Where Are Airlines Going With Their Loyalty Programs in 2012? (Guest Post)

If the name down below looks familiar, it’s because he wrote a guest post here on the future of airline loyalty programs way back in 2008. Now he’s back to fill in while I’m on paternity leave.

Last year, when Southwest Airlines released its new Rapid Rewards program, the whole system seemed very familiar to me. Several years ago, I predicted that there would be a day when airline point systems would become detached from actual flights, and the points would merely represent a fixed value.

This is almost exactly what Southwest has done. It has gone from offering domestic flight awards with limited availability, to handing out fixed-value points with unlimited redemption options. Its previous system was incredibly simple, and, sadly, it has thrown that out in favor of a far more Frustrated Travelercomplex scheme. A similar system was announced by Virgin America in 2008 and launched by JetBlue in late 2009.

Even with two fewer major domestic airlines than there were in 2008, surviving carriers have not switched to fixed value systems – at least, not entirely. Delta continues to offer its Pay with Miles program, which allows customers to liquidate their accrued “miles” at a rate of one cent per SkyMile toward the purchase of any airfare. Similarly, United offers its Choices program, while American rolled out its Dynamic Air awards for customers to trade miles for airfares at fixed rates.

Signs of Customer Frustration Reach the Top
Imagine Doc Brown from the movie “Back to the Future” becoming obsessed with airline miles instead of time travel. The character might resemble Randy Peterson, the founder of Flyertalk and milepoint.

Recently, at a frequent flier loyalty program┬áconference, Peterson offered some interesting observations and anecdotes. Speaking on the basis of anonymity, several airline CEOs and airline loyalty program executives divulged to Peterson that they were intrigued by the trend of fixed point systems, seeing this as an opportunity to avoid customers’ dissatisfaction with limited award seat inventory.

This reality comes as no surprise to members of frequent flier programs, who often dislike airline loyalty programs because they rarely offer awards at lower mileage levels. Several banks offering rewards programs, such as Capital One, have also responded to this problem, and offer more products with fixed value reward points.

The Problem With Fixed Value Programs
The airlines Randy Peterson met with have seriously considered revising their programs so that each mile represents a fixed amount of airfare. Peterson, perhaps the world’s foremost expert on points and miles, offered this observation: If airlines convert their loyalty programs to a revenue-based model, how will they dispose of unsold seats?

As it stands now, airlines can offer discounts on select flights, while turning their remaining inventory into low mileage award buckets. If miles come to represent a fixed value towards the purchase of existing airfares, airlines will lose a key distribution channel for their unsold inventory.

The Paradox of Airline Awards
Airlines need their loyalty programs because they give customers a reason to return, as well as the promise of free flights and vacation travel. In addition, these miles function as a kickback to business travelers who receive reimbursement for their travel from their employer. This benefit vanishes when customers cannot use awards for trips to Hawai’i in the winter, or to Europe in the summer.

A revenue-based program fixes the problem of availability, while removing the ability to earn amazing rewards. People want to redeem miles for fantastic First Class trips, not for pennies towards regular airfare.

Southwest Airlines, which will begin offering service to Atlanta in February of 2012, will have a hard time winning over Delta customers who dream of trips to Milan, not Milwaukee. To remain competitive, Southwest has created the More Rewards option to allow customers to redeem points on other carriers. I am skeptical about whether this particular fixed value program can sway devoted Delta fliers. However, only time will tell.

Is There a Middle Ground?
When it comes to award travel, the elephant in the room is fuel prices. Airlines have to justify each award, as every occupied seat and every bag carried burns fuel.

A distance-based award chart may provide the solution. While some take issue with the haphazard implementation of British Airways’ new Avios system, this type of program may be more beneficial than a revenue-based system. This program, perhaps inspired by fellow oneworld member LAN, offers customers fantastic deals on short-haul flights and some multi-stop itineraries. With distance-based award charts, airlines can be assured of a correlation between costs per available seat mile and the mileage required for those awards.

At the same time, carriers like British Airways and Air Canada risk alienating their customers further by turning valuable award programs into weak discount programs under the guise of suspiciously large “fuel surcharges.” British Airways’ justifications for its enormous surcharges strains credulity, especially when you consider that it imposes these charges on award tickets for infants carried on their parents’ laps.

Final Thoughts
It appears that, over the next few years, carriers around the world will continue to struggle and experiment with zone, revenue, and distance-based award systems. Airlines need to generate profits from their loyalty programs, but they cannot forget that customer satisfaction is the only path to that goal.

What awards programs do you believe still offer the most benefits to customers?

Jason Steele is an avid rewards traveler and shares his best tips & tricks related to scoring great deals on airfare and the best travel rewards credit cards on the Money Crashers personal finance blog.

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