Editor’s Note: This week I thought it would be a good idea to publish a recent interview I had with Vasu Raja, American Airlines’ Chief Revenue Officer.
There are a couple of reasons for this. One, thank you to all the subscribers who have posted the COPYRIGHTED interview on the usual online pilot haunts. Much appreciated. Not.
But yeah, if someone is going to post it for all to read on the interwebs, I want to make sure it’s at least posted in its original state.
More importantly, this is now the most heavily commented-on piece we’ve published in PlaneBusiness Banter this year.
Third, this interview, as is most news in the industry these days, has already aged. So before we move further into July I figured it was a good idea to get it out there. You’ll already note that a number of items related to comments he made in the interview have occurred (including United’s announcement to increase capacity and American’s recent announcement regarding schedule cuts out of LAX.)
A disclaimer. We like people who are excited about what they are doing and who are respected for their passion. Not to mention their smarts. Judging from the number of emails we received after this interview was published, I’m not the only one.
For reference purposes regarding dates mentioned in the interview, Vasu was interviewed on June 12th. The interview appeared in PBB on June 25. Also, I got tired of coming up with creative ways to hide the F-word. Just suffice to say, “friggin'” never came out of Vasu’s mouth. Those of you who know Vasu know that colorful expression is a part of his DNA.
American Airlines’ New Revenue Czar Vasu Raja: “We Aren’t Going To Be ‘AMR’ed”
My only regret about getting to talk recently to American’s newly-minted Revenue Chief Vasu Raja is that we did not sit down and do a full-blown Lounge Lizard interview. It’s been a long time since I’ve done an official one. Heck, if I can drag out PlanePerspectives, maybe it’s time to drag out the Lounge Lizard as well.
In the meantime, we’re talking to Vasu this week about American’s decision to go “against the grain” regarding capacity cuts in reaction to the historic decline in demand as a result of COVID-19.
While both Delta and United announced aggressive cutbacks in capacity this spring, American ended up going in the opposite direction. The airline was also, for whatever reason, slow to explain the reasoning behind their actions. Re: the mic drop moment on the airline’s 1Q20 earnings call when Vasu strenuously assured analysts that American had no intention of cutting any hubs. It was a message that ran directly opposite to the ones being sent by the airline’s competitors, including United’s then-President Scott Kirby, who took the opposite tack: nothing was sacred – everything the airline did was up for review.
As you’ll hear, American was just as willing, apparently, to put their own sacred cows out to pasture. We just didn’t know it.
Not surprisingly, instead of bestowing accolades for taking the lead with a contrarian approach, many industry analysts and observers were off-put by American’s position. With no details provided, it seemed the airline was “not taking the situation” seriously enough. United had set the stage in March. They had also set the narrative. Even employees seemed confused. Is it that bad – or not?
So what were these guys in Dallas thinking? Why was CEO Doug Parker smiling and why did he seem like he knew something we didn’t on that CNBC interview?
Last month we talked here about our conversation, back-channel, with someone at American, who was kind enough to explain the basics of their plan. As he explained it to us – and we then explained it to you – it then made more sense.
This week, we talk to the man behind that plan. About a lot of things. No more unanswered questions. No more BS. Here we go.
PBB: COVID-19. Why is this situation so much more difficult to manage than other “disasters” affecting the industry?
Vasu: The politicization of COVID is a completely detestable thing. Right now it’s so hard to bend your mind around the risks of it and what’s there. So much conflicting information. For example, while numbers are going up around the country, in the last three weeks we’ve only had one incremental case [of COVID-19] amongst our flight attendants. What makes it harder than any crisis… I’ll argue, at least in terms of modern human history, is the total lack of faith in authority figures.
But then again, authority figures haven’t done anything to help themselves out. Or us either.
PBB: Does that lack of respect in authority figures then impact you, as members of airline management, as being seen as trustworthy?
Vasu: Yeah. But there’s another problem. The fundamental problem for the airlines right now, and this is where I kind of lose it, is the narrative we have today. I mean, it is a common human intellectual failing … it’s understandable, but it’s a failing in that whenever faced with a new crisis, you want to immediately pattern-recognize it to all the prior crisis situations that have taken place.
So, we look at this situation and the natural reaction is to say okay, things are really bad, demand is really uncertain, we need to hoard cash, take out as much expense as possible, shut down hubs, etc.
But I’ll tell you the same thing I’ve told our board. That is – this way of thinking is the friggin’ case study of AMR.
There is no question in my mind – the airline from 2001 to 2010 that was the absolute best at taking out non-contractual expenses was AMR.
We de-peaked hubs, we shut down spares, it was a cost take-out machine. Holly, you would get written up if you left the friggin’ lights on in a conference room. I mean, it was crazy.
PBB: I remember those days very well. Cut costs, cut costs. There was never an emphasis on revenue generation. That was one of my pet peeves with the Arpey years.
Vasu: American neutered its ability to actually generate demand.
As a result, whenever there was a recovery, American could never participate in it. It structurally surrendered an advantaged position to its competitors. Because it was just so hell-bent on cost take-out.
PBB: Then there was all the debt. All the ill-will from the near-bankrupty in 2003. Concessions.
Vasu: Right. It had so much debt and all this other stuff. And what it did was – all of this eroded everybody’s will. It eroded the will of the frontline team, of management, of investors, everybody.
I’ve always thought that if we could go back in time at AMR, the point I would go back to would be 2003. Whenever the airline got out of restructuring but after the time Carty left.
If I could tell [CEO] Gerard [Arpey] anything – I’d tell him, “Grow the friggin’ airline.”
Because, at that point in time, AMR had an advantage over all of these other guys – because they were all going to hurt their employees as they took them through bankruptcies and things like that.
But the only way to do that was to NOT shrink. Grow at DFW. Don’t shut down St. Louis.
PBB: St. Louis. That was so poorly handled.
Vasu: Let me tell you something – St. Louis should have been and could have been the Charlotte of the Midwest for AMR. Hyper-peak St. Louis. When St. Louis was hot, that shit was bigger than Chicago today for American Airlines. Think about that, right?
We should have gone the other way. When everyone else is shutting it all down, go.
Because when you do this, your team is with you. And in the airline game, getting 80,000 or however many employees you have pulling in the same direction is difficult. In this modern era, it’s almost impossible. So if you can do this, it is a huge force. The kind that no one could reckon with, right?
I guarantee, if you were to go to any crew break room, APA [Allied Pilots Association], whatever, in the system today and you said, “Okay guys, you have a choice. Either we’re going to go friggin’ big, we’re going to go bold, and Wall Street might hate us for it, and people might not get it, but we’re going to go out swinging. It’s either going to be home run or strike out.”
Or …”We can sit here and watch every pitch sail by the plate. And you know, maybe they’ll walk us and we’ll get on first base, but maybe we’ll just go down looking.”
I guarantee. It will be a 100-0 vote – swing for the fences.
I do think, as a business, investors discount that advantage at Southwest Airlines and what it has meant for them for what… 40 plus years?
And maybe it’s different now than it was in the Herb days, I don’t know that situation over there well enough to say, but when you have an airline with thousands of people making thousands of small decisions, all of whom are “bought in”, they make you better.
They can literally shave one minute off the turn time of an airplane.
If they can structurally do that, that can save you a whole friggin’ 737.
Now is the time you zig when the others zag.
PBB: Historically, hasn’t that been what the smaller airlines have done?
Vasu: Yes. Look at all the little airlines that did this… Now this is probably going to be offensive to those from the old AMR … but if you look at all the airlines that have done just this, they all happen to be the little ones – America West, Continental, Northwest – they were the ones that drove today’s modern industry.
They were the ones that drove consolidation. Those management teams, in one form or another.
They did it.
PBB: They were more nimble. Not as afraid to take chances.
Vasu: Right. They de-peaked hubs. On the day of departure, they’d swap a 737-500 for a 737-900 based on what demand was. They were able to source ideas from employees. There wasn’t this massive power dynamic where in order to see the CEO you had to pass by a black marble door guarded by a friggin’ war eagle.
PBB: [Laughter, remembering the old days of the black marble enclave on the sixth floor of Centreport.]
Vasu: Right? It was different.
Vasu: So, here’s the deal. All of this that we are going through today. It sucks. But this is how I describe it to my team: this is like win or crash. And we sure are not going to figure all of this out by cutting at a greater rate than the other airlines.
Let’s face it. We have $40 billion in debt. Let’s not friggin’ fool ourselves here. But if we keep cutting the airline down – what is that going to do? I’ll tell you what it will do. It will consign the airline to bankruptcy. I know how that movie ends.
The thing we have going for us now – and I realize people don’t appreciate this – but take away New York, and L.A., and the rest of our hubs produce a 112% revenue premium to the industry. 112% revenue premium.
And that number has grown over the last 2-3 years, primarily because of our growth at DFW.
PBB: But there are costs…
Vasu: Right. The problem is, at the same time, we’ve grown our CASM. Our CASM is at a premium to the industry too.
Look. This ain’t a race.
This is a friggin’ weight loss contest.
If we can go in and really shave down our costs, and I’m talking about smart stuff… I’m talking about being more efficient with pilot reserves, that type stuff. We can do this. I mean, let’s face it. You’ve talked about this.We have a lot of bloat in our company.
But, at the same time, the core of our business is something that is competitively advantaged.
PBB: So what are you going to do about Los Angeles and New York?
Vasu: Yeah, we have to figure out New York and L.A. L.A. does becomes a whole lot easier with Alaska though.
Now, however, when you talk New York, let’s talk international.. Do you realize the first time we have ever made money on international was in 2019? The first time.
The amount of expense that we hang around our international product – the complexity in our business – is massive. And so we have to do a huge reimagining of our international business. But again, I’m not talking about massive cuts. We don’t have to fall into the old tropes of how the airlines friggin’ ran, because, again, as I said, I’ve seen that friggin’ movie. I mean, you shut hubs, and you gut all your contracts, and you know what, if demand doesn’t recover, you’re still in a shitty place. But now, you’ve just sapped people’s will.
PBB: So why wasn’t any of this enthusiasm, and an explanation of what direction the airline is taking on the revenue side, included on the airline’s 1Q20 earnings call? The airline did not explain its strategy.
Vasu: You know what – it probably should have been. I think probably going forward it should be.
I mean, you tell us. I mean, I’ll be honest with you, Holly. I don’t know either. And if you have a view on it, I’d love to hear it, because we’re all kind of thinking about this now.
But I’ll add something here about changes going on at American now. This will sound like the most masochistic thing in the world, but you know, in some ways, this thing has been the best thing to happen to the management team at American Airlines.
I wish I could show you [CEO] Doug Parker right now. His mood. This is a reset. This is our chance to do a reset. Isom is the same way. “Shit, I spent 17 years of my career in businesses like this one,” he tells people. [Alluding to stressful situations.]
Everybody understands how precious this opportunity is and we’re not going to f#&% it up.
But hey, trying to explain all of this is hard. Let’s face it. We’ve burned a lot of credibility. Then you have those who are dying to hear us get on the calls and fall into the old tropes of airline management.
PBB: I disagree. I think the problem here is that Scott Kirby established the dire narrative in March. So, if American is going to veer off and do something else, and you don’t seem to be as “negative” as your peers, but you guys are looking at this massive amount of debt on top of everything else – it only makes sense that Wall Street would be a bit confused. So are employees. I would argue that they wanted to hear what your plan going forward is. “What exactly is it?” That is essentially what analyst Hunter Keay was asking when he asked, “How are you going to pay off this debt?”
If you are this committed to this plan – and I know you guys are – it is crucial that on the next call, you explain it. Just as you are doing here.
Vasu: You’re right. This has been an ongoing debate. But frankly, this issue is going away. Things are beginning to change as we continue to make management changes.
It’s time. We have to tell our story differently. We’ve got to find the right vocabulary to do it. We just gotta go do it.
PBB: So why did you guys decide to zig, when everyone else decided to zag?
Vasu: Well, you know, we were looking at all of this like everybody else and Scott [Kirby] was talking about having to shrink and everybody was expecting us to take out a lot of capacity as well. At the time, early on, that thinking made sense.
But then, we start looking around and hey, credit to Zed [Brian Znotins, VP Network and Schedule Planning]. I mean, he came and said, look, “Our break-even load factor at $35 fuel is like 25%. But then when fuel went into the tank – that number dropped to 9%.
So then we began to look at what other people were doing with their schedules. So we looked at Delta and United – and both airlines completely shit-canned their hubs. They literally broke all of their connectivity.
And it was at this point that we were also just about to go cut a ton of capacity.
But instead, what we did was, we actually went in and completely rebuilt our hub structures.
Go pull up any set of O&D markets. Take a look.
And guess what happened. In May, load factors got bigger.
For June, we’re looking at a system load factor of 55%, but in our [core] domestic system, our load factor is runnning at 70%.
PBB: But are you now “too” successful? What about the issue of flights being “too full.” Are you seeing a lot of passengers opting out of the fuller flights because of COVID concerns?
Vasu: No. We keep giving people the option to switch off of a flight if it is full, but it’s like a 6% take-rate.
Like, nobody wants to do it.
Because the two types of people traveling today are the most inelastic customers imaginable. They are either traveling because they are a medical professional, or someone traveling for what we call a “life event.” You know, a wedding, or a funeral. Something like that.
Or else, it’s somebody who’s hellbent to get to Florida.
Not surprisingly, I will add, if you’re trying to get to Florida, you want to get to Paradise by lunchtime. Not by 6 in the afternoon.
So we’re seeing very low take-rates for that option.
PBB: What happens if the rate of COVID-19 infection continues to go up, as it seems to be doing. What does this do to your plan?
Vasu: You know, after a year of dealing with the MAX, this has now led us to a world where we have at least a half dozen processes to help us cut down the schedule after it’s been closed for crew [scheduling.]
So, with our break-even load factor where it is, and with our hubs built to go out and source all this demand, wherever it might be, and however small it might be, it’s easy to fly over a 25% load. And if that’s not the case, our ability to cut is ample.
So if we need to scale it down, we can scale it down. The only things we have to think about when we cut are things like… slots in New York. But so far the FAA has not had an issue with that.
Global slot regulators have been a bit more difficult though.
But our ability to scale down is actually easy.
The hard thing with a “second wave” is – then flying once again becomes a consumer confidence problem. If there is a hot spot in Austin for example, then we’re going to have to figure out what to do. But again, one of the great side effects of this exercise has been to literally force the airline to become more flexible. So if that happens for a prolonged period of time, I think we can figure out how to manage our way through.
All I know is that right now, about 40% of all passengers boarded by TSA are ours.
And hey, for those people who say, it’s not going to last forever, no, it’s not, but hey, f&^% it.
This situation right now, today, is a knife fight. This is today. And we can do this. August is going to be something different. But if we can do this, we can do that too.
But the one thing we are not doing is we are not trying to figure out what Wall Street would like us to do, and what Delta would like us to do, or whomever, and then conforming to that.
But again, you make an excellent point about how we communicate all this. I couldn’t agree more. We need to find our voice for how we explain all this shit.
And we haven’t.
I haven’t yet.
But we need to think about that.
PBB: Yeah. When Doug gets on CNBC and looks like he’s happy, but no one can figure out why, that creates a disconnect in confidence. Or, when there are no details given on the call as to just exactly how the airline expects to increase revenues, when, frankly, that has not been the case for years.
Vasu: The thing is – he is happy. He totally gets what we are doing. Like I cannot tell you the full-body committment around “We’re not going to furlough.” I mean, even I… I mean, even up to a couple of weeks ago, I thought when it came right down to it, we’d be forced to…
But don’t get me wrong. If we can’t come to some kind of creative deal with the flight attendants or enough voluntaries, the pilots, whatever, maybe we will have to.
But man, I’ve never seen the senior team stress people out like they are now over finding a creative way not to do a friggin’ furlough.
I don’t’t care what it is. Redo the hub structure. Recut the Boeing deal. Whatever … I don’t care if every day in Chicago has to have a different schedule. What does it take to do this?
So yeah. He’s excited. We are excited. We get to reset this thing.
But, I hear you on the perception stuff. Right now, it’s friggin’ hard. I mean, Holly, I can sit here and say we’re excited, but holy shit what is going on out there in the world – there is war on the streets. People are dying when they go to the hospital, and our crews don’t always feel safe going to work.
So it’s a weird juxtaposition.
So somehow we need to project that we’re confident taking risks even though the odds of success may be small versus we’re happy that the world is improving – when clearly the friggin’ world ain’t improving.
PBB: Then there is that pesky problem of the debt level American currently has, and how that debt total is going to grow even larger.
Vasu: So yeah, a big part of it is liquidity. But it is also, underneath everything, a structural issue.
And this is where, again, I think the old tropes don’t friggin’ work.
We like to think the bankruptcies and the consolidations made it better. But the core of the issue right now in this industry is this: the cost structure of an airline isn’t variable. We have a 25% load factor, but that is because 80% of our costs are fixed. It’s not like we lease the airplane every time we fly it. You just own the friggin’ airplane.
A pilot is paid for 75 hours a month. Whether they fly 75 or 110 hours is a different problem.
So the real thing we have to figure out and everyone is trying to do it, not just us – is how do you build structural flexibility into the airline?
Obviously there are some ways that are easier. You can just fire people who are bureaucrats and need to go anyway.
There are ways with Boeing and Airbus in which you can re-structure the fleet plan. And for the first time ever we have some leverage with these guys. We never had that in the dark days of AMR.
But the hardest is with labor. Everybody knows this. How do you get those guys to do this? How do you go about doing this? Organized labor in the airline business has gone through some hard shit.
My biggest fear on this part – I really fear that labor unions have been so conditioned – that when faced with the furlough of x thousand of their members versus having to go do something politically creative and different – that the leadership of the unions may default to furlough.
Why? Because it’s familiar. So many people have gone through it. It’s the nature of the seniority list, etc. Members understand the process. That for me is my biggest concern.
But failing that, we’ve got to figure out, if there is no contractual relief, how do we create variability in the cost structure? Enough so we can weather whatever happens going forward.
That part – we haven’t figured that out yet, Holly. But we’re all thinking about how to do it.
PBB: What is everything going to look like at the end of September?
Vasu: It remains to be seen.
First, let’s talk about Southwest. Whatever Southwest says about how they are going to be at 100% capacity by December… I imagine every one of us is looking at that and …
Hey, you know, this is not 2008. This isn’t a fuel advantage. And nobody is scared of these guys anymore. We certainly aren’t. Look, we can use basic economy to undercut them. They don’t even have the technology to match that shit. So…
We went through all this bankrtupcy and consolidation in order to be able to compete with Southwest. To be able to function in a world of high fuel and low fares.
So for that, we are totally wired for.
But, as we look out there, even under the most U or L shaped recoveries, having big hubs matters. If you had 1000 people in Lexington who wanted to go somewhere before, now maybe there are 300. Of those, maybe 100 want to go to Orlando. But the others want to go visit Grandma in El Paso.
So, the big hubs count. Right now, in this situation, they matter.
For us, we just happen to be a big airline in the core domestic hubs. We are a materially smaller airline in international. Like think… 30% smaller.
Ideally, at the end of September, we have not furloughed anybody.
In a perfect world, we would have, by that time, the same ability to flex down the airline as we do to flex up.
As an industry, we’re probably going to see capacity down 25%, I think demand will be at 50% year over year.
End of September, your big companies in coastal cities still won’t be traveling. The Googles.. those people. They will not be traveling.
Maybe some of the Seattle companies where they are making a lot of money. Maybe.
Small midsize businesses may start back up a bit, becaue they won’t be able to afford not to.
Leisure will be good on short-haul, but it doesn’t work anywhere else.
Meanwhile, we’re going to have a massive number of international airlines failing left and right.
PBB: How do you see your other competitors faring?
Vasu: United has a difficult road. I mean, they are literally built to be big in what is now the wrong places. I mean, they are big in San Francisco, New York, Chicago.
They made their big money internationally. Zed talks to me about what their international margins were like, and holy shit, I didn’t even know you could make that much money flying international. And so, I think Scott is credibly right in terms of how serious this is for them. Yes, the industry situation is dire. But, as you have written previously, United is also positioned in a particularly difficult way because of its network structure.
The most interesting thing to me though is Delta. You know, I’ve said it in the past, and I’ll say it again. I feel it already. These guys, if they don’t watch it, could be the new AMR. I mean, I watch it every Saturday when the schedules transmit. They have a Devil’s Bargain going on. If they shrink in Seattle, Alaska grows, if they shrink in Boston, JetBlue grows. Which means… I suspect it’s not an easy time at Delta these days. When you are that successful, dealing with hard times is not easy. I know. I’ve been there. I understand. I mean, it is just like it was at AMR.
When things are going so well, and then, all of a sudden, the things that worked so well for you don’t anymore… it’s hard.
Delta was yesterday’s genius. Tomorrow is up for grabs.
The airline that figures out a way to not furlough people, particularly pilots, the airline that is able to reduce contractual minimums to get the value from scope flexibility before the end of September, they are going to come out of this on top.
Vasu Raja is Chief Revenue Officer, where he oversees American’s global network as well as has oversight of the airline’s alliances and partnerships, revenue management and American’s loyalty program, AAdvantage.
Previously he served as Senior Vice President of Network Strategy, where he was responsible for Network and Alliances. Vasu joined American in 2004 and has held a variety of roles in Sales, Corporate Planning and Revenue Management.
He began his career with Teach for America in 1999, and taught for three years in Baltimore City Public Schools. In 2013, he was named one of the Top 50 Executives under 50 by Diversity MBA Magazine.
Vasu earned a bachelor’s degree in humanities from The University of Texas at Austin, a master’s degree in teaching from Johns Hopkins University, and a Master of Business Administration from Georgetown University.