Will American Airlines Use Premium Economy To Devalue AAdvantage Again?

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Since we found out American Airlines’ plans for its Premium Economy product there has been a lot of talk about what changes this is going to bring about. We’ve had discussions on how the airline will implement the new cabin, what effect Premium Economy will have on upgrades, what routes American will introduce Premium Economy on and how much American Airlines will charge for Premium Economy.

What I haven’t seen discussed is how American Airlines is going to fit Premium Economy redemptions into its award chart and it’s this aspect of what’s coming soon that has me concerned.

As I guessed back in September, American Airlines will be selling Premium Economy as a separate cabin for flights commencing 2 April 2017 so, as that’s less than 5 months away, we should be getting some indication of pricing soon.

More importantly we should soon know how many miles American Airlines intends to charge for Premium Economy Awards.

Why I’m Concerned

It was only back in March that American Airlines devalued the AAdvantage program by increasing the mileage requirements for almost all routes you can book with AAdvantage Miles and, while I thought that would be it for AAdvantage mileage devaluations for a while, I’m no longer so sure.

Before the March devaluations AAdvantage had, without question, the most generous award charts and, as long as you could find award space, the pickings could be rich. That went a long way to explaining why American Airlines felt able to devalue the charts to the degree that it did.

The idea that American repriced its award charts to bring them directly in line with its immediate competition is reinforced when you compare the current cost of American and United Saver Business Class awards:american-united-business-class

Note: I’ve used the American Airlines terminology when naming the regions but the destinations map pretty well.

As you can see from the table above, there really isn’t too much difference between how many AAdvantage Miles you need and how many United Miles you need for the various Business Class awards (the South Pacific is a bit of an outlier).

The general opinion has been that American Airlines is more than happy to offer more or less what United is offering but it doesn’t want to go too far and offer something worse. That could give United a competitive advantage.

But I’m no longer sure that’s how American’s leadership is thinking.

The recent announcement from American Airlines explaining who can get waivers for the minimum spend criteria and how much of the minimum spend criteria can be waived proves that the airline isn’t scared of offering something worse than its immediate competitors. In this particular case…a lot worse.

So if that’s really how the airline is thinking what’s to stop a further devaluation in the award chart? And wouldn’t the introduction of Premium Economy be a perfect time to do just that?

Why The Introduction Of Premium Economy Could Be Used To Devalue The Award Chart

American Airlines has to come up with a mileage cost for its international Premium Economy cabin and, obviously, that cost has to fall somewhere between the cost of an Economy Class award and a Business Class award.

Here’s how many miles are needed for Economy & Business Class awards from the contiguous 48 states to various regions around the world:

screen-shot-2016-11-14-at-17-43-25

In some cases, like routes to the South Pacific, there’s clearly a lot of room to fit in the cost of Premium Economy awards – 60,000 miles would probably be about right – but that’s not the case for all the routes.

Premium Economy to South America Region 1 would presumably have to be priced at 25,000 miles if the chart remains unaltered…..but is 5,000 miles a big enough premium to charge on top of Economy Class? And is 5,000 miles a big enough premium to charge for Business Class over Premium Economy?

I’m not sure it is.

You could argue that for trips to/from South America Region 2 and to/from Europe the airline could fit in a Premium Economy award at around 45,000 miles but, while that would appear an appropriate premium over Economy Class, who’s going to balk at paying 12,500 more for Business Class if it gives them a lie-flat bed in an all-aisle-access cabin?

Note: I appreciate that American doesn’t plan on adding Premium Economy to all its routes immediately (and I suspect South America Region 1 will be one of the last international routes to get Premium Economy service) but I don’t think that will stop the airline from announcing the cost of awards on all routes.

How Does British Airways Do Things?

American Airlines is going to be the first US airline to introduce a Premium Economy cabin (Delta will introduce PE in late 2017) so there aren’t any easy direct comparisons to be made. With that in mind I’m going to take a look at how American’s transatlantic partner prices its Premium Economy cabin.

Yes, I realise that British Airways uses a completely different system to work out how much its award flights cost but the principle I’m going to discuss could still apply.

Here are the costs of some British Airways awards:

screen-shot-2016-11-14-at-17-25-49

In this case I’m not interested in the actual number of miles needed for each award, instead I’m interested in the ratio between each award type.

Off Peak awards:

  • Premium Economy awards cost 2x the price of an Economy Class award
  • Business Class awards costs almost 2x the price of a Premium Economy award

Peak Awards:

  • Premium Economy awards cost 2x the price of an Economy Class award
  • Business Class awards cost 1.5x the price of a Premium Economy award.

Applying This To American Airlines

If I take a very charitable view and say that 1.5x is a reasonable multiple to use between the cost of awards and if I assume that American isn’t going to change the cost of an Economy Class award, this is how the American Airlines award chart would look:

screen-shot-2016-11-14-at-17-47-13

Knowing what we do about the New American Airlines and knowing how management loves a good devaluation, is this (or something similar) really too far fetched?

Bottom Line

Clearly this is all just speculation on my part and I may be completely off-base here….but when I look at the current award chart I’m not sure I can see where Premium Economy is going to fit in with any ease. At least not on all the routes.

If American doesn’t alter the cost of Economy or Business Class awards then, depending on how Premium Economy is squeezed in, there could be some very good value redemptions to be had (Premium Economy if the premium over Economy Class is low or Business Class if the premium over PE is low…it will be one or the other).

But I have a bad feeling that we haven’t seen the end of American’s changes to the cost of awards.

I fully admit that my ratio of 1.5 may be too harsh but, having looked at the numbers, I still can’t see how American will incorporate Premium Economy into its award charts without making one of its existing awards (or the new Premium Economy award) a “no brainer”.

The recent ease with which the airline announced changes that makes it uncompetitive with its fellow legacy US airlines shows that American isn’t scared of being an outlier, and a management team that thinks like that is more than capable of yet another award chart devaluation. Let’s hope I’m wrong.

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