Just over a year ago, American Airlines took the decision to pull 40% of its lowest fares from many online booking platforms. These fares would only be released through its own channels and its New Distribution Capability (NDC) channels.
Announcing full year results for 2023 in January, the airline noted that some 80% of its bookings were coming from internet customers, with 65% of those via its own in-house channels. It doubled down on its strategy, reiterating its goal of getting 100% of bookings this way.
Now, CEO Robert Isom has indicated the airline will begin walking back this strategy. Once-champion of NDC, Vasu Raja – the airline’s CCO – is out. The controversial AAdvantage changes are no longer happening. What’s going on?
A weak Q1 at American Airlines
American Airlines swung to a loss in Q1 of 2024, despite record-breaking revenue. Much of that loss was attributed to Boeing issues, but there were also questions raised about the lack of growth in the managed corporate travel market.
Direct competitors Delta and United both reported a 14% increase in managed corporate booking in the first quarter. Alaska’s were up 22%, and Southwest had 25% more corporate bookings year-on-year.
Getting that number from American Airlines was not an easy task, as Cranky Flier explains. Ultimately, Chief Financial Officer Vasu Raja admitted it was ‘mid to high single digits,’ although he still didn’t put a number on it.
Speaking at today’s Bernstein Strategic Decisions Conference, CEO Robert Isom admitted that revenue production and expectations for domestic performance had ‘worsened materially’ since the airline provided guidance in April.
Indeed, in the hours before the conference, news had begun to spread that the carrier had cut its Q2 profit guidance. It now expects second-quarter adjusted earnings in the $1 to $1.15 per share range, compared to previous expectations of $1.15 to $1.45 per share.
Elaborating on the carrier’s weaker performance in Q1 and subsequent guidance adjustment, Isom noted,
“We believe this is, in part, due to the changes that we have made to our sales and distribution strategy.”
It’s the first time the CEO has admitted they made the wrong move in quite such an open manner. Later in the discussion, he gave a little more color on the issue as he sees it.
“We all know that NDC, modern retailing, internet-based channels for selling your product is the future of airline distribution. But we moved faster than we than we should have; we didn’t execute well.
“We regret that and the difficulty that it created for our agency and corporate communities.”
Is American about to restore access to travel agents?
American’s move to favor NDC bookings last April faced a strong backlash from the travel agent community. The American Society of Travel Advisors (ASTA) called it a ‘clear abuse of market power,’ as the airline withdrew 40% of its fares from operators using the widely adopted Global Distribution System (GDS).
To put this in perspective, IATA advised in 2022 that just 10% of indirect airline sales came from NDC-based connections. That was up 5-6% in one year, according to Travel Weekly. Similar growth could mean more are using it now, but most are not.
This prevented huge swathes of the travel agent community from accessing the most competitive fares, including many corporate travel management companies (TMCs). The impact of this is being felt, clearly, as Isom added,
“One of the things that is very clear is that we’ve driven some customers away; we’ve restricted some customers from actually finding our product. Those are the kinds of things that we have to be attentive to.”
Without going into detail, the CEO hinted that a change is afoot, and that it will be to the benefit of TMCs and travel agents.
“We’re evaluating our strategy holistically and piece by piece. We’ve spent a lot of time listening to our agencies and our corporate customers, and we hear their feedback.
“We’re taking some immediate actions to respond and adapt. And over the coming weeks, we’ll be working to ensure that we’re optimizing for our customers and American as we move forward.”
Modifying the strategy
To date, American has remained buoyant about its NDC shift, with executives presenting a united front to defend the questionable strategy. At the Q1 earnings call, CCO Vasu Raja declared the airline would be ‘leaning further into this’ despite warning signs that TMC bookings were not where they should be.
Today, the CEO indicated that changes would be coming, and it sounds very much as if TMCs and other travel agents will have more fares restored to their platforms.
“We are going to modify our distribution strategy. Specifically, we need to work closely with our agencies and partners to ensure that the transition that we’re making is not disruptive to our end customers.”
While the exact shape of the reform will take some time to shake out, Isom flagged a few key areas that will be a focus going forward.
First, he said that he believes American’s products are “more easily understood and valued by customers when distributed through modern retailing technologies.” However, rather than pulling content, he said the airline would work to promote NDC to those using legacy technologies.
“We’ve used a lot of sticks. We’ve got to put more carrots in place and make sure that our product is available wherever customers want to buy it.”
He noted that American would also be reviewing its many changes to its relationships with agencies and corporate customers, including how it solves problems and pays its agencies.
On the customer side, Isom committed to rolling back the changes to AAdvantage that would see no points earned for booking with non-NDC agents, adding,
“We want to make sure that no customer that’s out there traveling is made worse off from the changes that we make.”
The fall guy
Vasu Raja has been with American for 20 years, working his way up the ranks through network planning roles to chief revenue officer and finally to his current position of CCO.
Raja was a champion of NDC from the start and really pushed American’s strategy in this respect. He can also take at least partial credit for the Sunbelt strategy, which Isom admits isn’t being as productive as hoped. Some of the recent route shakeups are also in his wheelhouse
The announcement of his departure lacked the usual fig leaf of thanks for many years of work that normally form part of such a release, suggesting the split wasn’t entirely on good terms. Without specifying reasons for Raja leaving, Isom noted,
“I’ve known Vasu for a long time. I admire his creative thinking, his passion. He’s been an innovator, a disrupter, and a good friend. Sometimes we need to reset and in this case, we do.”
That disruption and innovation could have gone one of two ways for American Airlines. It was looking to shake things up, and shake things up it did, but not in the way they had hoped.
“We have to be better at executing those long-range plans. We have to be more attentive to the marketplace. We have to be more detail-oriented. And we have to go forward as a team and really make it easy for Americans to do business with us.”
Stephen Johnson, current vice chair and chief strategy officer, will take Raja’s place, at least in the interim. He’s an industry veteran, a lawyer by trade, and a staunch Isom loyalist. The CEO said he was confident in Johnson but indicated he’d be taking a more hands-on approach to revenue management.
“I feel very confident in our plan right now with Steve Johnson coming in and making sure that we’re assessing and reviewing everything. I’ve been around the business a long time so you’re gonna see me start pay a lot of attention to how we produce revenue day in and day out.”