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.
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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?
The numbers don’t lie. Taking away things like seat assignments, a carry on and miles that can never be redeemed don’t save a carrier any money, they just alienate customers. Fine if you want to alienate a “once in a lifetime customer” but when you extend these non-cost saving measures to the ret of your customer base you are shooting yourself in the foot.
Munoz doesn’t have any answers because the only way to raise margin with rising costs (thanks to union contracts and a very modest increase in fuel) is to sell more tickets (hard to do with full airplanes) or raise prices. (Impossible to do with an inferior product).
Wait until we have significant increase in fuel or a slowing economy. The operating leverage these companies joy during the boom will cause a great deal of pain on the other side. I can’t wait!
I think they can raise margins without costs by adjusting their model but refusing to compete with superior carriers and focusing solely on ULCCs has already been proven to fail, so why continue to pursue the model?
Sounds like you are advocating more attention to the premium customers so that they increase their selecting United. Perhaps I am wrong but most of these passengers are not paying out of their pockets and their firms that are paying their premium fars kind of limit the decisions.
Charles, to clarify, I am suggesting United should offer incentives to their elite customer base (all levels) to drive more incremental growth and divert spending to them away from other carriers when travelers have a choice. Companies that pay for their employee tickets may limit some aspects of the choice but not usually all aspects. For example, let’s assume a traveler in Chicago has a direct option for the same price on American, United and Southwest. They have already re-qualified for Gold status with United, but likely won’t make it to the next tier before year-end. That traveler (who is unlikely to clear an upgrade anyway) might instead choose to fly American because of timing or to diversify their points, or they may fly Southwest where redeeming accrued points is easier and cheaper. There is no reason to fly United for that traveler and in the absence of any such incentive, they may choose another carrier. Instead of focusing on customers who have already demonstrated loyalty and a propensity to buy United tickets, they are chasing after customers who Kirby has openly stated they do not expect to return. Why chase after them instead of incentivizing your best customers to spend more money with you? And why do they have to be mutually exclusive? Couldn’t United just add additional benefits to their elites for achieving spending goals (much like IHG Accelerate) while still keeping their fruitless race to the bottom (which they appear to be winning)?
I don’t understand this column, quite frankly. The three best incentives United offers me — as an elite flyer at its top level — to buy international business class tickets when I have lots of choice (like right now when I am flying home on a route that nobody flies nonstop so I can connect on virtually any airline) are (1) 11x miles (which is at the 75K cap this trip), (2) the possibility of requalifying Global Services and (3) 2 more regional upgrades and 2 more global upgrades after my next trip.
My one quibble, which applies to all three major domestic airlines, is with the 75K cap. It makes little sense. United should be thrilled to have a 1K flier buy a $11,000 ticket and not treat him/her the same as a Gold on the same ticket. If anything, that incentivizes me to fly one way on UA and the return on AA, which also gives me 11x miles.
Jeff, I think we are actually closer in thought process than you might think. Let’s assume for a second that you are unlikely to hit Global Services but have already re-qualified for 1K – why then should you put expensive spend towards United instead of American as you have suggested? Wouldn’t it be better to end the year with Gold on American while retaining 1K? Or if looking internationally, flying with a carrier like Emirates or Etihad to points in Asia on a superior product for the same or less money?
@Jeff – if you are a UA GS, frankly you aren’t part of the conversation…United has in effect decimated the higher elite levels (Plat/1K0 in order to cater to GS, and you have little incentive to move to DL to get 360 or AA to get CK, as those levels aren’t heads & shoulders above the top tier mileage levels.
And getting 11x miles isn’t even a differentiator anymore if you are already a top elite. AA and DL offer the same.
My annual airline spend is ~$25K, but because that is not UA GS range, I purposefully scrape by with only giving $12K of it to UA, and if/when I have paid int’l biz class, it goes to superior foreign airlines.
Precisely my point sir. My question, is why aren’t they offering incentives to travelers like you (and me) to grab that incremental growth and margin? Why are they so laser-focused on trying to win the bottom 87% that only contribute to 50% of revenue. Wouldn’t it be wiser to encourage increased spending (even just a small percentage) on the 13% that deliver half of the revenue? Wouldn’t that be an easier proposition?
I know if I was west-coast based and exclusively domestic I would give 100% of my business to Alaska Airlines. The program is just hands down better.
@UA-NYC: spot on!
I have flown almost exclusively on UA for 17 years, qualifying for Gold or 1K. Unlike some, my annual spend of $30K is all personal leisure travel in bizz. No corporate funds used here, or economy seats either.
In the 12 long haul Polaris segments I’ve flown this year the product has been inconsistent, diluted, poorly rolled out and just basically a joke. Now, let’s give them points for trying, as their J cabin is still pretty good in comparison to others, and for me personally, their routes and equipment fit my needs. But they totally blew the launch of Polaris from the get go. Heads need to roll.
But, as the prices are going up while the premium product is faltering. I am looking at alternatives.
I really appreciate your point of view in this piece. I’m currently in the situation you describe where I’ve qualified for gold on united, but will not have enough travel for the rest of the year to get to platinum. With that in mind, I’m just picking flights based on the fare and shortest travel time. I think last year, United had a promotion where you could gain additional points for reaching certain spend thresholds, and that kept me loyal in the latter part of the year, but this year there is no such option, so I feel compelled to be a free agent.
You are spot on Kyle. Having already requalified for 1K, and with $15K PQD, I’m now actively booking away from UA. Will fly DL home from MSP tomorrow and to NYC next weekend, all in paid F/J. Just booked paid J to BKK on CI for end of the month, and looking forward to checking out their new 350.
Not only is UA NOT incentivizing me to spend with them, they are actively disincentivizing by (1) downgrading meals in domestic F, (ii) cutting saver award space, and thus the value of the miles I would earn with them, and (iii) generally pissing me off by not opening advance R on virtually any domestic routes, including what should be a “gimme” route like SFO-PHX.
UA’s predicament for years now (as well-discussed on FlyerTalk, I think) has been massive discounts to win/keep corporate/managed traffic, especially through the rocky merger. But then they chip away at elite benefits and MileagePlus, which is the what keeps unmanaged traffic like you, me, and other “overentitled” elites buying UA.
Particularly frustrating is that that “premium” revenue from the corporate/managed bookings surely end up nowhere close to the published fares after cash discounts, but of course us unmanaged folks don’t have access to those prices.
What we do have are instrument discounts through RPUs, GPUs, and mileage redemptions, but as the frustrations of using those grows and grows (see also: devaluations)….different aspects of the program are important to different fliers, but if you can’t use the parts of value to you, you can’t justify the incremental spend on UA.
Just to connect the dots—I’m proposing the reason they can’t incentivize spend in the way you say is because they can’t, they’re already oversubscribed in premium cabins between the managed discounts and unmanaged MileagePlus. At least, I assume that is so, or else why cut product and devalue elite benefits?