Hello World
Vasu Raja has been giving interviews after being let go as American Airlines Chief Commercial Officer. American’s financial results have been poor, and at some level either he needed to go, or the CEO did. It’s not surprising which decision got made.
American’s performance wasn’t helped by de-emphasizing managed corporate travel and travel agencies, strategies most associated with Raja, but blaming underperformance on those aspects of the business is also wrong. Raja’s network strategy has focused on the Sun Belt, but that is the hand he was dealt with. Prior decisions at the airline to walk away from Los Angeles, Chicago, and New York hamstring him.
He’s still being paid through January and that constrains what he can say, but he does have an interesting perspective and he shared it with Brian Sumers, for the excellent subscription Airline Observer newsletter which is a must-read. I love this first quote about Raja as disruptor,
“I would say the exact same thing [as current United Airlines CEO Scott Kirby]: I was fired from American Airlines and I was better off for it,” Raja said. “A long time ago, he and I had this conversation about how when you bring a lot of innovation and new ideas to these big established companies like the airlines, typically your last day doesn’t end with cake in the break room and a happy hour after work.”
Raja’s War On Travel Agents
Vasu Raja isn’t wrong that much of the technology used in airline sales is antiquated, and that many of the seats airlines discount for managed travel programs could be sold directly to other customers at higher fares.
However airlines don’t sell all seats that way, and travel agencies do represent many customers even if those agents aren’t selling high margin ancillary products like assignments. Raja slashed sales staff and managed deals and imposed penalties on agencies that wouldn’t switch to not quite ready for primetime technology. He thought they’d make the switch, and American would generate more revenue at lower cost in any case. That didn’t quite happen but it’s only part of the story.
Raja defends the longer-run objective, and he’s likely correct, but he doesn’t appear to own the mistake of going too far too fast and with sticks and not folding in carrots (though he at least acknowledges the possibility that it did not go well):
“If there were tools for agencies to go and sell different services and products to you and to me that the airlines really valued, suddenly travel agencies would have to compete at a level that they arguably don’t have to do, when everyone’s effectively selling the exact same product,” he said. “When you endeavor to go and drive that kind of change, regardless of how well, or not, it has gone, it’s not going to be met with thunderous applause.”
How Much Does Onboard Product Matter?
Vasu Raja’s focus has been on moving to direct distribution of tickets and self-serve tools for customers, selling short haul flights in the Sun Belt, and monetizing the AAdvantage program.
He’s long described the network as being the product – they sell flights that get people from one place to another, and their product is creating connections. Now he says, sure, that doesn’t mean you shouldn’t also have a good product.
If I fly one time a day between Los Angeles and New York, and you fly 20 times a day between Los Angeles and New York, I can do anything I would like with a product, but I’m still disadvantaged relative to you. But that doesn’t mean that I shouldn’t have a really, really good product.
Raja also says that the product isn’t just the seat, it’s also “the selling experience (was it easy for a customer to book and change a ticket?) and the flight attendant service.” And he says “I very much believe in what I’ll call a really practical and elegant kind of product.” I hear those words as “basic.” Some might even say “mid.”
He did focus on the selling experience at American, but didn’t make positive progress during his tenure with the onboard product or service.
He Hates ‘Strategic’ Flying
A lot of airlines fly routes for reasons that aren’t obvious. Maybe they’re money-losers but they’re still sacrosanct.
Sumers gives examples of these reasons,
[A] corporate client wanted the route, or airline planners decided the network needed to include a major city, or executives feared that if they pulled the route, a competitor would jump in. More recently, airlines have added routes to boost credit card applications.
Criticizing ‘strategic’ flying is easy if you define it as money-losing and you do the accounting correctly. United Airlines pulled out of New York JFK, because they saw it losing money, but then learned that they lost Los Angeles corporate deals because nobody wanted to fly cross-country to Newark. If a route is necessary for a corporate deal, then the profitability of the whole deal needs to be considered and not just the one route in isolation.
Similarly, when Raja oversaw the dismantling of competitiveness in New York (before driving the JetBlue partnership, which would have solved for this had it been allowed to continue) he talked to me five years ago about the success of that strategy as having stopped the losses. But he was talking about the accounting wrong.
I told him at the time that ceding New York was ceding New York spending on co-brands and they needed to attribute this high margin revenue from their AAdvantage card deals to these routes. He started talking about that once the JetBlue partnership came into play and card signups in New York accelerated.
Was New York strategic flying in 2019 when Raja argued that the drawdown of flights improved their P&L? I suspect that they were simply ignoring the value of the card, when Raja was driving the network but didn’t have responsibility for the full P&L.
American Airlines Walked Away From Chicago, Los Angeles And New York
American has hubs in these three cities but they’re not the preferred carrier in any of them. They had an opportunity in the Bay Area with their Alaska Airlines partnership but haven’t capitalized on it. Their transatlantic gateway is Philadelphia, which has limited high yield local traffic. Charlotte is a poor man’s Atlanta.
The airline pulled its international flying from Chicago other than London, and became a clearer second to United. They eliminated their non-joint venture long haul flying from Los Angeles, planning a retreat to Seattle as Pacific gateway that never happened. New York is perhaps the greatest tragedy.
Apparently Raja “traces the New York shift back to December 2006 when Delta announced a new flight to Accra, advertising that it would be the only airline to fly to five continents from JFK.” That seems wrong – Delta’s ascendance in New York really began with the ill-advised slot swap US Airways did with Delta that was first proposed in 2009. US Airways leadership sold Delta is New York position.
Then, when US Airways management took over American, their strategy in 2014 shifted to no longer compete for the business of New Yorkers but to become the airline ‘that brought people to New York’ with scheduled optimized for flights into and back out of New York in the same day.
Raja acknowledges that New York is “a massive wealth center and wealth turns into travel.” He now realizes this and makes the Jeff Bezos point about one-way and two-way doors.
“What constitutes strategic flying?” Raja said. “Is strategic flying loss-making flying? Or is strategic flying something like: if I exit a market like San Francisco or Los Angeles or one of the big cities on the East Coast, what actually happens? That is risky, and then you’re making a one-way decision if you go and exit a market.”
How Much Do American Airlines Decisions During Raja’s Tenure Reflect His True Self?
As American Airlines removed premium seats from its Boeing 787-8s six years ago, Raja groused publicly to employees that he didn’t have enough premium seats to sell and that this was hurting them in Chicago.
At the same time, you adopt your employer’s incentives if you want to succeed. When United Airlines became first to ‘permanently’ eliminated change and standby fees from fares other than basic economy, Kirby said he wanted to do this since 1998. But he spent years as an airline President and not CEO.
He now says that eliminating change fees has neutralized a major Southwest Airlines advantage (and United competes heavily with Southwest in Houston, Chicago, Denver and California). Where he was once the airline industry executive status quo, he says that status quo was wrong and led a shift away from it.
Kirby came up from America West, becoming Executive Vice President. That airline took over US Airways and he became its President. Then that carrier took over American Airlines where he served as President, before becoming United’s CEO. He acknowledged the contract in viewing service with history “at America West.” However he’s been “convinced by Delta that product and service mattered.” He’s seen them differentiate themselves to earn a revenue premium, and no longer just offer a commodity product.
While United’s economy seats remain paper-thin, he’s adding seat back entertainment screens and has even disavowed the decision at American to rip those out (he claims to have had nothing to do with it as President there).
What does that mean about Raja? He’s clearly focused on the schedule as the product but it’s difficult to disentangle how much of that was simply what he had to work with and the incentives he faced? He came up over 20 years at American in fleet, network planning, and pricing not product so it’s also not surprising that his areas of deep expertise would be what he saw as most important.
I wouldn’t be surprised to see Raja in very senior airline roles in the future, and the opportunity here is to grow. He’s come across mostly as arrogant. He’s been the smartest guy in most rooms, and that can lead to a sense of infallibility. It’s useful when articulating a broad, sweeping vision about the world but less useful when needing to revise and improve that vision. His success going forward will come from understanding the role of product and service on top of just route network for anything other than an ultra-low cost carrier (and even there!).
For American Airlines, in particular, they need to earn a revenue premium over peers because they are a high cost airline and that’s not likely to change (even if they were to go through another bankruptcy). That requires more than just offering flights and even delivering on-time flights. Those are table stakes. Customers need to actually prefer you over competitors and be willing to spend more to get that.