On the heels of its decision to pull forty percent of its fares from sale through traditional third party channels, American has now made the even bigger decision to stop selling tickets entirely, seeing opportunity to completely revolutionize how airline travel works.
The original shift in fares was meant to allow American to sell more through what it calls “Modern Retailing,” but its projections now don’t provide enough cost benefit to the airline, which has been struggling to boost margins. In order to reduce those costs further, American began experimenting with a broader cost reduction program.
Instead of selling tickets in advance for those select flights, American will require everyone to just show up at the airport for the flight they want. Each passenger will have to pay a $50 non-refundable deposit to get to the gate. American will then run an auction at each gate where the highest bidders get onboard the airplane. The rest can either go home or pay another $50 to get in the gate area for another flight.
American’s Managing Director of Modern Retailing Neil Guerin explained the benefits of this strategy as he was packing up his office since his role was no longer needed at an airline that doesn’t sell tickets.
With our previous plan, we were using a more modern system to sell tickets, but we still had significant distribution costs plus commissions, technology issues, and more. Now with this new system, we can eliminate all of those. All we need now are some portable cash registers that we found in the basement of the old North Terminal in Newark, and we’re ready to go.
The cost benefits were obvious, but the question about revenue performance was a real concern. The airline’s revenue management team ran several tests in recent months that surprisingly proved this strategy to be a winner.
To give it the best chance of success from a revenue perspective, the airline determined there would be a minimum bid of $100 per person per hour of flight time for a standard traveler. Credit cardholders can bid as low at $80 per person as an exclusive benefit — really now, the only benefit — of having a card.
Scott Chandler, VP of Revenue Management until next week when his job is also eliminated explained, “you know, we thought that pouring all this money into technology to enable continuous pricing was going to really give us an advantage, but it turns out that a random auction actually boosted unit revenue by 9 percent. Go figure.”
The revenue boost was particularly evident in New York and Boston where travelers taking advantage of expanded service under the Northeast Alliance (NEA) with JetBlue had no option but to bid high enough to get on their connecting flights.
This shift in model also means that the AAdvantage program will not be able to function as it had previously. With the inability to sell tickets, AAdvantage has now suspended the redemption portion of its mileage program. Travelers will, however, continue to earn miles by spending on the credit card.
Heather Samp, American’s Managing Director of AAdvantage until her role was downgraded to junior analyst, said AAdvantage will look to the future with a model focused on gamification. “Loyal travelers can continue to earn miles as they always have. Instead of redeeming them, however, we will broadcast an enormous leaderboard on the side of Skyview 8 [American’s headquarters building] showing who has earned the most miles for all airplanes flying overhead to see. Who wouldn’t want to be up there?” she explained as she moved her belongings into a small corner cubicle, hoping nobody would be able to find her to tell her that she was fired.
Though there are clearly risks to this shift, the timing of the move coincides with what will be one of the best demand environments that the airline industry has ever seen. That has given the airline confidence that this is a lower risk decision than it ever has been.
Despite this confidence, it’s still a controversial move. Chief Commercial Officer Vasu Raja — the only employee left in the commercial organiztion — beamed, “Indeed, just look at how much people are paying to fly places right now. I mean, $500 to fly from Charlotte to St Louis this summer… ST LOUIS?! People will do whatever we say if they want to fly right now. It’s a great f*&^ing time to be alive.”
The plan goes in place today, April 1, which if you hadn’t noticed… is April Fools’ Day. And a very happy April Fools’ to all!
