There's a story I heard when I was writing a book about Harvard Business School.
It goes like this. A student at an elite college is upset about a school policy.
The dean replies: "That's where you're mixed up. You're not the customer. You're the product."
I thought of this recently when I heard what American Airlines is saying about the passengers who are now flying -- and whom it will need to attract to survive in the post-coronavirus world.
Let's take a quick step back. For a long time before the pandemic, American Airlines has been like its big rivals -- specifically United Airlines and Delta Air Lines -- in that its key passengers were business travelers.
It made sense. I mean, if you ran an airline, who would you rather have in the seats?
Would you want casual flyers who have very little brand loyalty and whose top concern, bar none, is simply finding the cheapest flight they can?
Or would you want loyal business travelers -- the kinds of passengers who fly often, who join your frequent flyer program, who value things like comfort and convenience more than price, and whose companies are ultimately paying the bill?
The problem is that since the pandemic, there simply aren't as many business travelers anymore. Top airlines' revenue and passenger levels have fallen sharply -- to the point that American Airlines plans to cut 40,000 jobs (including voluntary separations), and United Airlines says it will furlough 19,000 employees on October 1.
But there's been one bright spot, American Airlines chief revenue officer Vasu Raja revealed in an interview. It might be a bit of a dim one, but it exists.
In the month of June, there was a bit of an uptick in passenger levels. But it turns out that the passengers who were willing to fly weren't the business customers that big airlines have coveted. They were the price-sensitive, less-loyal travelers -- many of whom might frankly rarely have thought of flying before.
Raja explained it this way:
- Three years ago, American Airlines introduced basic economy service -- its lowest cost tickets with the most restrictions and the fewest perks, designed to siphon some low-cost travelers away from airlines that built more of their business model around this kind of passenger.
- During the June uptick however, fully 85 percent of American Airlines passengers were flying on these low-cost, basic economy tickets. Even since then, a majority are still flying on these tickets.
- The overwhelming majority of these passengers are under 30 years old and have never enrolled in the airline's mileage program, AAdvantage, suggesting that they're new customers -- not repeat customers.
"We envision basic economy as being much different than what we designed it as," Raja told Bloomberg. "We anticipate using it quite directly as a means of getting customers who really weren't travelers before to come to market, as an entry product into the airline, to the travel experience."
We can debate whether it's a good strategy, trying to coax new travelers who haven't flown much before (and who are paying out of pocket), as opposed to trying somehow to reattract business travelers who were willing to pay more (and whose companies largely foot the bill) -- and to what degree American might make the shift.
But it all brings me back to that elite college story, and the question of who is really the customer and who is the product.
Because remember, these are the passengers who've rarely flown before. They're the ones who aren't members of AAdvantage. And frequent flyer programs are big businesses.
At least, they used to be before the pandemic.
Go back to 2018, for example, and American Airlines made $1.15 billion selling frequent flyer miles to banks in just the first half of the year, according to an analyst. That same analyst argued that half of American's total margin could come from selling frequent flyer miles.
American Airlines CEO Doug Parker disputed that idea, but earlier this year, American Airlines had its frequent flyer program appraised, and it reportedly came in at $30 billion, View From the Wing.according to the airline site,
Even before the pandemic, the entire market capitalization of American Airlines was just a small fraction of that. But regardless, you see where we're going with this, right?
Frequent flyer programs are valuable ... if they have a lot of members ... and if those members are the type of people who do things like take out high margin credit cards ... and if they choose their cards based on the promise of miles for purchases, not just flying.
But every step American Airlines or its competitors takes away from business passengers and toward low-price passengers is a step away from that model. There is a physical limit to how many passengers you can fit on a plane.
So that means it's not just a lower ticket price the airlines are dealing with when they have to cater to basic economy-type flyers; it's incrementally less of an opportunity to sell miles to banks.
Personally, I haven't been on an airplane since before the pandemic, so I don't have a stake in the fight. But I do run a small business. And the takeaway for me is clear.
When times are tough, that's when you find out who your real customers are.
And maybe, your true product.