Why Revenue-Based Loyalty Programs Aren’t the Right Answer

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?