In a bad-news year, American delivers the goods

It has been my policy and practice in Decembers past to wrap up the year with a review of the most significant recent developments in the travel industry, with particular emphasis on frequent flyer programs. A pat on the back for the good moves; a slap on the wrist for the bad ones.

This past year has been anything but typical, and so I resolved to alter my year-end behavior to focus exclusively on the positive. Going back over the last 11 months? worth of articles and newsletters, I was struck by how little was truly noteworthy. Even so, on that shortlist of the year’s significant events, one company was distinctly over-represented: American Airlines.

American, of course, is both the originator of the frequent flyer program, and its greatest success story. AAdvantage was launched in May 1981, with 283,000 original members, and is currently the world?s largest program, having grown to a membership of 45 million.

So, to mark the end of a year that featured both the worst losses in the history of commercial aviation and the 20th anniversary of frequent flyer programs, the following are some thoughts about the program which started it all, AAdvantage, and excerpts from an interview with the current president of AAdvantage, Ed French.

American Does Acquisition Right

The final flight bearing TWA’s two-letter flight designator, TW, landed at TWA’s St. Louis hub and hometown airport at 6:30 a.m. on Sunday, December 2. The storied airline of Charles Lindbergh and Howard Hughes is history. At midnight on November 30, the TWA Aviators frequent flyer program was also relegated to aviation history. The good news for Aviators members: Among the TWA assets acquired by American was the Aviators program, including both members and their miles.

Some airlines would have scrutinized TWA’s assets and cherry-picked the low-cost, high-profit pieces?high demand routes, gates at congested airports, late-model aircraft, non-union employees. And they likely would have passed on the frequent flyer miles, which after all reflect customers’ loyalty to the previous airline, not the new one, and which at some point will translate as real, hard-dollar costs to the airline.

In that context, American’s decision to “adopt” Aviators members, and their subsequent handling of the transfer of miles from Aviators to AAdvantage, easily qualify as the year’s most customer-friendly moves. And they follow on the heels of American’s “More Room Throughout Coach” initiative?another example of the company’s doing right by the consumer in an industry known for producing an indifferent product served up with a take-it-or-leave-it attitude.

Corporate altruism? Hardly. American didn’t become the world’s largest airline by giving without getting. Rather, the company has operated according to some of the most enduring (but elusive) clichés in the marketing playbook: Know your customer, and armed with that knowledge, give him what he wants.

AAdvantage: The View From the Top

Ed French assumed the top position at the world’s first and largest frequent flyer program several months ago, following the retirement of Bruce Chemel. With 10 years of American Airlines marketing experience under his belt, much of it on AAdvantage-related projects, French hit the ground running.

I spoke with him in early December.

TWA, Customers, Miles

Asked whether the decision to grandfather Aviators miles into AAdvantage was a difficult one (I had envisioned a heated internal debate), French replied in the negative: “It was never really a question.” Customers, French continued, “are what make the acquisition work.” And separating customers from their miles would have undermined the overall marketing effort.

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Decisions are one thing, implementation something else.

As we spoke, billions of Aviators miles were being transferred to over one million members’ AAdvantage accounts. Despite the scale and complexity of the undertaking, reports from many former Aviators members indicated that the process was proceeding with remarkably few problems.

How, I asked, had American executed so well on a project that could have gone so wrong? French described a white board in his office on which he and his team had itemized every possible type of Aviators member together with handling procedures for each. “We ran out of space,” he says.

In other words, exhaustive planning and effort went into the transition. “We had to deliver on the promise?made very publicly after the acquisition announcement?that Aviators members would be made whole.”

Miles, According to American

American, in contrast to the majority of other airlines, views AAdvantage?the operation, the miles, the marketing communications?as “paid for, through partner revenue, or through additional revenue to American.” If, in other words, American’s annual report included a separate income statement for AAdvantage (it doesn’t), it would show revenue far in excess of expenses.

According to French, AAdvantage “is not a competitive necessity. It pays for itself many times over.” How? Again, partner revenue (AAdvantage “partner” companies purchasing miles for use as sales incentives) and incremental American revenue (tickets which, but for AAdvantage, wouldn’t be purchased, or would be purchased on another carrier).

French boasts, justifiably, that the profitability of AAdvantage creates a virtuous cycle. The more generous the program is, the more members it can satisfy, which leads to higher profits; and the more profitable it is, the more generous the program can afford to be. In practice, that means American generates more AAdvantage profits at the same time it issues more frequent flyer program awards.

Looking Ahead

What does French see in the future? He cited two general directions, united by a utility-of-miles theme: “new and different ways to earn miles” and “extension of the network of partner alliances.”

As French put it, “The more consumers see miles as a currency, the more they will use them as a currency.” And the more currency-like miles become, the greater their value and, by extension, the value of frequent flyer programs.

My last question to French concerned the tie-up with Olympic Airways, or OAL, a move that left many consumers (myself included) wondering if American, uncharacteristically, had made a major marketing misstep. French acknowledged that there was some brand confusion with AOL AAdvantage, but suggested that the future held “some interesting developments” in this area.

I wouldn’t even hazard a guess as to what specifically might be in the works. But if the past is prologue, it’s a safe bet that it will play well to the wants and needs of AAdvantage members. And turn a nice profit for American as well.

Check out last year’s year-end column.