by Gary Leff
After comments by American Airlines CEO Robert Isom at the Bernstein Strategic Decisions Conference this week, where he explained changes that he planned to make after the ouster of Chief Commercial Officer Vasu Raja, many customers and readers of this blog have speculated that the airline would right the ship. After all, Raja was famous for his belief that network is the product.
Would the high cost airline, which desperately needs to convince customers to pay more in order to earn a profit, finally focus on delivering a higher quality product? Don’t bet on it.
- Isom was clear, speaking for the first time since the announcement of Raja’s departure, that they planned to stay the course – aside from reversing course on penalties for agencies that didn’t adopt the airline’s preferred technology and from walking away from corporate sales. In fact, there’s been nothing wrong with American’s plan – the problem was just one of execution.
I do believe that the strategy that we’re pursuing that we laid out in Investor Day are the absolutely right ones. Now one of the things that is very clear is that we’ve driven some customers away. We restricted some customers from actually our product. Those are kind of things that we have to be attentive to.
It’s one thing to have a plan and that plan can be the greatest player in the world. You can have the best people operating it, but execution is critical.
- Raja’s ouster was a result, ultimately, of a contest between him and CFO Devon May – known to be even tighter in customer investment than his predecessor Derek Kerr.
- Isom’s first instruction to employees on becoming CEO of the airline was to not spend a dollar more than they need to. He told investors at the conference that cost-efficiency remains key:
I will tell you that my view is that we have done an exceptional job of running a reliable airline. And I know that, that has been something that’s been hard to do to get back after pandemic and we’ve held ourselves accountable to it and we delivered. It’s hard to run a very cost-efficient airline in this business. I’ve tasked our team with doing that, and they have delivered.
To achieve profitability, Isom says, the “philosophy hasn’t changed.” American remains committed to Sunbelt flying, and using regional jets to connect passengers through hubs.
There are analysts suggesting American will now improve its soft product, but the ways it will do that are the things they’ve already announced – faster wifi on regional jets (given the important role that Eagle carriers play in their strategy), new business class on new planes (but no plan announced to offer it on any existing planes other than Boeing 777-300ER, removing first class), and a new soft product that includes updated meals, blankets and amenity kits (and eliminating pajamas from the longest flights in business class). This is a very cost-controlled update.
New Business Class Amenity Kit
This is still an airline that reminded flight attendants in the fall not to provide elevated service to coach passengers; not to give them blankets, pillots or treats from business class, because surprise and delight is anathema to ‘consistency’. No meaningful effort was being made, of course, to ensure a consistent customer experience in premium cabins – such as that predeparture beverages are provided consistently.
AA: pic.twitter.com/UN8aVpAbsZ
— JonNYC (@xJonNYC) November 7, 2023
American Airlines remains the U.S. airline with the greatest potential to be better than it is today. But it has high costs, and those are only going to go higher with a new flight attendant contract. They’re still living off of 2019 wages. That means they need to earn a revenue premium. They’ve believed that reliability alone would lead to profits, but they’ve improved reliability and shown that that is mere table stakes.
The airline’s Chief Commercial Officer before being taken over by US Airways was Virasb Vahibi. He talked about the ‘circle of the customer’ where all parts of the customer journey should feel premium. That doesn’t mean expensive but that paying attention to all of the details mattered, down to the finish and stitching of a seat. US Airways management came in certain that ‘nobody buys a ticket based on the color of a seat’ and that’s true in isolation, but cutting those little things creates a cheapened product and overall effect that people pay less for.
It also turns out to be more expensive. When your view is that a seat is a seat, and cost is paramount, you bolt those seats to the floor of an aircraft without thinking through how passengers will stow their bags. American lost under seat storage in first class, didn’t think through how galleys and lavatories would work in their new domestic product in 2017, all because they were too cheap to build mockups – and wound up having to retrofit their recently-retrofitted planes to fix their errors.
American Airlines today has a premium economy seat that in most cases lacks a footrest, because they want to squeeze seats together they offer only a foot bar protruding out from the seat in front. But that’s a product that isn’t worth as much as competitors. They removed business class seats from planes, which Vasu railed about back in 2018 – an inability to sell the premium products people wanted to buy.
We’re going to see more business class seats. But they haven’t shown that there’s a mindset shift beyond ‘not spending a dollar more than they have to’ (except in commissioning consulting reports from Bain and overpaying their CEO). Letting go Vasu Raja does not signal a shift to premium, that’s served both Delta and United far better.
