On Tuesday, United Airlines held an earnings call with members of the investment banking community to announce its third quarter 2016 results.
Near the end of the call, Evercore ISI analyst Duane Pfennigwerth asked United president Scott Kirby, about a statistic Kirby once told the analyst.
“A few years ago, you said that 87% of your customers at American Airlines fly less than once a year and represented about half of your revenue, do those statistics look materially different at United?” Pfennigwerth asked.
Kirby, who served as president of American Airlines before joining United in August, replied that the stats are similar at his new company.
At United, 85% of customers fly less than once a year and, like American, also account for close to 50% of revenue, he said.
This means that just 15% of United’s customers account for half of its income. And a large chunk of that revenue comes from a small, but highly important group of frequent business flyers who pay full price premium or economy cabin fares.
As a result, it is imperative that airlines keep those who spend the most money with them the happiest while maintaining a positive relationship with the rest of its clientele.
- REUTERS/Ginnette Riquelme
To do so, airlines have resorted to two strategies in recent years. First, American, Delta, and United have all converted their frequent flyer programs from a mileage-based award system to a revenue-based system.
Delta and United both made the switch in early 2015 with American following suit earlier this year after the completion of its merger with US Airways.
Here’s how a revenue-based system works. Instead of earning frequent flyer miles based on the distance of the flight, mileage is accrued based on the price of the ticket.
For instance, American’s new system awards basic members of its AAdvantage program with five miles per dollar spent. However, high ranking Executive Platinum members – usually frequent business travelers who book full-price premium cabin seats – receive 11 miles per dollar spent.
As a result, perks such as reward flights and free upgrades accrue exponentially quicker for those who spend more money. In addition, a revenue based system has all but wiped out the “mileage run” – a hack used by flyers who buy cheap tickets with itineraries designed to maximize the accrual of miles.
A second strategy airlines have undertaken is the increased segmentation of their product offerings. So instead of offering economy, business, and first class, airlines have crafted products specifically targeted to the needs of specific passengers.
For example, Delta now offers bargain hunters a low-cost offering called Basic Economy which does not allow customers to pre-select seats and make changes to their itinerary. At the same time, Delta also offers a Comfort Plus product which – for a fee – gives economy passengers a taste of the business class experience at the a much lower price point.
- American Airlines
Conversely, Airlines have redoubled their efforts to woo lucrative premium cabin customers with new accommodations as luxurious as there has ever been on an airliner. In August, Delta announced the introduction of a new Delta One premium cabin made up of all luxury suites. A couple of months earlier, United announced plans to revamp its premium cabin with a new Polaris Business Class suite.
These days, flying is a significantly safer and more affordable experience than the halcyon days of the Golden Age of aviation in the 1960s. Still, America’s airlines remain a convenient target for complaints.
And that’s for good reason. Even as American, Delta, and United begin to reintroduce amenities cut during the financial crisis, air travel in America, these days, is hardly glamorous. This is especially the case in the close confines of economy class.
- United Airlines
Right or wrong, the statistics offered up by United gives us a glimpse at why airlines in America behave the way they do. While flying in coach should not brutalize flyers (something airlines need to work on), it is also clear why the folks at the front of the plane or with frequent flyer status are treated in a different manner by airlines.
As with any business, money talks. And in such a highly unstable and capital intensive industry as commercial aviation, cash doesn’t just talk, it stands on the a coffee table shouting into a mega phone.
In case you were curious, United Airlines reported a profit of $965 million with pre-tax earnings of $1.5 billion for the third quarter of 2016.