The future of AAdvantage

[ronaldl79]

I did some reading over the weekend and stumbled upon an article which featured the man responsible for the creation of AAdvantage (and the frequent flier loyalty program for the entire industry.) You'd think that he'd be praising an industry he created, but instead, he shares the same gripes as everyone else: "I can't book travel on the dates I want."

The article pointed out the billions of miles fliers have racked up over the years and the difficulty of redeeming them for a free flight. It was estimated that collectively, there are some 20 million free roundtrip flights on the books -- and it's actually viewed as a negative by those on Wall Street. Hmmm.

In my experience, I've never had a problem booking my AA miles on the dates I needed, but I wonder about the future of these programs.

 

[flyhigh]

It's a tough equation. Initially, the programs were meant to create loyalty to the airline by flying. Today you can get miles for paying your mortgage. Once the airlines realized they could generate miles by selling them in bulk to other partner companies who would then in turn use them as a way to draw business their direction, the programs became a whole different beast. Quite frankly, they're almost a new form of currency. By volume, I've heard in my past that airline miles are the second most traded currency behind only the US Dollar.

I know as schedules were shrunk after 9/11 AMEX got very frustrated with Delta over the lack of availability. While airline A can show they have plenty of seats available, if they're all on Tuesdays, that's about useless. It's a huge financial liability for the airlines as each ~30,000 miles is a ticket awaiting redemption they have to be prepared to give away.

In the end, it's a big debate as to what to do...

 

[Oneflyer]

In the end, it's a big debate as to what to do...

The answer is that most likely the programs will continue to go on as they are. They are a huge money maker for AA and other airlines. As to availability, most people just don't know how to use them. People will try to book for economy award from Dallas to Europe in May for travel in June. Well, the plane is already full, you should have thought of it a year ago.

 

[ronaldl79]

How lucrative are these bulk miles for the airlines, I wonder? You're right that it's a different beat altogether, especially when demand is outstripping supply.

Doesn't sound like a winning deal to me -- not for the consumer at least.

It's a tough equation. Initially, the programs were meant to create loyalty to the airline by flying. Today you can get miles for paying your mortgage. Once the airlines realized they could generate miles by selling them in bulk to other partner companies who would then in turn use them as a way to draw business their direction, the programs became a whole different beast. Quite frankly, they're almost a new form of currency. By volume, I've heard in my past that airline miles are the second most traded currency behind only the US Dollar.

I know as schedules were shrunk after 9/11 AMEX got very frustrated with Delta over the lack of availability. While airline A can show they have plenty of seats available, if they're all on Tuesdays, that's about useless. It's a huge financial liability for the airlines as each ~30,000 miles is a ticket awaiting redemption they have to be prepared to give away.

In the end, it's a big debate as to what to do...

 

[Oneflyer]

How lucrative are these bulk miles for the airlines, I wonder? You're right that it's a different beat altogether, especially when demand is outstripping supply.

Doesn't sound like a winning deal to me -- not for the consumer at least.

I believe AMR gets over a billion dollars in revenue from AAdvantage.

I think it is a great deal for consummers. In about a month I will book two first class tickets to Thailand using miles. Retail value is something like $20k or more and I'm getting it for a fraction of that cost.

You just have to be willing to understand how the system works and understand the rules. Fortunately for me, most consumers are not willing to put in the time or effort to learn.

 

[flyhigh]

Most of the majors are generating in excess of $1B annually on these sales. The problem OneFlyer is that the consumer is not being sold that way. Until recently (the last year or so), it was difficult for the casual mileage earner to find flights to fly. Additionally, if I pay an annual fee for my credit card that generates miles and I'm told I can get a seat for those miles (like Capital One has sucessfully done thus the large erosion to them from Citi/AMEX, etc.) I expect them when I can take my vacation, not when American Airlines says I can go. It's perception vs. reality vs. the sales pitch.

 

[FWAAA]

I believe AMR gets over a billion dollars in revenue from AAdvantage.

I think it is a great deal for consummers. In about a month I will book two first class tickets to Thailand using miles. Retail value is something like $20k or more and I'm getting it for a fraction of that cost.

You just have to be willing to understand how the system works and understand the rules. Fortunately for me, most consumers are not willing to put in the time or effort to learn.

I agree with everything you posted except the billion dollar figure. My estimate is about $600 to $700 million last year. Still very lucrative. Here's how I arrived at it:

Although the airlines do their level best to hide this ball from their investors (and competitors), reasonable estimates can be gleaned from the 10-Ks.

AMR's liability for unredeemed earned miles PLUS unrecognized revenue from AAdvantage miles sold to partners was $1.6 billion at 12/31/06. Assuming about 10 unredeemed awards (AMR's figures at 12/31/04 and 12/31/05) and an average incremental liability of about $30 each, the liability for earned but not yet flown award seats is about $300 million.

That leaves $1.3 billion for unrecognized revenue from AAdvantage miles sold to partners like Citi and the others. That revenue is recognized over a 28 month period, or about $550 million for a 12 month period - but that would assume level sales. Safe to assume, IMO, that sales grow each month - hence the $600 million to $700 million of AAdvantage miles sold in 2006.

Couple other minor points: AMR doesn't disclose its incremental liability for awards - but until a couple years ago, DL and some others did. Last time DL posted the numbers in its 10-K, it was about $23 or $24 each, on average. With higher fuel costs, seems to me that $30 each would be about right. Food is rarely provided in coach, somewhat offsetting the higher fuel costs.

This year in the 2006 10-K, AMR no longer disclosed its estimate of the number of unredeemed awards, but it used 10 million outstanding in the prior two years, so I used the same 10 million for 12/31/06.

I tend to use my miles for international premium cabin awards, which often have rack rates of $8k to $20k round trip or upgrades on purchased tickets. I'd never buy those tickets at those price - of course. Generally, I don't use them for standard 25k mile domestic coach awards where the tickets could be bought for $200 - $600 or so. Coach awards can't be upgraded and cheap revenue tickets can be upgraded.

As you point out, the vast majority of AAdvantage mile collectors aren't actually frequent flyers - and thus their miles are unlikely to displace me from the types of tickets for which I like to redeem my miles. Learn the rules and you can generally get what you want if you're the least bit flexible.

Our country has no shortage of inflexible people who are in great need of a reality check; I know of people who are pissed that they can't get a half dozen coach award seats to popular destinations during peak travel times - they are seriously delusional if they think the standard awards should be unrestricted (at least when they want them). They could get what they wanted for double miles - AAnytime awards are just that - if there's an open seat - an AAnytime award gets it.

 

[eolesen]

There is a benefit to the people that loyalty programs were originally intended to serve -- those who spend a lot of money with that carrier, thus earning enough miles to not really care about whether or not I'm redeeming 30K miles or 60K miles.

A lot of these puff pieces focus on infrequent fliers being unable to use the lowest redemption awards, but overlook the fact that loyalty programs aren't designed around people who only travel two or three times a year. They're designed around people who fly two or three times a month.

In the past, I've redeemed more of my mileage for hotel nights, companion tickets, and upgrades than I have on plan-ahead tickets. There are a lot of other options available. Use a higher mileage award and you won't have blackout dates or capacity controls.

 

[Wretched Wrench]

Ronald, you are not running for office.

Ace the picture.

 

[Oneflyer]

I agree with everything you posted except the billion dollar figure. My estimate is about $600 to $700 million last year. Still very lucrative. Here's how I arrived at it:

My $1 billion number comes from AAdvantage when I interviewed for a position there a couple of years ago. Given the accounting of miles I think anything in that ballpark is possible.

 

[ronaldl79]

The estimates given so far are a lot higher than the $200-400 Million I was thinking. Unfortunately, I those dollars are probably being sucked away in fuel and maintenance, etc.

My $1 billion number comes from AAdvantage when I interviewed for a position there a couple of years ago. Given the accounting of miles I think anything in that ballpark is possible.

 

[Oneflyer]

Most of the majors are generating in excess of $1B annually on these sales. The problem OneFlyer is that the consumer is not being sold that way. Until recently (the last year or so), it was difficult for the casual mileage earner to find flights to fly. Additionally, if I pay an annual fee for my credit card that generates miles and I'm told I can get a seat for those miles (like Capital One has sucessfully done thus the large erosion to them from Citi/AMEX, etc.) I expect them when I can take my vacation, not when American Airlines says I can go. It's perception vs. reality vs. the sales pitch.

1. Why is it AA's fault that the consumer is not educated about the rules and availability? If they don't want to know the rules, then they can always pay double for Anytime Awards.

2. The Capital One card is no better. Redemption is based on the cost of the tickets, not a set price. So getting a ticket on a hard to use route, would cost you about the same amount of miles as using the Anytime Awards on AA.

 

[FWAAA]

Incidentally, in today's WSJ, Scott McCartney concludes that AA and UA are the most generous in granting award seats:

http://online.wsj.com/preview_login.html?u...hs%26ru%3Dyahoo

As expected, the research is little more than anecdotal, but it does confirm suspicions that DL, NW, US and CO are not as generous and that AA tends to be more accomodating.

 

[Connected1]

IMO, people get too tied up in the accounting numbers when evaluating whether the AAdvantage program's value to American. The more relevant question to answer is, "If every airline were to abolish their frequent flyer program, would their total revenue decline?" This is a complicated issue, but the long and short of it is that realistically the airlines would have to open up larger amounts of lower-priced inventory to fill their aircraft and consumers would purchase the lower-priced inventory using the money they would save by not "purchasing" their miles from credit card companies, etc. Just because there isn't a cost to the consumer directly tied to the miles that they earn, you can bet that the credit card companies are getting paid one way or the other.