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.

The Problem With Mileage-Based Frequent Flier Programs

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.

The Problem With Revenue-Based Frequent Flier Programs

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.

Air Canada Fares

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"

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Grichard
Guest
I don’t really argue with how you formulated this problem, but I do think one of your assumptions is wrong. Assuming that the *real* purpose of loyalty programs is to drive more business to the airline, I think that the system of elite status does far more toward this end than bulk mile accumulation does. Don’t get me wrong, I like miles and the free trips that come with them. But I don’t think that simple mile accumulation drives people to pick United v Delta v American: they’ll take the miles on any carrier. It’s building traffic on a single… Read more »
David
Guest

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.

Neil S.
Guest
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. So the things I really care about – upgrades, priority boarding, etc don’t change, even though I’m potentially earning less miles. In practice, I’m one of the ones who should benefit, as most of my tickets are last minute. I don’t agree with this point: Meanwhile you could do the opposite in Dallas to Corpus Christi, or some other market… Read more »
USBT
Guest

“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%.

Wild Bill
Guest

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
Guest
Interesting article that raises some valid points. As someone with more miles accumulated than I will ever use, I think the bottom line here is that the airlines want to make it as hard as possible to accumulate large mileage accounts; and to allow as few redemptions as possible. For years flyers were spoiled by overly generous mileage awards. Now, the airlines are trying to rein those programs in without upsetting customers. I accept change is coming, that programs will be stingier and more complex. As a customer I would be willing to accept that if the airline(s) also made… Read more »
John Tarik
Guest

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.

Jason H
Guest

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.

David SF eastbay
Member

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.

ptahcha
Guest

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.

Airjunkie
Guest
As an agent who works for one of the airlines that has gone to the revenue-based frequent flyer model, I can say the feedback has been, not surprisingly, mixed. Super elites are all over it: a couple of top tier elites said they will earn top status with less flying — even though their jobs will have them flying just as much. The lowest tier flyers are unhappy: silver or gold ends up being that much more out of reach. Most of the elites I encounter stick with one airline or another just to keep the perks of elite status,… Read more »
ptahcha
Guest

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.

Million Miler
Guest

“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.

BigSix
Guest
I agree with Airjunkie, most elites have corporate travel policies that steer them toward the airline that have given that company the best negotiated rates. I also believe that most elites value the elite status more than the award miles. There was a time (1980s and 1990s) when award miles were paramount in a frequent flyer program. Since then, with the national expansion of Southwest and the other LCCs that have emerged (Spirit, Allegiant, Frontier), award miles are less meaningful since you can usually catch a cheap (less than $200 RT) from almost anywhere in the US within 150 driving… Read more »
A
Guest
I’ve never been a fan of the mileage based system primarily because it favors the international fliers and slightly less the transcontinental domestic fliers. Being based in the middle of the country I do a lot of trips that are under 1000 miles but cost ridiculous amount of money, especially at last minute. The example I love is a couple years back I was flying MSP – YYZ very often. One way miles was something short of 700 but ticket price was always over $1000, often pushing $2k for r/t. I got silver status on Delta for segments flown but… Read more »
dc
Guest

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).

PK
Guest
My vote stays with the DL revenue program; yes, it has it’s faults but one can poke holes in any system. It does a good job of rewarding the high revenue passengers, loyalty with dollars is the goal behind DL’s move. Compare a Business class corporate passenger who has a DL vs. AA choice, the DL scheme is more attractive. I’d argue that the LAX-SFO passenger at $200 is of similar profitability as the $200 NYC-LAX passenger (higher RASM would overcome the higher shorthaul CASM) and so a similar award is fine. Grouping into fare families like AC in interesting… Read more »
mmcdonald
Member

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.

A
Guest

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.

timlsurfer
Member

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.

Nick Barnard
Member

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.

southbay flier
Guest

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.

Kilroy
Guest
I agree with Nick Barnard. One thing I will add, though… As an infrequent flyer (12-15 segments this year, probably 8-10k miles total, across 3-4 airlines) who primarily shops on price and schedule, across a variety of airlines, and who isn’t a miles fanatic, I question the whole relevance of monopoly money, I mean miles, to people like me. I would gladly forego earning miles on a flight for a $5 discount, for example, or a free drink coupon, or any other token gesture. Heck, I don’t even have FF accounts with some airlines I fly, not worth the junk… Read more »
Lou
Guest
My interest is also in maintaining elite status and if I have to shell out some cash to do so, that’s even better. One thing that always annoyed me is that many times for my corporate travel, I’d be willing to pay the difference in fare between what was booked by my company and a F ticket. However, I’m not willing to pay the change fee on top of the fare difference. I’d think if you are paying up, they should waive the change fee. I know in this case, the airlines would be getting more money from me. What… Read more »
Jonathan Reed
Guest

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.

EndlosLuft
Guest
With airlines moving away from miles (which in the best case scenario for the airline had people do crazy stuff like go on mileage runs earning them revenue they wouldn’t have otherwise) and adopting an unbundled “a la cart” pricing model Frequent Flyer programs really have little to no power left to entice people to stick to one airline. The really bad news for airlines like United is that they will actually have to compete on service soon. With reduced capacity and a growing economy the consequence of that is masked but eventually that will change and then things will… Read more »
Raffles
Guest
There seems to be a big flaw in your analysis – that the person paying for this ticket is the person benefitting from the miles and status. In the corporate travel word that is clearly not the case. That is why miles-based status and rewards work better. Because a business traveller who flies x miles believes he should have status. That person may not even know what their ticket cost and it did not come out of their pocket anyway. That flier feels ‘I spent xxxx hours with my bum in these guys seats this year and I want something… Read more »
Bobber
Guest

Totally second these points:)

Carl
Member
I think we got these revenue-based earning programs for three principal reasons: 1. It’s a way for the airlines to give out significantly fewer miles, so lower their expense for RDMs. You have to ignore the miles given out for use of the branded credit card since you get those today. And remember that they aren’t awarding miles on taxes and fees, so when someone thinks they are buying a $200 ticket and will get 5-11 miles/dollar, it will only be on about $160 of the ticket. On the whole the airlines will give out about 40% less miles –… Read more »
JeffRobertsonFanClub
Guest
I agree with many of Carl’s points. Fare families would make things clearer and encourage buy-ups by showing side-by-side the earning and other benefits. In 2015 Delta won’t care if I buy a First, Biz or Coach ticket; only the cost of that ticket will earn me miles, not type of ticket. I’m also perplexed why Delta isn’t counting ancillary and incremental revenue as spend: ticket changes, Economy Comfort upgrades, extra bags, inflight food purchases, that bottle of Johnnie Walker Blue in the SkyClub, etc. I get taking miles away from the gamers and mile-runners, but for those of us… Read more »
southbay flier
Guest

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.

Nick Barnard
Member

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.

>

Nick Barnard
Member

Oy, I’m not sure what I think about this new commenting system. That was in reply to Carl.

Nick Barnard
Member

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.

Carl
Member

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.

troyfilson
Member
As much complexity is involved, I think the revenue-based system is fair in some markets, not so in others. Just as the mileage-based system, there are winners and losers. One question I have about revenue-based systems is regarding calculation points earned on negotiated fares. CF knows that I have background in this area and I’m sure he’s thought of this, but how on earth would airlines calculate points for corporate negotiated fares, tour operators, consolidators and so on. Travel agency override schemes might be easier to calculate, but I still see issues based on the type of override method. And… Read more »
Ben Brooks
Member
Cranky, I agree that having miles earning based on factor ($ spent) and elite qualification (based on miles/segments, with a $ spent minimum) is confusing. However, if they simply stripped out the revenue minimums it would essentially mirror that of some hotel programs like SPG elite for Gold or Platinum. However, I think the move to revenue based programs is economically rational. It was a few years ago that the head of Starwood Hotels said that something like 2% of their customers accounted for 30% of their profit. Those customers (or passengers) that generate most economic benefit to airlines should… Read more »
JW
Guest

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.

Alex
Guest
I think the biggest problem from an airline’s point of view is that they cannot account for the redeemable miles as revenue, if I’m correct. Thus from an accounting point of view, revenue-based mileage is convenient; looking back at 2008 when I was a 1K on United, they had the double-mileage elite bonuses, and tickets from the west coast to Europe cost $400 – $500, they were probably losing a substantial portion of the revenue on the mileage alone. Unless I’m making an assumption incorrectly. From a consumer point of view though it’s not great though. The fundamental problem with… Read more »
Carl
Member
Alex, I believe that the accounting is as follows: when RDMs (redeemable miles) are earned, there is a cost associated with the RDMs that is “charged” as an expense to that paid trip at the time that revenue is recognized, and that cost is essentially an average marginal operating cost for travel redemptions; when RDMs are redeemed then that cost is probably recognized as revenue to offset operating cost. And when mileage is sold to credit cards and other merchants (and even to fliers buying extra miles) the revenue is recognized immediately and the cost is charged. I believe that… Read more »
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