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American Airlines' CEO Says the Least Important Customers Get the Worst Planes

American Airlines' CEO Says the Least Important Customers Get the Worst Planes

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Old Mar 28, 18, 10:50 am
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A rookie error to conflate "passenger" with "customer". Certainly there are HVC leisure and self-paid business passengers out there. But, the bulk of the revenue comes from corporate customers who are not likely to be moved much by a hot towel with a higher thread count or whatever it is/
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Old Mar 28, 18, 10:51 am
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DTW is served mostly by MD80s, which to me means that it is full of HVC given how great first is.
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Old Mar 28, 18, 10:59 am
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Originally Posted by Often1 View Post
A rookie error to conflate "passenger" with "customer". Certainly there are HVC leisure and self-paid business passengers out there. But, the bulk of the revenue comes from corporate customers who are not likely to be moved much by a hot towel with a higher thread count or whatever it is/
What would happen if fims told their employees (below say VP status) that they're flying the least expensive ticket available? I'm pretty certain that the response of the airlines would be to create a cargo hold ticket, earning no ff points, raise the price of BE, and set that as the pricing target.
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Old Mar 28, 18, 11:04 am
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Originally Posted by SOBE ER DOC View Post
HYPOTHETICALLY, I am flying from, say, ORD to CDG. On AA I get an old 767 with no wi-fi, IFE provided with overhead monitors in Y and tablets in biz and uncomfortable seats or I can fly AF or UA on the same route and enjoy large seatback monitors, wi-fi and better seating...all for the same price...what is my incentive to fly AA? Will the occasional traveler know the difference? No. Will a savvy business traveler who travels on someone else's dime know the difference and will it influence their purchasing decision? Quite possibly and that is my point.
​​​​​​I agree that the 767 has a laggard hard product. But hard product is not the only thing that influences purchasing behavior.

FFP benefits are a big part - it's the reason the programs exist.

If I am on that hypothetical AA 767, chances are I am going to be in SWUed J, or at the very least MCE. Instead of crammed in regular economy.

I am going to have access to the Flagship lounge. Instead of being in the crowded terminal

When there is a flight delay or cancellation I am going to get more rapidly and easily rebooked, via the EXP line or the lounge rather than being in line as a no status customer.

All part of the "product" well beyond the cabin itself. It's a multi aspect issue - not an individual flight in a vacuum.
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Old Mar 28, 18, 11:07 am
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Originally Posted by bse118 View Post
​​​​​​I agree that the 767 has a laggard hard product. Bit hard product is not the only thing that influences purchasing behavior.

FFP benefits are a big part - it's the reason the programs exist.

If I am on that hypothetical AA 767, chances are I am going to be in SWUed J, or at the very least MCE. Instead of crammed in regular economy.

I am going to have access to the Flagship lounge. Instead of being in the crowded terminal

When there is a flight delay or cancellation I am going to get more rapidly and easily rebooked, via the EXP line or the lounge rather than being in line as a no status customer.

All part of the "product" well beyond the cabin itself. It's a multi aspect issue - not individual flight in a vacuum.
Of course, no-status me is going to be crammed in a Y experience that is worse than a Norwegian 787 (or soon, a Spirit A320, once the pitch is ridiculous and Basic Economy is everywhere).

I should pay for AA for that if I have other options at the same price (some of them better ones, like that Norwegian 787) exactly why?

If AA wants to be NK or NO for me, that's cool. I just don't have any reason to prefer them over NK or NO if all they want to give me is lowest common denominator, self loading cargo treatment on junky old 767s.
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Old Mar 28, 18, 11:13 am
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Originally Posted by eponymous_coward View Post
Of course, no-status me is going to be crammed in a Y experience that is worse than a Norwegian 787.

I should pay for AA fly that piece of junk when I have other options at the same price exactly why?

If AA wants to be NK for me, that's cool. I just don't have any reason to prefer them over NK.
You maybe shouldn't. That's kinda my point:

it's not as simple as just " the hard product is terrible, that's the only thing customers care about."

For some customers that might be true for others not.

customer purchasing criterion and decision making is complex and variable.


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Old Mar 28, 18, 11:49 am
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Originally Posted by SOBE ER DOC View Post
Yes, After emerging from bankruptcy, DL made major investment into their hard product. While they purchased used airframes, they completely overhauled their interiors, installing powerports at all seats, replacing old seats, creating a unified brand in their interiors. As a result of this and other initiatives, they have consistently been able to command a higher fare than their competitors.
A little background on DL's position...
  • Richard Anderson, DL CEO who engineered the merger, was Northwest's CEO. Gave him a huge advantage in dealing with the less amiable Northwest unions.
  • DL legacy had no flight attendant union, and overall better labor relations than AA/UA/NW prior to the merger. And it was materially larger than Northwest, so its culture and practices more easily took over. More important - let DL have more flexible work rules which implicitly lower cost.
  • ATL is the lowest cost major hub in the country - giving DL a cost advantage - also very convenient AirTran and Southwest merged, with Southwest gutting the ATL operation
  • Its hubs are the most uncontested among the majors - more leverage when scaling up.
  • Also for frequent flier program, DL/NW did not need to be as generous as legacy AA and UA were, which operated hubs in large, fragmented business centers like ORD, LAX. Customers were less likely to walk over frequent flier program issues than those at AA/UA. There weren't big third rails like going from 8 to 4 SWUs that send people in competitive cities packing.
These elements gave DL cover to make the kind of investment you mention and most important - deliver incredible reliability after a couple years of headaches.

AA/UA were in a position of defending legacy high yields while trying to work out more complicated issues with its unions, which impacts reliability and cost, leaving them less *incremental* room to invest.

The answer for AA/UA may well be to take short term margin hits, but tough to get boards / public investors to accept that. Public investors tend to have 1 year time horizons as the investment managers are generally benchmarked against one year performance relative to the market.
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Old Mar 28, 18, 12:11 pm
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Originally Posted by SOBE ER DOC View Post
It's unfortunate that when a post is placed to stimulate discussion that some people choose to resort to sarcasm and rude comments that don't add value.

The INTENTION of my post was to stimulate a conversation about how AA's CEO views his own business model and lack of understanding into the client and their needs. Those of you who say this is a business are correct, it is a business and not a charity. However, simply saying AA is s business and leaving it a that demonstrates a lack of understanding of the nuances of business strategy and services design. AA is a business that provides a perishable service. As such, they are dependent on demonstrating that their value proposition to consumers exceeds that of their competitors. One way to do that is to design experiences that will resonate with consumers, driving them to some degree of brand loyalty or willingness to pay a premium based on a belief that their experience will be in some manner improved or better than with a competitor. This is part of the strategy of airlines like B6 and why their new Mint service has been a smashing success. The best companies give their customers what they want before their customers even know they want it.

AA is welcome to do as they please, but they are losing out on a tremendous opportunity to differentiate themselves in the marketplace on something other than price. Parker's approach is to provide the bare minimum that consumers will tolerate before jumping ship. That is one strategy, but it is not the strategy of a company that claims to be "Going for great." AA has no consistency of brand in their hard product and that, IMHO, is a major failure of their leadership that WILL matter to a certain portion of the consumer segment.




Yes, After emerging from bankruptcy, DL made major investment into their hard product. While they purchased used airframes, they completely overhauled their interiors, installing powerports at all seats, replacing old seats, creating a unified brand in their interiors. As a result of this and other initiatives, they have consistently been able to command a higher fare than their competitors.
DL is most profitable because of where its hubs are. It completely dominates ATL/MSP/DTW/SLC, which are probably 4 of the top 10 most profitable hubs in the country and 3 of top 5. It does this with its FCM that sells really well in its core hub markets. It really doesn't make much money in the new hubs/focus cities its competing in like JFK/LAX/SEA/BOS. In fact, it has the lowest margin of any major airline in NYC despite having the most slots. If DL investment was so great, then shouldn't it do better in NYC and LAX? It seems to me while they do have a good product, much of their success is due to being the dominant carrier in a metropolis with little outside competition.

It's no wonder AA's CLT hub is the most profitable given that it's of the same profile. Whereas DFW/MIA/PHL all have to compete against other carrier hubs like DAL/FLL/EWR.

Now I would agree that in hub situations like MIA where AA has to compete against LCCs at FLL, it's less impressive product with high cost is causing defections. But that's a decision AA has to make. I think if DL was in a similar position, it would also have similar problems.
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Old Mar 28, 18, 12:18 pm
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Originally Posted by cerealmarketer View Post
  • ATL is the lowest cost major hub in the country - giving DL a cost advantage - also very convenient AirTran and Southwest merged, with Southwest gutting the ATL operation
  • Its hubs are the most uncontested among the majors - more leverage when scaling up.
  • Also for frequent flier program, DL/NW did not need to be as generous as legacy AA and UA were, which operated hubs in large, fragmented business centers like ORD, LAX. Customers were less likely to walk over frequent flier program issues than those at AA/UA. There weren't big third rails like going from 8 to 4 SWUs that send people in competitive cities packing.
You've been drinking deep of the UA cool-aid, rationalizing why DL consistently out-performs United.

ATL is a low-cost hub. CLT is a low-cost hub. DFW is a low-cost hub. Scale is part of what makes a hub low cost. Air carriers choose their hubs. Delta built hubs in LAX and SEA; UA departed a hub at CLE; DL departed MEM (and largely CVG).

Delta's hubs are not uncontested. ATL, MSP and DTW all have far above-average fractions of connecting passengers. While it gives them scale it shows Delta's restricted ability to gain outsize profits from locals. A route xxx-ATL-yyy competes with xxx-yyy non-stops as well as every other one-stop offering xxx-zzz-yyy. BTS data show that two of the top five operating carriers at DTW are Spirit (#3) and Southwest (#5). Delta fights B6 at JFK and with UA for the #2 position overall in NYC. SLC fights with DEN for inter-Mountain traffic. LAX...

Southwest has (up to) 125 departures a day from ATL and a higher average gauge than AirTran ever had.

Your line of reasoning No unions >>> product investment is a little tortured. AA and UA can afford stock buy-backs, $9 Billion for AA, $3 Billion for UA announced just a few months ago. They could have used the $$$ to refurb old planes (or, in UA's case, dump lousy single class E145s/CR2s). They've decided that customers aren't worth it. That is the contempt for customers that Parker's statement reflected. There's nothing wrong with prioritizing assets for best markets but he didn't even have the sense to say that AA is making big investments in new aircraft to improve both cost efficiency and passenger experience but some routes see older products.
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Old Mar 28, 18, 12:36 pm
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Originally Posted by SOBE ER DOC View Post
In a shining example of what NOT to say to earn the loyalty of your customers, AA's CEO stuffed not one, but both feet in is mouth recently by admitting that AA intentional places crap planes and certain routes and that he has never had the pleasure of the sardine can known as the AA 737 MAX.
.
He is now a top runner to be appointed head of DOT. Should fit right in.
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Old Mar 28, 18, 1:29 pm
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Originally Posted by 3Cforme View Post

Your line of reasoning No unions >>> product investment is a little tortured. AA and UA can afford stock buy-backs, $9 Billion for AA, $3 Billion for UA announced just a few months ago. They could have used the $$$ to refurb old planes (or, in UA's case, dump lousy single class E145s/CR2s). They've decided that customers aren't worth it. That is the contempt for customers that Parker's statement reflected. There's nothing wrong with prioritizing assets for best markets but he didn't even have the sense to say that AA is making big investments in new aircraft to improve both cost efficiency and passenger experience but some routes see older products.
Stock buy backs come from after profit dollars.

Capital investment (hard product) reduces net margin / EPS via depreciation, reduces cash balances, while soft product improvements hit margin via opex. Without an immediate revenue increase these investments hurt the remaining cash available to dole out to shareholders, and that's the issue AA/UA face. To do the things people here want, costs them margin and cash flow in the near term, which so far public markets don't seem willing to accept given their strong cash generation so far this cycle. I'm sorry, but offering the 'best' product on every route we want isn't going to make them outperform on revenue growth in a quarter, or likely even in a year.

All else equal, Delta set itself up to spend less on the essentials - labor, facilities, landing fees, idling aircraft - which puts itself in a position to spend more than AA/UA on hard / soft product that we say drives a revenue premium, all while delivering a better margin. It had more margin breathing room to reinvest, and wait for revenue gains from these investments to take hold during 2009 - 2013.

If the answer to winning the profit game next cycle is AA or UA having superior product / customer experience, they need to take a significant hit to margin and cash flow now - they also need to reduce buybacks to increase cash on hand to weather the next industry downturn. These are things investors seem unwilling to accept in the public markets today. Witness JetBlue's attempts to hold out on densifying its aircraft, which led to a CEO departure and a grumbling compliance.

https://paxex.aero/2018/03/jetblue-spaceflex-regrets/

Delta's hubs are not uncontested. ATL, MSP and DTW all have far above-average fractions of connecting passengers. While it gives them scale it shows Delta's restricted ability to gain outsize profits from locals. A route xxx-ATL-yyy competes with xxx-yyy non-stops as well as every other one-stop offering xxx-zzz-yyy. BTS data show that two of the top five operating carriers at DTW are Spirit (#3) and Southwest (#5). Delta fights B6 at JFK and with UA for the #2 position overall in NYC. SLC fights with DEN for inter-Mountain traffic. LAX...
DL has no crosstown airport to siphon off local traffic at ATL, DTW, MSP, SLC. They do at LGA/JFK and LAX (though not sure I'd call LAX a hub for any of the three - no one has 50% share). Why do they fight so hard to prevent even a small second Atlanta airport.

AA does at ORD (MDW), DFW (DAL), JFK (LGA/EWR), MIA (FLL). Not at PHL, PHX, CLT.

UA does at IAH (HOU), SFO (SJC, OAK), ORD (MDW), EWR (LGA, JFK), IAD (DCA, BWI). Not at DEN.

There wasn't any at CLE, CVG, MEM, though all were smaller local markets than remaining hubs - which emphasizes that having dominant local market share in cities large enough to support a full hub, but not so large they can support a second airport is an important piece of the competitive landscape.

Last edited by cerealmarketer; Mar 28, 18 at 1:45 pm
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Old Mar 28, 18, 1:47 pm
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Originally Posted by eponymous_coward View Post
Of course, no-status me is going to be crammed in a Y experience that is worse than a Norwegian 787 (or soon, a Spirit A320, once the pitch is ridiculous and Basic Economy is everywhere).

I should pay for AA for that if I have other options at the same price (some of them better ones, like that Norwegian 787) exactly why?

If AA wants to be NK or NO for me, that's cool. I just don't have any reason to prefer them over NK or NO if all they want to give me is lowest common denominator, self loading cargo treatment on junky old 767s.
The AA 767 is one of the most comfortable rides in Y in the fleet.
Only 1 in 7 chance of a middle seat.
Seats that are wider than the 787 & most of the 777/330 seats.

Why on earth would you think the Norwegian 787 is more comfortable?
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Old Mar 28, 18, 3:27 pm
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Originally Posted by tphuang View Post
It's no wonder AA's CLT hub is the most profitable given that it's of the same profile. Whereas DFW/MIA/PHL all have to compete against other carrier hubs like DAL/FLL/EWR.
This is not a correct statement, PHL and MIA are both fortress hubs for AA. HVCs living in MIA are not big fans of driving the 30 miles to FLL to fly with a LCC. In PHL, the closest LCC hub is 80 miles down the road at BWI. Yes, there are LCC flights out of PHL but AA dominates the market.
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Old Mar 28, 18, 3:36 pm
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Originally Posted by Often1 View Post
A rookie error to conflate "passenger" with "customer". Certainly there are HVC leisure and self-paid business passengers out there. But, the bulk of the revenue comes from corporate customers who are not likely to be moved much by a hot towel with a higher thread count or whatever it is/
I would assert that yours is the rookie error in not understanding the concept of service design and how much truly understanding your customer, passenger, whatever you want to call them, can impact overall organizational profitability. Businesses that care about their employees do actually listen to which airlines their employees do and do not like and this CAN factor into which airlines a company contracts with (as can a multitude of other factors). In other instances, like my firm, we contract with more than one airline for discounts but are certainly not required to fly them if fares are within a certain range.

As for the comment about selections based on a hot towel and thread counts, I think that is minimizing what customers, passengers, whatever you prefer to call them, value. No, I will not select an airline based on a hot towel, but I will choose an airline if I believe their hard product enables me to get a better few hours of sleep when flying overseas when I need to hit the ground running. This is why I will NEVER fly BA in biz with their 2-3-2 with alternating front and rear-facing seats...no matter how much less expensive their fares are. Some people will and do fly them, I will not.
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Old Mar 28, 18, 3:38 pm
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Originally Posted by SOBE ER DOC View Post
This is not a correct statement, PHL and MIA are both fortress hubs for AA. HVCs living in MIA are not big fans of driving the 30 miles to FLL to fly with a LCC. In PHL, the closest LCC hub is 80 miles down the road at BWI. Yes, there are LCC flights out of PHL but AA dominates the market.
Correct about PHL.

MIA / FLL. Think of the reverse. The presence of FLL siphons local traffic that would have originated in the north metro - plenty of DL/UA options there - it also served to dampen the market overall - one of many challenges Eastern faced. Not as much of an impact as a DAL, HOU, DCA, or MDW which are all closer to the city center, but MIA would be an even better operation for AA without FLL. Not that you'd ever expect South Florida to live without three airports for the metro versus Atlanta's one. Same sized population, but more wealth and more tourism. Point being - the bigger market isn't always the best profit profile for an airline.

Last edited by cerealmarketer; Mar 28, 18 at 3:44 pm
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