One of the big topics we tackled at the Travelport Ignite conference was loyalty programs. There were some very interesting ideas floated, including one that airlines should give their loyal top tier elites benefits when they have to fly other carriers on rare occasion. My initial reaction was that it was insane, but after further thought, it’s not so crazy. That’s why I like these kinds of sessions. They make you think. And once the session was over, a few of us gathered together to talk about the latest craze, revenue-based frequent flier programs. I’m not a fan, and I think there’s a better way to do this.
[Disclosure: Travelport paid for my hotel only at this event]
The Mileage-Based Program Flaw
First, let’s be clear that we’re talking about the redeemable mileage-earning part of the program and not elite status qualification. Let’s keep this discussion simple, though ultimately, elite status qualification could work similarly. I’m also going to be talking about earning miles here, because I don’t think the redemption side needs to change.
When loyalty programs started, the best way they could handle awarding points was based on the number of miles flown. That’s definitely a flawed metric, but with technological constraints, it was the best option at the time. Here’s the problem.
You end up giving someone who pays $1,000 to fly from LA to New York the same number of points as the person who pays $200. That doesn’t seem right.
We can debate the point of a frequent flier program, but in my opinion, it should be there to reward people for doing business with you. And the more business they give you, the more they should be rewarded. We can also argue for days about what makes a “good” client. Some will say that the $200 ticket could be more profitable because the expectation for that seat may have been that it would go empty, but crafting a loyalty program around that is silly. No traveler will get it and it’s not going to make them feel valued. What makes sense is that if you fly a lot and pay a lot, then you should be rewarded for it. And the basic mileage-based program wasn’t making those who paid a lot feel valued.
The Revenue-Based Program is a Bad Solution
This problem has been around for a long time, but there really hasn’t been the technology or the wherewithal to do it any better. The best effort we’ve seen to make a real change is to go to a revenue-based system. Airlines with simple operations have adopted that in recent years (like Southwest), but Delta was the first really complex airline to adopt that style of program. United copied it soon after. It sounds great, because people who pay a lot feel valued, but it really just trades one problem for another.
Now there’s differentiation on what’s awarded to the two people paying different fares between LA and New York. But the person who flew from LA to New York for $200 gets the same benefit as the person who paid that full $200 walk-up fare on LA to San Francisco. What’s more, the airlines are actually really bad at getting revenue data from partners. So you could buy a ticket on United’s joint venture partner Lufthansa and United won’t know how much it cost so you can’t get miles that way. This method just makes for a much more confusing program that is still flawed… and it pisses people off.
How do you fix this? It’s not easy. I’m sure airlines would love to award miles based on how profitable each purchase is to the airline, but that’s not only difficult, it’s so incredibly opaque that it just doesn’t make sense as a way to reward the traveler.
The Fare Family Fix
Airlines have been on the right track when they offered bonus multiples for higher fares (say, 150% of flown miles if you fly business class or only 50% of flown miles if you fly the cheapie fare), but that was also pretty opaque. That was managed by the booking class that was used, and most travelers don’t even know what a booking class is.
Instead, the airlines need to change the way they sell fares and go with fare families. Look at Air Canada.
The lowest coach fares are Tango fares followed by Flex and Latitude. The names don’t matter, but the point is simple. If you buy the cheapest branded fare, you should get no or few miles. The next one up should get 100% of miles. Then the highest category gets some multiple above that. That way you award miles based on categories that are easily understood by the traveling public. And you’re giving them a reason to buy up.
The best part for the airline is that this can vary. You don’t have to hard-code a booking class to go into a single fare type. You can do whatever you want. If you’re American, you can say that all fares in the Delta-dominated Atlanta to Salt Lake market go into the higher fare category to entice people to fly you. You sweeten the pot. Meanwhile you could do the opposite in Dallas to Corpus Christi, or some other market where you dominate.
Online Travel Agents Ruin Everything
This is pretty easy for people to understand if they book on an airline website, but the big snag is for people who book elsewhere. If you book on Expedia, it’s not going to show you these different categories. Same goes for most travel agent systems, though it can be built into the fare rules so travel agents could still book this. (Outside the US, there’s been more progress at getting travel agents better fare displays, so the technology exists.) It will also be tough to figure out how partners fit in this scheme, though close partners could work on a joint fare family scheme.
For that reason alone, this system is hard to implement unless you do nearly everything online. And there isn’t a legacy carrier that does that (unless you count Southwest). So in order for us to have a really simple, easy-to-understand loyalty program, we need technology to catch up first. Fortunately, that’s starting to happen, so this doesn’t seem nearly as far-fetched as it used to.
Maybe an airline like American will be smart enough to consider this before it goes down the revenue path that both Delta and United have followed. This is a better way to do it. Now, in the spirit of the Ignite conference, let’s take this conversation down into the comments. Do you agree or not?
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49 Comments on "Why Revenue-Based Loyalty Programs Aren’t the Right Answer"
USBT – Yes, there is a revenue component now as well, but the program is still largely based on miles flown (or segments). It’s different than how they’ve tackled the redeemable mileage issue.
Plenty of airlines manage to assign the multiplier to convert miles flown into miles earned by using booking codes and labelling them as “Discount Economy”, “Full fare economy”, “Economy Plus”, etc…
I don’t see how this labelling is currently a particular issue.
David – First, it still requires travelers to know the booking codes which is simply added complexity that a regular traveler shouldn’t have to worry about. Second, those labels don’t really mean much. Full fare is usually so much more than anything else that it doesn’t adequately create tiers that matter.
Neil S – Yeah, so the exact plan on varying awards may not work well as I put it. That’s up for discussion. But the main point I wanted to make is that you could vary what goes into which category by market if you’re looking to try to make a dent.
“Unless I’m mistaken, the MQM system on DL will be the same next year. So although I’ll earn miles based on ticket price, I’ll still get 2475-ish in MQM between JFK and LAX. So the elite qualifying stays the same.”
MQMs are the same, but the MQD requirement is going up by 20%.
Great article. The airlines made this system too complex and they sure as heck won’t be able to figure out how to simplify it without their premium passengers getting screwed (hello Delta??).
Get Crandall out of retirement and have him start a think tank. He started this, let him fix it!
Michael – I’ll disagree with one point. Airlines do not want to make it hard to get big balances. It’s easier to that than it’s ever been because of the partners. Airlines make great money on that. That has nothing to do with redemption but in terms of building the balances, they’re all for it.
Complex, incomprehensible programs can’t drive behavior.
With the exception of elite programs, I wouldn’t be surprised if UA and DL programs have a negative ROI, due to most customers acting like me: I can’t figure out how these things work, and miles are super-hard to redeemed anyways (SkyPesos anyone?), so they don’t affect my purchasing behavior. But if I find myself on UA or DL I won’t turn down whatever miles I may (or may not) get.
Come to think about it, these programs look like an ivory tower PowerPoint wet dream.
What about a mix of the two – something like half the miles flown + 2x dollars spent, so in your NY-LA example, the cheaper ticket would get 1238+400=1648 miles, and the expensive one 1238+2000=3238.
Not perfect but it does seem like a reasonable compromise, since you still have the problem of lack of transparency on the fare paid, but if you know that you will get a minimum amount of miles, that does reduce the concern that you will be earning basically nothing.
Jason H – You could, but then you’re just adding complexity and making it harder for people to understand. And the revenue piece is really hard to handle with partners.
There will never be a good way to do this, twenty years from now people will still be debating which way is the best.
Doesn’t anyone want to toss in another way, forget miles flown or dollars spent, what about something simple like how many times you fly? Why should somone who flys a couple of times a year (or lifetime) get anything at all compared to those that fly weekly.
You mean like Southwest’s old program, where you earn a free ticket by number of segments?
Worked well when they were doing only short-hops. Not so much when they started trans-con and mid-con routes.
I think your post illustrates exactly what the confusion is all about. The revenue-model switch only impacts redeemable miles, not elite qualification. Sure, the super elite in the example will probably earn more redeemable miles due to the high $$ spend, but they will still need to fly just as much to requalify for their status since EQM/PQM/MQM is still based on mileage.
“Online Travel Agents Ruin Everything.”
But a very large percentage of the high $ corporate travelers (the original targets of the frequent flyer model) book on some form of online service tied to their corporate travel management system. So be careful here.
Million Miler – Well sure, but the point is that this model doesn’t work well if the online agents can’t properly display these categories. Of course, airlines could enter into corporate deals that would give x amount to people who book through the tool anyway. I think corporate tools are a different animal.
I agree. Providing miles (or points) based on miles flown is rewarding your loyal customers based on your expenses (e.g., fuel, labor hours) not your revenue (i.e., fares paid). As a public company i would assume their goal is to maximize shareholder value and grow revenue. The hard part is changing customer expectations (getting miles for travel distance).
After several years of being Gold with Delta, I am not even going to make Silver this year because I did no travel in the first half due to a terminal illness in my family. Oddly enough, I scored enough MQDs to qualify for Silver, but I’m short about 2,300 MQMs. If it’s money they want, they’ve already got it … this hybrid approach seems to me to be encouraging mileage runs.
Agree completely. I’ve got plenty of $ spent on Delta for higher status but lack the miles. I would prefer they ONLY count the dollars spent, lose the hybrid or highly favor the spending over miles.
Totally agree with Grichard….Love the miles, but the status is what really has driven my participation in FF programs since their inception. As a side note, I am a Million Miler with United (for whatever that is worth now!) and got an email from them last week that indicated that the dollar (spending) requirement is increasing by 20% in 2015. Good thing I don’t have to qualify anymore….if I did, that move would really piss me off.
I think airlines should just go for full opaqueness on the earning side, and more clarity on the redeeming side. List the number of miles you’ll earn when you buy the ticket on the sites. (This way the airline can put whatever multiplier they want on the back side.)
But on the redeeming side, make 1 mile equal to a certain dollar figure, and allow people to purchase any seat. But yeah, I’m not really that frequent of a flier.
If redemption becomes mileage based, I’m out. One thing I like about the current system is that you can use the miles for international J seats and cash out at a reasonable level.
Aren’t we missing the point talking about earning miles by flying? The easy way to earn miles is to apply for and flip credit cards with their sign up bonuses. And you may buy a lot of stuff with airline cards, especially if you run a small business.
Totally second these points:)
I’m not a fan of these changes. As someone who does mostly transcons, this will mean a lot less miles, even though I’ve had status with an airline since 2006.
I think airlines need to realize is that those who buy full Y tickets or fly up front will base their airline of choice on convenience or service. They aren’t into loyalty programs since they pay for all those services anyway.
I agree with you that mileage programs have gotten insanely complex.. I wonder if part of this is the insistence to bundle status up with pseudo-currency.
Perhaps there should be two distinct parts to any loyalty program:
1. A way of getting status to distribute upgrades and those little things.
2. A currency program.
Some fliers really care about part 2, some really care about part 1, having one program try to serve both of them seems silly.
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Oy, I’m not sure what I think about this new commenting system. That was in reply to Carl.
I’m also curious if airlines will start thinking of ways to reward business travelers for specific large companies on contract without awarding them miles.
The miles become a liability for the airline but are given to the employee. The airline could package the corporate rate at a lower price but without the miles.
I think that’s really another flaw of the move to revenue based earning. It becomes much more feasible for large corporate customers to negotiate non-earning fares since the number of RDMs are fixed and more clearly calculable.
It will also make it easier for the IRS to start taxing the miles.
All bad developments.
Troy – For the most part, bulk or negotiated fares will earn percent of miles flown since the fare is opaque. Here’s the full list for Delta:
http://www.delta.com/content/www/en_US/skymiles/earn-miles/earn-miles-with-exception-fares.html
Good article in distinguishing between the types of Loyalty Program however you’re magnifying the “Partner” earning issue too much. Remember, the loyalty programs are designed to keep the customer within your ecosystem and drive repeat business. Having the ability to earn on partners is great and somewhat inspirational, however programs are designed, in the first place, with their own metal in mind. Take care of the majority.