Should Airlines Have Frequent Flier Programs?

It seems to be a no-brainer in the airline industry to have some sort of frequent flier program. In fact, people have come to expect it. JetBlue, for example, tried to go without it, but after 2 1/2 years of flying, they started their own program as well.

But a research paper released back in July called “Do Frequency Reward Programs Create Switching Costs” by Wesley Hartmann and Brian Viard at Stanford’s Graduate School of Business questions whether it’s a good idea at all. (Read a summary here.)

To be fair, the main research in this wasn’t directly related to airlines, they used a golf course that offered a “Buy 10, Get 1 Free” program, but the results are worth reviewing. In this study, they were looking to see if the program encouraged people to accelerate their playing behavior as they got closer to the reward.

They found that frequent users of the course thought the program to be very important, but their playing behavior did not accelerate as they closed in on the reward. Sure the effective discount did get them to play more, but it was because the cost was lower. A 10% decrease in price would have had the same effect without incurring the administrative costs of the program.

On the other hand, infrequent golfers did show some accelerated behavior as they got closer to the reward, but very few of the infrequent golfers played enough for that to even matter. So was it worth it?

In short, no. It is argued that the increase in play from the infrequent golfers wasn’t enough to offset the cost of giving away free games to the frequent golfers, so the program was not very successful.

They argue that the only way a frequent user program is really successful is if your most frequent users are extremely price sensitive. In that case, the loyalty program would make sense, because you would be increasing your returns from the majority of your users instead of a small minority.

Does this relate to the airlines? Sure.

In fact, the golf course admitted that they modeled their program off of Southwest Airlines’ famous Rapid Rewards program. It’s also probably safe to say that many of Southwest’s customers are price sensitive, so this might not be a bad program for them.

On the other hand, some of the bigger airlines generate the bulk of their revenue from people who are less price sensitive, so the program may not make much sense at its base level.

The difference is that those airlines have turned their frequent flier programs into more than just a free flight scheme. It would actually surprise me if most frequent fliers in those programs even cared about the miles. In those programs, it’s the elite status that matters – the product differentiators. If you’re an elite member, you get upgrades and special treatment that make it even more difficult for people to switch you.

So with that, you might consider removing miles from the program altogether, but in the world of airline economics, that doesn’t make sense either. See, airlines have found a way to turn miles into a profit center. Do you have that United Mileage Plus Visa? Maybe you’re a Delta SkyMiles Amex fan? Well, each time you earn a mile, those credit card companies pay the airlines, so the airlines can recoup the costs of handing those miles out in the first place.

In short, while the basic reward program might not make sense, airlines have evolved the programs to the point where I think intuitively they make sense but further research would certainly be required before coming to any conclusions.

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