The blurring of lines between leisure and business trips — also known as the “great merging” — is one of the lasting changes of the Covid-19 pandemic. No where is that more evident than at airlines, where the old calculus that people were either on a leisure or a business trip but never both was upended.
American Airlines, after analyzing who was flying in the early days of the pandemic when most of the world was in lockdown, realized the old paradigm of leisure and business travel did not apply anymore. It found that, even before the crisis, as many as 25 percent of trips were what Chief Commercial Officer Vasu Raja called “blended trips” at the Skift Global Forum. That number has only grown, now accounting for nearly half of American’s revenues today and driving the “real revenue growth in the airline.”
Watch Raja’s full on-stage appearance with Skift founder and CEO Rafat Ali, as well as read a transcript of it, below.
Rafat Ali: Thank you all for staying. The best interviews of the day are coming now.
Vasu Raja: Which is great, because it’s the very end of the show. I think I’m all that’s keeping these people from drinking.
Ali: We’re going to say whatever comes to our minds. Thing to note, our shoe game is on par.
Raja: It is. It is.
Ali: Well, thank you, Vasu, for being here. Vasu is the chief commercial officer of American Airlines.
Ali: The reason I wanted him onstage is he’s become this leading thinker. And also, this is happening in your business as well, what we call a great merging, the stuff that I talked about in the morning, the essay that I wrote, which is how we live, work and travel have merged into each other. And American Airlines, the data that you have been talking about on the earnings calls, I think, over the last two or three earnings calls is actually bearing that out.
Raja: Oh, most definitely and continues to bear it out.
Ali: And when I wrote the essay, I took your last, I think it was first quarter, maybe, earnings call, where you talked at length about what used to be the blended trip, X percent now has gone on. Instead of me telling what it is, tell us what the data is today.
Raja: Well, sure. Look, what we find is almost half of the revenue at American Airlines now, and it has been the case for, let’s call it, most of the last several months, nine months, almost three quarters, and we see it out there in the future, are actually blended trips. People aren’t flying for what we would historically have called business or historically leisure.
And that’s meaningful for us because that figure is almost doubled. It’s even more meaningful because the real revenue growth in the airline is powered by that. And that’s very significant thing because our airline’s flying about 90 percent of the seat capacity that it did in 2019, but it’s producing 110 percent of the revenue of 2019. And so, really, that increment is, for the most part, driven by these blended trips.
Ali: So let’s unpack that a little bit. So, 20 or 25 percent pre-pandemic. So how did you know they’re blended, and how do you now know they’re blended?
Raja: It’s a great question. One of the great beauties of the airline is that we have tons of information, of every transaction that comes through, but we’re also very fortunate because we can survey our customers and they can corroborate the data. So, through the data, we can see things; for example, when we call something a business trip, we have algorithms that look at it and, say, well, if you’re a single person in the itinerary, you don’t check a bag, you’re not staying a Saturday night, you’re going to New York — high probability you’re for business.
And we can ask you that and people can correlate. And so, that was very much the case. But along the way, through the pandemic, I’d say a couple of strange things happened. The first that got our attention was March of 2020, and we lost 90 percent of our revenue, but that’s not what got our attention. What got our attention was that we kept 10 percent. It’s March of 2020, who was traveling? Because whoever that was, and what we said is, let’s just think about this different, forget about everything that happened before it.
Actually, this is almost like adopting a new technology. What if these are all the early adopters that we see? Who are they and what utility do they see in this product? And as they started coming back, what we found was then the second thing, which was really this blended trip. These customers, who were traveling, would travel with one person in the PNR [Passenger Name Record], the reservation. There wouldn’t be a checked bag. They would be traveling in the middle of the week, but they were going to Bozeman, Mont. And so, there would just be some things in the algorithms that would just be off.
And though people would grade themselves as business or leisure, it made us realize the next thing, which is, the only way that we have ever given a customer a choice is business or leisure. Which took us to the third thing, which really is, if you go back and look at the history of airlines, business and leisure is itself a nomenclature thing. Really, if you think about the airlines in a bygone time, the ’60s, the ’70s, we had this really fundamental product — a fundamental problem. We had an infinite number of SKUs [Stock Keeping Units]. You could sell any number of airline seats, to an infinite number of customers, but there was no internet. How do you distribute your product?
And the way we simplified the problem was that we shipped the lowest fare or the fastest schedule. And if you bought the one, we called you leisure, if you bought the other, we called you business. But along the way, we built the entirety of our operations and our means of thinking around two different transactions. But this was the third realization: business and leisure are a transaction, it’s not a customer. The last of our realizations was not so much, ‘oh my goodness, 50 percent of our trips are blended.’ But, in a bygone time, 25 percent of our trips were blended. We just never realized that.
Ali: You didn’t realize it.
Raja: As we started unpacking this, we found that with those blended trips, a disproportionate amount of them are actually people who were traveling for what they would call, their primary purpose is actually a leisure trip. Like, I’m going to Bozeman, Mont., for what I consider to be personal pleasure. I am choosing that. However, while I’m there, I’m going to take conference calls on a Friday, I’m going to hike Saturday and Sunday, whatever the case might be.
What the pandemic really unlocked in the recovery from it is, something that you’ve rightly pointed out, which is the great merging. That people don’t have to keep a work life for five days and a personal life for two days, and carve out two weeks a year for vacations. And we keep seeing that. We were really curious what would happen after the middle of August, when people started resuming schools, and after Labor Day, when we thought that normally —
Ali: Things would drop off.
Raja: Yeah. What we call, business travel would come back and people would stop taking trips to Orlando. Indeed, what we’ve seen is blended trips continue to grow. There’s a lot of traditional business trips that don’t come back, but we are seeing more blended-style business trips, more blended-style leisure trips, and, indeed, more people are still traveling for leisure than ever before in a September.
Ali: And these are people, potentially, who can work from anywhere.
Raja: Who are mobile, who are any number of things. And the other thing that’s quite striking about it, it’s interesting, but when we look at those blended… Though we call them trips, we’ve spent a lot of time in the last, let’s call it, year or so really studying the customers who are behind them. And disproportionately, the customers who tend to be in blended trips are more likely to work at a business where there’s a hundred or fewer employees than one of the major Fortune 500s.
Ali: That’s right.
Raja: And this may be more unique to aviation than a number of the businesses represented here. But a lot of how aviation has thought about this thing called schedule sensitive or business-type travel, is that we see the Fortune 500 of companies and think that’s everything. But actually, I mean, just be practical about it, there’s probably a few trillion dollars of economic output in the United States of America alone, from companies of a hundred and fewer people.
Ali: Yes. Yeah, true.
Raja: Well, those a hundred and fewer people [companies], if you want to hire somebody talented and they’re based in Oklahoma City, they may not be very compelled to move to New York City. So the reality is, for a big chunk of the economy, the great merging is the way things are.
Ali: Is the way things are. And you also talked about the yield. So, for those of you who don’t know yield, explain what yield is.
Raja: It’s basically the average fare someone pays.
Ali: And so, that has also changed with the pandemic. The blended trip is potentially bringing in, I think, 70, 80 percent of the yield or something like that, you were saying?
Raja: Well, yeah. And in some cases, perhaps even more. What we found, again, a lot of it was just this very simple bifurcation we had. We could recognize transactions, we called those customers. Maybe the simple way to think of it is like this: We realized along the way in the pandemic that business-style travel, big corporates, weren’t coming back. But we would look out and ealize that in a, let’s say company X, a Fortune 100, they were 0 percent back to travel. But 75 percent of their travelers before were out there taking trips, and they had status and things like that.
And what we realized, we had this one customer complaint, which was actually very transformative to us. And this person said: “Look, I bought a basic economy ticket” — basically, the lowest fare on the airline — “when I used to travel three times a week for business, you treated me like a king. I earned Executive Platinum, the highest level of loyalty. But now, I’m flying on the basic economy ticket with my family to Las Vegas, and I’m not treated that way, but this is the most important trip for me.”
And so, again, think about it through the lens of the customer. For the customer, the thing, when they were traveling on these schedule-sensitive trips, it was usually because their employer was asking them to go do it. Wake up at 5:00 a.m. in New York, go fly to Chicago, fly back that night. The thing that they really valued doing was going and redeeming miles to go fly the whole family to Hawaii or something like that. We built our business to go and try to reward people and make it easy when they actually did the thing they were least excited about doing in some cases.
Ali: Of course.
Raja: And we made it harder to do the thing they were most excited about doing. Because what we find in these blended trips is, actually, a lot of them can tend to start as a leisure trip. And what we find is that, for example, many, 70 percent of the people who shop for the lowest fare on our website, and we would historically call them leisure, actually buy something more expensive than the cheapest fare. But it’s not because there’s some airline machinery to go and try to get them to buy more, it’s because they start shopping and they realize they can earn more miles if they buy a higher fare and they value that.
Or, they can get a seat assignment, they can sell themselves up to first class. Our largest premium sales channel is the dotcom. Seventy-five percent of all of our first class and main cabin extra seats are sold on dotcom. So a lot of it is, when you look at it through the lens of the customer, you realize with these blended trips, or even with these leisure trips, they’re not all the same and they’re not all low-paying. Indeed, there’s a lot of things that these customers want, where their average fares can be 90 to 100 percent of what a typical business fare might be.
Ali: And profitability is higher because the marketing channels are lower cost?
Raja: That’s true. It’s a lower cost of sale, but very importantly, it’s also a greater lifetime value in the customer. People who are on a blended trip are more likely to enroll in the loyalty program, they’re more likely to have our credit card, they’re more likely to want to be engaged with the company. And we find very often that the only really good sales channel that we have fulfilling the blended trip is dotcom.
Ali: Through the channel, right?
Raja: Or, mobile.
Ali: Which is, the whole point that airlines have been trying to do for the last many years, is direct, direct, direct.
Raja: Yeah. And in many ways, maybe it wasn’t as hard as we all thought. Because, actually, customers wanted there to be more options than just a cheap fare or a fast schedule, but they want to have some means where they can compare your options against the low fare or a fast schedule. That’s much easier on your dotcom.
Ali: Have you had to rethink the product itself in terms of, there’s the whole, I forget what the term is. Premium leisure, what’s it called?
Raja: Premium leisure?
Raja: Along the way the aviation business has probably had any number of ways of going and naming it. We had a thing called premium leisure, which is somebody who is flying on what would be the cheapest possible price, but they’re buying premium. We increasingly see ourselves growing out of these old definitions of leisure, business, premium leisure. There’s a lot of flavors which are really oriented around the customer.
And really, what we find is that, yeah, indeed, there’s a ton of customers where if they are able to simply understand what it is that you’re selling, they’re more likely to buy it. There was a stretch of time in the pandemic when we flew nothing but our biggest jets, our 777s, from Miami to Los Angeles. So, every flight that we had 45 lie-flat premium seats. And we ran this test where, on our website, we actually could show you that it was a lie-flat seat, and the take rate was so high on it. Actually, we did better selling the premium cabin in Miami-LA than we’d ever done flying longhaul.
Ali: That’s because of Miami and LA, probably.
Raja: A big part of it was Miami and LA. But in a prior time, when we didn’t have it, and we couldn’t show a customer — we would’ve never guessed there was demand for a flat-bed seat at a premium to what everybody else in the marketplace was selling it at. And it wasn’t because we hadn’t put a flat bed in there, it’s because we never actually told everybody, and we never made it easier for a customer who was now suddenly more willing to go buy it. And so, we find more and more cases of that.
So, no, this blended thing is a real thing. And we think that if there’s anything — and the pandemic has taught people a lot of things — but if there’s anything that they learned, it is that you can replace going out with eating in, and work from the office with work from home, but you can’t replace other people.
And the beauty of travel is, travel is about connecting other people. And very often the most constrained asset in travel is the airline seat. And so, when you look at it through the lens of where we are today, the great merging, assume that the world started now, it’s actually a really exciting time in the world of travel and can create some real interesting possibilities for us.
Ali: So, moving off the great merging, you have also been talking about American’s pivot. I’m guessing that’s not the word you’re using, to being a domestic airline. You are the biggest domestic airline. So, talk about that and how you’re thinking about international versus domestic now as a company, as you sit here.
Raja: I would actually characterize it slightly different, which is this: that American Airlines markets and sells, the largest global network in the world. And if you’re a member of the AAdvantage program, you are a member of the world’s largest and best travel rewards program. Not only can you earn on American Airlines or JetBlue or British Airways or Qatar [Airways], you can redeem at really attractive rates across all of them, better than what you can get through any other credit card program that might be there. That American Airlines does everything.
But American Airlines also runs an airline, that happens to be called American Airlines, too. And about 65 percent of where that airline flies is in North America. And, realistically, it’s going to always probably have about 65 percent of its capacity in North America. I think we use our partnerships with British Airways, with Qatar [Airways], with Japan Airlines, to go and offer the world’s biggest international network.
Increasingly, where we choose to go and fly our flights, will realistically probably be a lot more heavy in the domestic system. And this probably will be the case for a while, due to nothing other than the fact that, right now, the North American demand base has recovered at a far greater rate than the rest of the world. And, indeed, even though it has recovered, it’s recovered a whole lot more in shorthaul markets than it has for seven-day business trips to China, for example.
Ali: And China, I’m guessing, its certainly not anywhere near what it used to be?
Raja: Yeah. Well nobody even has the rights to go and operate their old schedules there. So, no it’s not. In times past, in the transpacific network, 50 percent of our revenues came from the business class cabin and true large Fortune 100s flying it, and it’s going to be a while before that.
Ali: Let’s do some quick questions. So Peter’s asking: “In a world of blended or merged trips, is there a place for the Saturday-stay rule to price a business trip?”
Raja: Well, Peter, you’re in great luck, because the Saturday-stay rule, I think, exists in maybe less than 1 percent of all markets in the system, and probably has been that way for the better part of 20 or 25 months now. But that said, look, the Saturday-stay rule is a great example of what our airline had done over the years; that we could go and send to the world, in a pre-internet time, a low fare or a fast schedule, and that created a fence, it created a natural segmentation.
And whether it was a Saturday-night stay or everything, so much of the airlines, for maybe 40 or 50 years, was galvanizing that segmentation and trying to keep it. And so, in a lot of ways, if you look at it through that traditional lens, and if you think about the world as trying to recover back to something in 2019, the great merging is a huge threat. People aren’t in the office. The world is changing. There’s no Saturday-night stays anymore. If you see it as the start of an opportunity where, indeed, the world has changed and these blended trips are now, there’s a bunch of people who have a range of trip purposes. And now, technology and travel technology is in a place where it can contemplate that.
Ali: Speaking of travel tech, this is the last question. Tamur is saying: “Maybe we can call it proper segmentation, but how to leave the 1960s tech stack. What’s your take on one order?”
Raja: Oh, Tamur, this is going to take a lot more than the two minutes and two seconds I’ve got left to give you this answer. But no, we’re really excited on the future of what order management is, because so many of the fundamental consumer technology promise …
Ali: So, Tamur works for Lufthansa, so he’s also …
Raja: Oh, oh. So, it’s a rigged question. Ah, I see.
Ali: No. It’s not a rig question, but I just happened to know that he works for Lufthansa.
Raja: Yeah. No, no, no. Well done. Tamur can answer his own question then. But no, for everybody who isn’t familiar with the airlines, so much of our infrastructure for consumers is based in a world prior to the internet, when having unlimited SKUs and unlimited customers was a really complicated technological problem. It’s now something which any of your phones can go and solve. So, we are very excited for any technological progression in the business and are keen to lead it.
Ali: How’s your new campus working out?
Raja: Great, great. I was mentioning to some people backstage, that it’s very fortunate that we’re over 50 percent back to the office. Which is important for us because, again, our business exists to connect people and it starts by actually connecting our own employees. But we’re very fortunate, because so many of them actually see the utility in that. We haven’t had to go and put too many policies in place. A big part of it is the fact that we have a new campus in Fort Worth, Texas. I think some of you have been there. If you haven’t, well, consider this an invitation. But don’t tell anybody I was the one who invited you. That may get me in trouble. I don’t know.
Ali: Okay, let’s do one quick question. “Will the party of leisure trips, is it just a fad that fades when the economy slows?”
Raja: We’ve been waiting for 20, 25 months for this fad to fade. We keep waiting for it to fade. Actually, it stays stronger. The best example of this probably is, maybe this stat. In June of 2020, airline revenues were 20-25 percent of their historical level. But spending on our credit cards, our co-branded credit cards, with Citi, primarily, never fell below about 70 percent of their historical levels. Indeed, what we found is that through the pandemic, customers, more than ever, wanted to go and earn miles. We’ve set records for enrollments. All of those records, these single biggest predictor is did you fly on something that looked like a blended trip?
So, it is actually proving to become an increasingly big predictor of who actually are our most profitable customers. And it doesn’t seem to be fading out at any point along the way that we look out there. In fact, look, things as simple as you leave work on a Thursday night to go somewhere — visit your grandmother — you spend Friday taking calls and you’re with her all weekend. That’s a blended trip and that’s a thing which is possible now, didn’t exist before. So more’s coming.
Ali: Thank you, Vasu.
Raja: We nailed it.
Ali: We nailed. All right, thank you.