The Future of Airline Loyalty Programs

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.

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23 Comments on "The Future of Airline Loyalty Programs"

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Bobber
Guest
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… Read more »
RJTame
Guest

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.

David
Guest
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… Read more »
RJTame
Guest
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… Read more »
A
Guest
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… Read more »
Randy
Guest
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… Read more »
Bobber
Guest
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… Read more »
A
Guest
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… Read more »
David
Guest

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

Alex
Guest

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).

David
Guest

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.

The Traveling Optimist
Guest
The Traveling Optimist
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… Read more »
Randy
Guest
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… Read more »
The Traveling Optimist
Guest
The Traveling Optimist
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… Read more »
Eric Meadows
Guest
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… Read more »
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