The strategy to push corporate accounts to book flights directly with American Airlines has rubbed flyers the wrong way, and they are choosing competitors. — Bloomberg
THE post-pandemic surge of demand for premium air travel is where large carriers are making their money, and American Airlines Group Inc is missing out on the bonanza.
The reason is clear to chief executive officer Robert Isom. The strategy to push corporate accounts to book flights directly with American Airlines has rubbed flyers the wrong way, and they are choosing competitors.
The architect of that strategy was Vasu Raja, American’s charismatic chief commercial officer, whose departure was announced in a terse statement on Tuesday.
In just one paragraph, American said chief strategy officer Stephen Johnson would take over Raja’s duties immediately and is tasked with finding a new chief commercial officer.
The rest of the statement was dedicated to explaining how the airline’s second-quarter operating margins may be as low as 8.5% – a percentage point below its forecast – and how unit revenue will be down as much as 6% from a year ago, compared with an earlier prediction of a 3% drop.
The damage is coming from the revenue side, and Isom made it clear during a presentation at a Bernstein conference on Wednesday that a part of it was self-inflicted.
While it’s clear that this is more of a carrier-specific stumble than a signal of a weak summer flying season, investors in other airlines were nevertheless anxious.
In afternoon trading with the S&P 500 index down 0.6%, American tumbled about 15% while Southwest Airlines Co fell 4.8%, Delta Air Lines Inc dropped 1.3% and United Airlines Holding Inc fell 1.8%.
In that last 12 months before the big drop on Wednesday, American’s shares were down about 6% compared with Delta’s 40% gain and United’s 7% increase.
American Airlines’ sales have lagged behind those of Delta Air Lines. American has been dabbling in the low-fare end of the market and focused its capacity on the Sunbelt states, whose populations are growing faster than those in the rest of the nation.
Other airlines have piled into these southern states, creating overcapacity and fierce competition on fares. Even Frontier Group Holdings Inc, which said it had the lowest costs in the industry, couldn’t take the heat and moved capacity to Ohio from less fought-over turf such as Florida.
American’s focus on the Sunbelt may have come at a cost of its fading dominance in New York and Los Angeles. Isom defended the Sunbelt strategy, saying these Southern cities “are going to continue to be a real economic engine.”
American has a vast regional network to capture these customers, Isom said. The airline is also set up well to capture transatlantic demand, which is robust, and the return of Asian customers. In other words, this isn’t the problem at American in Isom’s eyes.
The big misstep was the carrot-and-stick approach to encourage direct bookings with American, bypassing an airline data system that has been around for decades and is used widely, especially by travel agencies and management companies.
This data on schedules and fares is routed through global distribution systems such as Amadeus IT Group SA, Sabre Corp and Travelport LLC.
Airlines would love to implement an Internet-based booking system known as New Distribution Capability, or NDC, that was developed by the International Air Transport Association about a decade ago.
This new system provides airlines much more flexibility, such as dynamic pricing and custom amenity offerings. It would also cut out the distribution intermediaries, saving money for the airlines and potentially for flyers. Raja’s push to adopt NDC caused friction with customers, Isom said.
“We all know that NDC – modern retailing, Internet-based channels for selling our product – is the future of airline distribution, but we moved faster than we should have, and we didn’t execute well,’’ Isom said.
“We regret that and the difficulty that it created for our agency and corporate communities.”
The cracks in the strategy to reward agencies that adopted the booking system while penalising those that didn’t cropped up only recently. No cracks were evident in early March, when Raja played a prominent role in American’s investor day meeting with analysts.
First-quarter results that showed Delta and United performing better than American were perhaps the first public signs of trouble.
Another hint came at the end of April when American delayed until July the implementation of the booking policy that Raja championed.
Isom scrapped the plan altogether after it became clear the effort was chasing off premium customers, the ones that the industry covets. — Bloomberg
Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. The views expressed here are the writer’s own.
