I’ve got a special guest post for you today from Jason Steele from AskMrCreditCard.com fame on the future of airline loyalty. Hit the comments below and let me know what you think.
As a frequent traveler, and the reward cards blogger over at AskMrCreditCard.com, I am excited to contribute to the Cranky Flier. I would like to share with you my perspective on the future of airline loyalty programs. These programs, once known as “frequent flier” programs, have morphed into “loyalty programs” over the last few years and are quickly headed towards becoming flat out barter systems.
Airline loyalty programs stopped being “frequent flier” programs years ago. Recently, I had my parents use their American Express Membership Rewards points, to get points on Al Nippon Airways, for an an award flight on their Star Alliance partner South African Airways. Note that they only joined ANA’s program for this award, and they have no plans to ever fly with them. So much for the idea of a “frequent flier” reward or even a loyalty program.
These days, the best way to earn miles is by doing anything but flying. Get a credit card, rent a car, get a hotel room, or go shopping, but whatever you do, don’t buy an airline ticket! That is the message the airlines are sending when they drop the 500 minimum mileage accrual. Yes, United Airlines will sell you a round trip flight tomorrow from Dulles to Richmond for $907.00. For that, they will reward you with 198 Mileage Plus Miles, worth almost a dollar! Buying flowers or a magazine subscription $20 will easily earn you more miles. Savvy travelers like Cranky and myself have already learned to disregard frequent flier miles when choosing an airline for a given trip.
I have often wondered why they use a mile to begin with. Why not a kilometers, or the aviation standard, nautical miles? Southwest wisely doles out “Rapid Rewards” points that are the equivalent of about 1500 miles in other airline programs.
Many airlines are selling off their loyalty programs, like Air Canada, or are positioning themselves to do so, like United. When this happens, the programs go from offering service based awards representing travel between various continents or zones, to awards that are simply based on current value of an airline ticket. I recently discussed service versus value based awards in greater detail here.
What is the natural extension of this trend? I can foresee the day where these point systems are detached from flight, and points merely represent a fixed value. With value based options, like Delta’s pay with miles program, you know exactly how much a point is worth. From the airline’s standpoint, this is a great way to account for all of their outstanding points and feel like they have alleviated consumer’s frustration with award unavailibility. This turns loyalty systems into simple barter arrangements and, like the example involving my parents, offers consumers no real incentive to actually purchase a ticket.
From my perspective as a customer, I have no interest in value based loyalty programs. In my experience, the value returned is rarely more than 1-2 cents per mile or point. While I realize that service based awards are often unregulated lotteries, myself and many others are able to maximize our rewards to return a value in the 4-6 cent range or more. For example, a First Class award seat on Singapore can be redeemed for a mere 140,000 Delta SkyMiles, yet can cost over $14,000 to purchase, making this award worth a phenomenal 10 cents per mile. Redeeming a international Business Class ticket or a premium hotel are both high value utilization, as well as luxuries I enjoy, yet would not have paid cash for.
If I were advising an airline, I would point them in a different direction. Airlines should realize that they are in the business of getting people to their destination, and should focus on rewarding their best customers. Reward customers with more miles for actually flying. Those who buy tickets with higher profit margins, such as full fare ticket tickets, should earn more miles, just as first class tickets do. They also need to make it easier and more transparent to redeem award flights. Myself and others have given up on airlines when our hard earned miles seemed only redeemable for travel to Buffalo in the winter. When the reward comes due, they should abolish the unregulated lottery of award redemptions and provide real value to their best customers. In a perfect world, airline programs would resemble the Starwood Preferred Guest program where awards could be redeemed, at a fixed rate, for any available room.
Until then, frequent travelers, consumer gurus, and airline dorks will play the free travel game, and I am not sure if the airlines are winning.
Jason Steele blogs about reward cards for AskMrCreditCard.com. He a commercially rated pilot, FAA Certified Flight Instructor, and a frequent traveler. He also blogs as the Denver Local Expert for PlanetEye, as well as hosting his personal blog, Steele Street about politics, consumer issues, travel, and aviation.
23 comments on “The Future of Airline Loyalty Programs”
Nicely put, Jason. Some very valid arguments here that sort of avoid some of the more diametrically opposed positions previously taken. I wonder what margin the airlines actually make from their non-flying activities e.g. credit cards? Whilst I have a United credit card, it contributes approximately 0.5% of my earned mileage each year, the rest coming from flight miles. Some of the most vociferous comments regarding rearrangement of these loyalty schemes have argued for reward of only those who pay exorbitant last minute or unrestricted fares for their tickets. However, I fail to see why a customer who flies a couple of trips a year, but just so happens to have booked at the last minute and therefore has paid through the nose for their ticket should be rewarded in preference to one who makes more trips on the same airline, yet manages to book before the typical 7-day cut-off period. I accept the first category of flier is yielding more financially for the airline on those trips, yet it’s hardly a reflection of loyalty. Curb the earning through non-flying activities by all means, but if you happen to pay reduced fares but fly more regularly, you are probably still going to be only cashing in your miles every four or five years for a transcontinental trip in C or Y, if you’re earning at the lowest elite status – hardly a crippling loss to the airline.
I wait to be shot down in flames for holding these heretic opinions!
Do you agree that a lot of the loyalty schemes are now not actually focused on rewarding frequent (loyal?) passengers, but are rather a way for the airlines to make significant profits selling miles to intermediaries?
I’m sure this has cropped up repeatedly in your work with credit cards.
Airlines are businesses with the objective of maximising long-term profits. A company should make greater effort to retain the customers who are likely to prove most profitable in the future – those flights in the past have no direct way of impacting future profits.
Measuring future value for any given customer is difficult – but spending patterns over the recent past are a reasonable starting point. You might be flying every week – but if it’s at deep discount coach fares, you’re not profitable – and there’s no reason to make great efforts to encourage customers like you. Fly once a month in business, and you’re a lot more profitable – and probably profitable in the future hence worth giving some of reward.
I fail to see why ful service carriers continue to give more than the most meagre reward points to those flying on the cheapest of tickets.
David,
To your last point, I think they just haven’t invested in the systems necessary to be able to differentiate between passengers and frankly, they don’t care.
They can give out all the miles they like; awarded miles are technically a liability on their balance sheet, but if you control how people redeem them, then in real terms it isn’t costing you very much (if anything) to give them out. The incremental cost of an extra passenger on an otherwise empty seat being so minor.
You can argue that a passenger ‘pays’ for his miles via his ticket, but while true in the accounting world, I don’t buy it – no-one sits there and says I’m charging $X for JFK-LAX, of which y% is paying for the miles.
So, the airlines don’t see a ‘cost’ associated with doling out miles to people who fly, regardless of how much they pay and don’t have the mentality to want to differentiate, which is why there needs to be a big change, or even more people will come to the conclusion that the miles are not worth the aggravation and won’t be a determining factor in their choice of airline for any given trip.
Interesting take Jason. I think the myriad of ways to earn points has somewhat devalued the “frequent flyer” programs. I know several people that are NW elite thanks to credit card purchases but are far from frequent flyers. I believe they get 1 point per dollar spent and it takes 25k points/miles to get to the lowest tier of elite status. So, on $25k CC purchases if NW gets just 1% (which I doubt) that’s just $250. Depending on where you’re traveling that’s worth a free one way fare and possibly a seat up front. Hardly seems like a gain for the airline.
The pay with miles programs (have used NW perk choice) is an interesting development which I do support in the current market of earning points for everything but flying. Since points are so detached from actual flying I think the “free tickets” need to disappear given my example above. And, using some miles to get a half-priced trip is better than cashing in for free magazine subscriptions or other useless junk.
What I am is an advocate of rewarding the most profitable customers. Seems simple to switch the points from miles to dollars spent. True frequent fliers would still have their status, while the full fare ticket buyers would get their taste too. If you’re giving points away from everything from Hotel stays to buying flowers, that too has to be based on what the profit to the airline is. Unfortunately I think it’s all too easy to “play” the system at the expense of the airlines. Not sure what the total cost is, but I’m sure the flying public is seeing the effect, i.e. more fees, less service, etc.
The airlines have no incentive to curb non-flying earning opportunities. Instead of being a frequent flier program, or even a loyalty program (a mild influence on buying decisions,) it is a cash cow. Half of the miles “earned” these days are sold, not flown. United just redid their airline credit card agreement with Chase and received $600 million upfront, nice change in these days of limited credit liquidity. Even Frontier pulled in $44 million in 2007 for their credit card fees. Airlines have increasingly view their programs as a revenue source. Overall credit cards alone were a source of $4 billion in revenue for the airlines last year. This is much more reliable than varying passenger demand and yields. That figure excludes the miles that hotels, car rentals, and other companies also pay to give miles out with their products, it is the modern equivalent of green stamps. Overall I have more than 2 million miles in the bank, earned with Amex or the Starwood Amex. I am the opposite of Bobber, in the last five years I have only bought only two tickets, a $98 roundtrip shuttle up to LGA from DC, and Ryanair from Bristol to Dublin (flying CO to Bristol when the more popular Dublin was unavailable for FF.) Redemption is of course important to me. Having worked at United in revenue management, helping to program their revenue management system, gave me a little insight into better using these miles. My axiom is book far ahead, or gamble on the last minute when their revenue optimization program held back too many seats and dumps inventory at the last minute. As long as a flight isn’t already full, which seat maps on a website can tell you, it gives you decent knowledge of your chances. I have never had too much trouble going where I wanted with a little flexibility, not even so much date, but maybe destination, airline, or class. Last summer Rome and Milan were unavailable of course, but I flew into Geneva on CO and drove down along the Italian coast, a nice addition to the trip. Value is of course is best with a premium product, an F or C seat, or a nice hotel room. I just checked on the Christmas first class ticket I bought from DCA to SAN for 45K miles, which runs about $2,100, a 4.7 cents value, not bad. The first class ticket to New Zealand down on Air NZ and back on Singapore was worth nearly ten cents a mile. This does leave one subject, the actual frequent flier or the high yield business traveler. Not having a mileage minimum of 500 is the airlines being too cheap for their own good. Even USAirways realized this and reinstated the policy. One figures a minimum of a $200 airfare for those thousand miles earned, and the airline is still making out. The person getting nailed I think is the high yield passenger. That person is paying $1,600 to fly last minute transcon round-trip deserves more than a 25% or 50% status bonus, more like double or triple to reward them. The downside is all airlines would match and you would gain no more loyalty than you had to start off with, but with a higher cost. In the end, selling the miles is a reliable revenue stream, where trying to reward frequent fliers more appropriately just will be matched, yielding little benefit to an airline, hence people like Bobber get the short shrift.
P.S. While looking for current fares for this post, I noticed that Delta will fly you $258 round-trip, plus taxes, transcon, with only one-day advance purchase and a Saturday night stay, hmmm, demand must have fallen off a cliff of late.
Bobber – Those aren’t heretic opinions, and there won’t be any shooting down in flames. As long as your arguments are well though out, it creates a great discussion, and that’s the best part of this blog, as far as I’m concerned. That being said, I disagree!
I don’t think anyone is saying that “only those who pay exorbitant last minute or unrestricted fares” should be rewarded. The key is rewarding them more for having paid more. I see this going hand in hand with the a la carte pricing model. If you buy the lowest fare, you get x miles. If you buy the next fare up, you get 2x miles, etc. So the people who pay more, get more, but that doesn’t mean that the rest of the world is left out. Then you can devise an elite system that would honestly reward those who are the most valuable to the company.
RJTame – Generally I think it’s true that airlines haven’t invested in systems to accurately do most things, but in this case I don’t think that’s the overriding reason for it not happening. I think airlines are afraid to alienate those people who they already have deemed worthy of elite-ness. A reworking of the program would certainly anger many of those who are taking advantage of the system as it’s set up today.
A – I don’t believe credit card purchases earn elite qualifying miles. I don’t know about Northwest, but that’s certainly true for most others.
Hi Cranky,
It’s the impression I’ve had from those most opposed to the current format of reward schemes. I’m all in favour of rewarding loyalty AND profitability – whether that’s by enhancing the mileage bonus one receives by being at a higher level of elite status or by the class in which you booked your ticket (thus rewarding the high yield, late-booking travellers). Either way, something has to change as it’s nigh on impossible to spend the ruddy miles in any case, as (until the co-pay comes into force) you need to book in full-fare Y to use Miles on United to upgrade, and if you’re going for full-on reward travel you need to book about 300 days in advance to stand a chance on the civilised flight schedules – otherwise you end up bunny-hopping across the Western United States with a 2 and 4 yr old on a flight from LHR (not recommended!).
Here’s my biggest beef with the whole setup of the “rewards” programs.
Like Cranky, I don’t book travel just to get miles. Be it business or pleasure, I’m always looking at schedule and price. That said, I am a member of all the programs, but tend to use the benefits soon as something is available. With the constant changes I figure it’s best to get something now than wait for something better. So, if you are pumping up your miles with CC purchases or hotel stays or whatever just for a free trip to Hawaii, so be it. That’s your perrogative and if airlines want to do business that way, that’s their decision.
All that said, I am many times a year flying on that full fare ticket. You know, the ticket that often times puts that flight in the black. But because I’m not a super elite customer that does a million miles/year I get treated the same as the guy that booked a rewards ticket from points earned purchasing dog food at Walmart. I don’t think it’s too much to ask that I maybe get put in a seat up front or get the short line or some of the other perks in appreciation for the price I paid. Many times I’ve been flying on $1500+ domestic tickets while there are empty seats up front. What is that?
A – does the person at the check-in desk really care about you when you’re not a high-elite flyer ? There’s a bunch of people behind you in the queue – and they’ve got to get them all processed quickly, while ensuring that pax are seated reasonably evenly around the plane for trim
Why don’t they just introduce a multiplier based on which fare bucket you book into?
Cheapo economy 50% full-Y 100%, C 200%, F – 300%. With various levels inbetween (semi-flex Y 75% etc).
Alex – some airlines already do have a multiplier doing precisely that when deciding how many miles you get. British Airways won’t let you join their FF scheme until you’ve bought a full fare economy ticket (or something more expensive) and gives only 25% of flown miles if you’re in cheapo economy.
Randy hit on a key differential regarding airline revenue practices (I demure to use the term “strategy”). The last thing revenue analysts in any business want to do is give away free inventory. On the sales side, however, perks, giveaways and other inducements are the norm for chasing the solid dollar they can count on. Thus the never ending battle between sales “giving away the farm” vs. revenue management trying to squeeze a decent profit out of it all.
More miles? More restrictions. Redemption Inflation. Plain and simple. And it matters not to the inventory managers if the “real” bread winners are being rewarded fairly compared to the occasional customer.
Can’t get nonstop to Paris? Try Amsterdam or Brussels, burn some miles on the TGV and add something to the vacation!
In revenue management, I always viewed it as my job to make sure that high yield Y or B class seats were left for frequent fliers to book right before a flight. It was a gamble on how many hold back. Yes there are the gripes of an $800 ticket vs. a $200 ticket, but it would be easy to sell out the entire plane with $200 tickets. Holding back inventory till the last minute for the forecasted $1000 ticket is an educated risk. If the airfare wasn’t higher, there would be no incentive to hold back inventory till the last minute. Business travelers would be confronted with sold out flights when trying to book a ticket to a last minute meeting.
How big the full vs. discounted spread should be is an open debate. Their is the potential for spoilage by not selling the seat at a lower price earlier on. Business travelers on the company dime are also not as price sensitive as someone spending their own money. Individuals also plan farther ahead than most business people can.
Virgin America is one of the few to deal with the high yield reward issue by giving points based on money spent and not miles flown. All the other mileage programs have devolved into a revenue source, not a loyalty program. Bonuses can easily be matched, so there there is little incentive to reward their best customers through program rules. Behind the scenes Sales gives out goodies to their best accounts. On the flip side, revenue management tries to make sure the store isn’t given away. I was pretty brutal about FF availability on Friday and Sunday evenings, and any flight around 5PM. Other times of the week the plane go be half open for FF. We had rules that at least 10% of overall inventory had to open to FF, or else we could open ourselves up to a fraud lawsuit. The 10% was over the course of the year, for the entire system, and each market and by time of year varied widely. Of course this was many moons ago.
I still wonder whether UA’s pledge to hold back at least 2 FF seats on every flight is still in affect. Silly to promise that on your best flights of the year. FF seats actually do get assigned a cash value in managing inventory. With half of the miles sold, they sometimes represent better fares than what are sold in a market.
Ask any airline manager who’s been in the business longer than the last 15 years and he or she may well tell you of one story that still resonates and frightens them all to this day.
If I remember it correctly, it goes something like this:
When FF programs were just beginning and fraud suits were starting to fly, Pan Am opened every seat on every flight for one day to allow customers to burn miles. One flight out of all of them took an unimaginable hit.
A 747 left LHR for JFK with every seat in the house taken by free travelers. Except seven.
Do we as a customer base care? Absolutely not.
Is Pan Am still around? For this and numerous other reasons….absolutely not.
Thus spake Randy: A Thursday morning flight to Des Moines? Take any seat in the house. Friday afternoon to Chicago? Cash, check AND credit card, please.
As a Platinum flyer on Delta much of what Jason states resonates and brings a new view on the value of airline miles, but for someone like me the miles are secondary or tertiary to other program benefits like upgrades, seat selection, upgrade certificates and additonal perks that I garner every time I travel.
I guess it depends on your perspective and mission with flying on how you view the current iterations of frequent flyer programs. I simply would like to note that mileage is only part of the larger equation and given your mission might only prove to be part of the picture.