

I believe AA's target audience is regular business travelers who do at least somewhat frequent commutes from NYC or BOS. These are people who might otherwise use JetBlue for those flights.

The thought is that AA gets these fliers to take their four R/T's on AA early in the year (to get the free tickets), and a lot of them are likely to keep flying the route all year long. 4 JFK-LAX R/T's has you basically at Gold status, on your way to Plat, lots of bonus and promo miles flowing in, with upgrades in your future. Therefore, you aren't likely to bail and go back to JetBlue - you'll keep buying your JFK-LAX on AA and therefore become profitable.

As for the economics of the deal, even if I lived in New York it wouldn't be worth it unless I already had a need to fly the qualifying flights. $320 for a ticket to Asia? Sounds good. $320 + two or three days of my life for a ticket to Asia? Sounds BAD.

Even piling on all of the bonus miles, AA knows that the number of pure mileage runners jumping on this is small in the grand scheme of things. Still, in keeping with the mantra of every FF program in the world, the butt-in-seat concept is king.

Edited to add: after rereading this post, I realized that I never answered the underlying philosophical question that we are talking about to begin with: why is butt-in-seat the king of all FF rules? I don't really know, but I guess it goes back to the fact that the miles were originally intended to reward loyalty to the most frequent travelers, nearly all of whom flew for business. The airlines would take a suggestion of "Can't I just have the miles?" as gaming the system without building loyalty to the carrier. At least that's my idea...

[This message has been edited by pinniped (edited Jan 21, 2004).]
pinniped is offline  
Old Jan 21, 04, 4:31 pm
  #3  
 
Join Date: Feb 2003
Location: NY
Posts: 185
Well, you can always fight the charge with AA or with your credit card and you will get back your money, I'm sure there are other reasons though, but this can go on and on, like buying tickets and not flying for the mileage, I would really like that in stead of always having to take these long mileage runs.
Happy flying!
e
elimuli is offline  
Old Jan 21, 04, 5:39 pm
  #4  
 
Join Date: Nov 2002
Location: SFO/SJC -> UME/ARN
Programs: AAPLT, SK/G, A3/G
Posts: 710
i think it is a filtering mechanism.

hanging around FT one might get the feeling that everyone and their mother is jumping at the AANYC/AABOS deal. in fast, most of the world don't care about it.

AA targets this promo, like pinniped said, at biz travellers to retain loyalty.

the mileage runners of the lot are a minority.

now, AA really doesn't make much money out of these mileage runners. one can even argue they incur a loss with a mileage runner

among the mileage runners, there are those that would pay $400 PLUS 2 days of their times for an intl ticket. there are also those who will pay the $400, but won't sit on a plane for 2 days.

by requiring people to fly, they effectively filter out those that won't spend the money and time. frankly, if they don't require ...-in-seat commitment, what's stopping peopl with summer travel plans to buy 2 tickets now for $400 and use them later? the ... in seat requirement will. award availability is just a hurdle for that kind of a price.

every promo has loopholes. mileage runners thrive on loopholes. by requiring ...-in-seat time the airlines are just trying to keep the loophole as small as possible
ben1979 is offline  
Old Jan 21, 04, 9:01 pm
  #5  
 
Join Date: Aug 2001
Location: Los Angeles, CA, USA
Programs: AA Plat, BA, DL, Frontier, NWA, SWA, UA, HHonors Gold, Priority Club Plat, Choice Priv, BW, Diners
Posts: 1,554
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by mch710:
Please note my co-worker and I have been arguing this. He wants an answer, but doesn't want to set up his own account so I'm letting him use my login.

Co-worker asks:

I called AA and asked them if one could purchase tickets for 2 qualifying trips and earn the free ticket, without actually travelling. They said no.

Just to be clear, I was pretty sure they were going to tell me no. But the more I thought about it, the more I wondered what the motivation is for requiring people to travel.

AA gets my money whether or not I'm physically sitting on the plane. So why should it care which it is, as long as the company is making money on each passenger who participates? (Let's assume one can't cancel or re-schedule flights once booked). Theoretically, the more flight promotions it sells, the more it earns. In fact, AA might even save more money if people didn't fly, since they would have less in-flight expenses like beverages and food.

However, since AA doesn't let you buy 2 and get one free without travelling, one has to assume that the promotion itself isn't profitable for the company. It is actually important to AA that passengers fly to their intended cities. So, what, then, could be the purpose of that requirement?

My only guess is that AA may have partnerships and business arrangements with various vendors who expect AA to deliver people to their various cities to spend oodles of money. Perhaps hotels and car rental agencies kick back a certain percentage to the airlines for business flown their way.

Just curious if anyone has any thoughts on the subject?
</font>
Think of as akin to "But Charlie, Starkist doesn't want tunas with good taste, they want tunas that taste good." In this case, AA doesn't want people who want a free flight cheap, they want people who they think will like AA's service between the cities in the promotion if they would just try it, and they're offering a free flight for just trying it. (And while they're at it, they're making sure the free flight has just about as many strings attached as it can, since it's just a "free toaster" kind of prize, not a "grand prize" kind of prize. It's just supposed to be enough to show someone that AA goes lots of other places that JetBlue doesn't. If you were never weighing repeated JetBlue flying against repeated AA flying, you're not the kind of person AA particularly wants participating in this promo. So why in the world would they want you to not have to fly???

Another way to look at it: Why in the world would they want to let ANYONE buy a $700 ticket for $400 just by claiming they were going to fly twice between CA and NYC for that $400 but then not doing so? They figure if you really want to fly on a highly restricted ticket in coach halfway across the world, you won't mind parting with $700 dollars. The free $700 ticket is worth giving to someone who only spent $400 ONLY if they're likely to spend a lot more (by continuing to fly the same route on AA from now on), not if they're over and done with once they've spent the $400. If that's all it took, they'd be losing $300 on each such transaction, wouldn't they?

Finally, the economics from YOUR standpoint: Just how much are you going to value that free ticket if you find that there are no seats you can book with it for any of the destinations you were intersted in at any of the times you can actually go? (The more people that participate in this, the more likely that is to happen, especially during popular times of year, but of course it will depend a lot on where you want to go, when you want to go, and how far ahead you decide all that.) It's quite possible that it's worth even less than $700 if it has even more capacity controls than a $700 cash fare! (In particular, if you can't actually use it, isn't it worth about $0 to you? Now, it's one thing if you got this award for making a couple flights you would have made ANYWAY, and you can't use the award. But imagine the greater liability AA would have if you paid $400 cash for nothing more than the award and then still couldn't use the award at all?)
Stefan Daystrom is offline  
Old Jan 21, 04, 9:15 pm
  #6  
 
Join Date: Nov 2001
Location: HKG, BOS
Programs: AA EXP
Posts: 579
The T class award ticket will come out of an existing inventory of "free" tickets anyway, right? Therefore, AA isn't really giving much away, and is gaining some revenue on the side from the FTers of the world who'll rearrange their lives (and have fun doing it!) to get the freebie.
tomofmaine is offline  
Old Jan 22, 04, 5:34 pm
  #7  
 
Join Date: Mar 2000
Location: California
Programs: AA EXP 5 Mil, UA Global Services, BA Gold, DL Diamond, SPG Plat75, Hilton Diamond
Posts: 1,231
Many "experts" have analysed this promo. Here is the gist:
- AA is doing this to directly take on Jet Blue. They want to aggressively defend their turf. Remember this was done when JBLU was getting a lot of buzz for its BOS launch.
- AA has said that they do not expect to break even on this promo. In other words theories about passengers who try the service and come back and bring more revenue etc. are not at the core of this promo. If that happends good, but AA is banking on it.
- AA is branding an important message. If you fly JetBlue you only get to fly domestically on your rewards. If you fly with us, the rewards are compelling and moreover you can fly ANY destination in our global network.
- AA will create a short term problem by increasing the number of time limited awards but not a corresponding increase in award seats. In a way AA does not lose too much.
- Customers will leave with the idea that AA does offer competing rates and a vastly superior FF program.

From a customer point of view, I see it as mostly a win-win, especially with the $170 fares (with taxes about $215). With the triple bonus promo you also get extra miles and pay higher (uppper 300s to 400s).

When they started the promo the focus was local markets in NYC and BOS with limited national coverage from ads in WSJ and USA Today. However, the promo was wildly successful and many non-FFers that I spoke to are well aware of this promo by word of mouth.

AA is also sending a message to JetBlue and analysts that they can defend their domestic turf by using their international network. It is not clear however that AA has the staying power to offer these types of promos and match JetBlue fares for long. YOu can still see those $2000+ P fares on AA for JFK-SFO.

Many analysts believe that AA always made profits from its transcons routes (much better than its median yields) and that it cannot afford to take the fight to JBLU for this long. There is also the question of opportunity cost as international traffic starts growing and AA needs to deploy capacity in those routes.

For now - as a branding exercise I believe it is a great successs. As a long-term survival strategy there is not enough data. I cannot see them doing similar promos to fight JetBlue. They have to find other ways.
enjoystravel is offline  
Old Jan 22, 04, 9:15 pm
  #8  
 
Join Date: Mar 2003
Posts: 1,434
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by Stefan Daystrom:



Finally, the economics from YOUR standpoint: Just how much are you going to value that free ticket if you find that there are no seats you can book with it for any of the destinations you were intersted in at any of the times you can actually go? (The more people that participate in this, the more likely that is to happen, especially during popular times of year, but of course it will depend a lot on where you want to go, when you want to go, and how far ahead you decide all that.) It's quite possible that it's worth even less than $700 if it has even more capacity controls than a $700 cash fare! (In particular, if you can't actually use it, isn't it worth about $0 to you? Now, it's one thing if you got this award for making a couple flights you would have made ANYWAY, and you can't use the award. )
</font>
BINGO

[This message has been edited by alien (edited Jan 22, 2004).]
alien is offline  
Old Jan 22, 04, 9:57 pm
  #9  
 
Join Date: May 2003
Location: PGA
Programs: Expedia All Your Booking Channels Are Belong To Us Club
Posts: 5,023
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by enjoystravel:
- AA is doing this to directly take on Jet Blue. They want to aggressively defend their turf. </font>
If AA really wanted to compete with JetBlue they'd offer this promo to DC area residents (on the IAD-LAX route to compete with JB's IAD-LGB service) and I wouldn't have to drive 5 hours to JFK.

mbstone is offline  
Old Jan 22, 04, 10:38 pm
  #10  
 
Join Date: Nov 2002
Location: SFO
Programs: AA
Posts: 38
Interesting topic and here is my take on all this:

The main theory that AA is taking on JetBlue in this highly travelled route is 100% correct. AA Frequent Flyer Program is the best in the business now that Southwest went to lee Rapid Reward Credits per segement.

The cost to AA per passanger is under $100.00 per seat, remember this is a daily scheduled flight, full or empty this plane leaves, nonstop and then onward from JFK.
AA in Y is one or two cans of soda or water and a Bistro Bag, not very much in cost there. So AA knows the fixed operating costs of each type of aircraft given a fixed number of seats. So the only trigger to price tickets high or low is consumer Supply and Demand. High Season July-September high demand thus above average airfares = more revenue to AA. Fixed operational costs are pretty stable and adjusted according to world events.

So I really don't think AA is losing much if anything at all, on the other hand AA can increase Business Passanger Traffic and revenue by showing passangers that AA can do much more with there vast network and the benefits of free travel would shift many over to AA.

Just my opinion
frqtflyr is offline  
Old Jan 22, 04, 10:47 pm
  #11  
FlyerTalk Evangelist
 
Join Date: Nov 2003
Location: HKG
Programs: Priority Club Plat
Posts: 12,311
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by mbstone:
If AA really wanted to compete with JetBlue they'd offer this promo to DC area residents (on the IAD-LAX route to compete with JB's IAD-LGB service) and I wouldn't have to drive 5 hours to JFK.

</font>
AA has limited market share in this market. You should ask why UA isn't competing with Jetblue.
rkkwan is offline  
Old Jan 22, 04, 11:10 pm
  #12  
A FlyerTalk Posting Legend
 
Join Date: Feb 2000
Location: Cambridge
Posts: 58,714
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by rkkwan:
AA has limited market share in this market. You should ask why UA isn't competing with Jetblue.</font>
First of all, I think AA has a substantial share of the Northeast to Florida traffic.

Secondly, UA is now matching this promo.
Plato90s is offline  
Old Apr 17, 04, 8:17 pm
  #13  
 
Join Date: Sep 2003
Location: NY NY
Posts: 2
I think the reason behind "having" to fly, lies in the fact, that, in a break even, or losing promotion, they know that they would have too many takers, it was commonly known that you can "buy and not fly." Also, defeats their competition uppance desires, too.
jeffharris is offline  

Thread Tools
Search this Thread