Across the Aisle from American President Robert Isom on Rising Oil Cost, Limits of Segmentation, and Getting Out in the Field (Part 2)

Welcome back for the second part of my interview with Robert Isom, President of American Airlines, while he was in Los Angeles for a town hall with employees. If you missed the first half, you can find it here. Let’s get right back into it.

Brett Snyder, Cranky Flier: We’ve had a prolonged good time for the airline industry and the economy on the whole. The price of oil is a concern. I’ve heard Doug say you’ll think about how capacity goes, but how are you looking at that right now in the near term vs. oil but then also, I know you’re never going to lose money again, Doug says…

Robert Isom, President, American Airlines: …And Robert agrees…

Cranky: …and Robert agrees. How are you fortifying the company to prepare for the bad times?

Robert: Well, we always have to be ready. One of the things you’re very aware of is we keep a higher cash balance than other carriers; that’s there to help during tough times. I guess what I’d say is we’ve seen a massive run up in the price of fuel over, what 7 months, almost a 100 percent increase? That’s a shock to the system. If it remains at the level it is right now, of course there are going to have to be adjustments made, and those adjustments, that which you can’t pass on to your customers, you’re going to have to find a way to adjust and that can take place in trying to make sure your cost structure is appropriate. And at the end of the day it comes to matching supply and demand.

Cranky: When do you decide to make that move? Because you can look at oil today but you don’t know what it will look like in 6 months. And yet if you’re making a capacity decision, it’s 6 months or beyond.

Robert: Brett, I think that’s the key. We can adjust around the edges right now, but largely in the third quarter, the planning you have to do to run an airline, the vast majority of people and expenses are in place. While you may be able to not burn fuel, so much of your expense are there that it’s a cash-negative decision. That being said, we’re conscious of it. And certainly any adds we’re going to make, those have to be profitable.

But the kinds of things that we take a look at… first off, we’re very interested in the pricing environment. And where we can, we try to make sure we’re earning a return on the services we’re providing. We’re pursuing that, we’re taking a look at capacity and route network and if there are areas of the system that are performing in a more marginal fashion. You saw we made adjustments with Chicago-Beijing and more recently Miami-Belo Horizonte. Those are the kinds of things you have to look and make movements. In the longer run, if we’re at elevated fuel prices, we’re going to be taking a look at making sure we’re flying the right amount.

Cranky: And when do you make that decision? You have someone sitting in a cave saying “alright guys, oil’s not coming down again”?

Robert: No, well, the planning process at American is ongoing. It’s not like we make a decision once a year.

Cranky: Right, but you still have to make the decision to say, “we’ll start pulling down capacity now.”

Robert: And those are the kinds of things we’re looking at right now in ’18 and into ’19. We’re taking a look at the inputs, fuel prices being one of them.

Robert: Now, the one thing I will tell you, is we take a look at that, but we’re mindful of strengthening our hubs. One of the questions you may ask is, “hey, you recently gained access to 15 gates in [Dallas/Ft Worth] and 7 gates in Charlotte.” And as we take a look out to the future, those are gates we’re going to want to utilize. Those are gates that I do really think benefit American. We take a look at the flying that we do. The profitability of the 25th percentile of flying in those hubs is largely better than the average profitability of flying in other hubs. So for us, building them is going to be advantageous in the long run.

Cranky: Sure, in the long run, but you still have to be mindful of your shareholders so you need to make those short term adjustments.

Robert: Certainly capacity is a way to address that from a cost perspective. You know about our “Project One Airline,” identifying over the course of the next few years, over a billion dollars in expense savings. We’re making great progress on that and we’ve hit the targets that we wanted to, so a combination of making sure we’re spending wisely and ensuring that we’re flying in a prudent fashion, and again, going back to our strengths. When we do add, you better make sure that it’s going to come at a profitable level.

Cranky: You’ve mentioned the segmentation process a few times. Of course that’s another lever you can pull to try to increase your revenues to deal with the cost side.

Robert: That’s part-and-parcel. You know what we’ve done by putting in a basic economy product, which is not a price cut. It’s really something that anchors all of our pricing structure. From there we’ve got an economy product. We relaunched our Main Cabin Extra product a couple weeks ago, and we’re really pleased with our first class domestic, our business class international, and ultimately our first class international product.

Cranky: But how much further can you go with segmentation? Is there a lot more ground to cover? It seems to me a lot of the ground to cover is just trying to implement what you’ve already done. You have a lot of trouble with distribution, [online travel agents], not being able to sell the product you tried to create. So that’s part of it, but how much more is there you can do with segmentation?

Robert: So, you’re absolutely right. The work ahead of us right now is what we’ve outlined. Getting that in place will lead to the next steps. But my view is that with segmentation, trying to find ways to offer value to people that customers will ultimately compensate for in a profitable fashion, that’s going to be an ongoing exercise forever more.

I take a look at our frequent flier program, the AAdvantage program, and the opportunities that we have there. We recently put in place a new segmented approach with our Platinum Pro level. What you see with the kinds of benefits that you offer really can be tailored in a much more fine and personal perspective. And the relationship we’re trying to create with customers is identifying what it is they want and will value… being able to offer them that and not something that they don’t necessarily find value in. So, Brett, my view is that whether it’s loyalty programs or pricing or creating different opportunities, that’s something that’s going to continue.

Cranky: Do you think you’re going to hit a point with segmentation fatigue? You already see some people who are just confused by the dizzying number of options. Do you think there’s going to be backlash or is it just an adjustment period?

Robert: I think if you take a look at the economy in general and consumers’ desires in general, right? The world is moving toward more personalization. And I think that that is something fortunately technology is going to help keep up with. And it’s something that we’ve gotta be mindful of. We can’t get stagnant in this business. We have to be constantly looking for what customers appreciate, what they want, and find a way to do it so we can deliver it in a profitable fashion.

Cranky: Alright, well, I guess my time is up.

Robert: No, wait, one more though…

Cranky: Ok.

Robert: I’m out here in LA, not to just visit you… good old friend… but really part of what is really American’s most important priority right now which is getting our team to a point where they feel like they’re supported, appreciated, and willing to take on anything. We’ve got 120,000 fantastic team members. We’ve brought on maybe 25,000, my numbers aren’t right, or 30,000 new folks.

Cranky: And a lot here in LA.

Robert: And a lot in LA, right. Really making sure that everybody that joins us has an appreciation for where their careers can go and they can be here forever. Part of the reason I like to get out here to LA and visit stations and operations throughout the country is to really hear what people are saying; where we’re doing well and where we’re not. We’re going to have a town hall later today. I’m sure I’m gonna get a lot of insight as to where we can do better and probably some feedback on where we’re doing well too.

Cranky: And those things make a difference? When you’re getting this feedback, you guys are really taking this back to the team and using it as tool to help?

Robert: Absolutely. The kind of things I pick up on a trip like this… it could be on the flight in where somebody alerts you to a catering issue. That very thing happened to me on a flight back from Lima to DFW the other night. There was something in terms of a catering spec that had gone awry and I was able to see that first-hand. It was something we were able to make actionable. Today, on our taxi ride over with some of our fantastic mechanics [Ed note: Robert excitedly told me that he joined mechanics to tow a 787 over from the maintenance base that morning], they talked to us about some of the struggles you run into in a complex environment like this. I take back from that, how do we simplify it? All of those kind of things feed into what we plan for next year and beyond.

As a reminder, if you missed the first half of the interview, here it is.

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Uk
Guest

I would have really liked to have read his views on the wholesale destruction of AA at JFK. To Europe they basically rely on their JV, but I don’t want to pay the absurd YQ that BA charges. To the Caribbean they practically have no non-stops left (B6 & DL are the go-tos there), to South America everything has to go through Miami pretty much. To go to the West coast sure, they have plenty of flights, but sobdo everybody else, so who does AA think I will send my $ to? The airline for which I can redeem miles… Read more »

DesertGhost
Guest
DesertGhost

Based on that reasoning, Delta should build up a big hub in Chicago. No airline can be everything to everybody. Most that tried to do that went bankrupt.

Anthony
Member
Anthony

I was astonished when UAL walked away from JFK, and this seems almost as strange.
Attention, airlines — it’s NY! You have to be there.

Bobber
Guest
Bobber

I thought so at first (UAL leaving JFK), but my transfer time from EWR to Manhattan has proved quicker than JFK ever managed, and connecting in EWR is pretty much as bearable as at any other US airport. JFK is a mess.

Wild Bill
Guest
Wild Bill

Mr. Isom discussed the new segmented approach with the Platinum Pro level. I’m curious how many focus groups AA put this idea in front of. I frequently had heard and still hear from PLAT’s that besides slightly better upgrades and some additional credited mile formula, all it did was to piss off many of them. So now their loyalty is not where it was before.I would love to hear what isn’t working or what major blunders they have made recently (i.e., banking on the 737 MAX).

Eric Morris
Guest

Fascinating what he said about DFW and CLT profitability compared to other hubs.

Tim Dunn
Member
Tim Dunn

…which clearly changed over the PaSAt week.

W Scott Moyer
Member
W Scott Moyer

Great interview Brett! I’m here in PHL so I’m interested in all things AA! — W. Scott Moyer