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

Frequent Flier Programs, Guest Posts

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 conference, 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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19 comments on “Where Are Airlines Going With Their Loyalty Programs in 2012? (Guest Post)

  1. BA and AC’s ful surcharge arent just ‘suspiciously large’ they can exceed the per seat fuel cost based on the airlines published fuel CASM from their latest financials.

    That moves it well past ‘suspiciously large’ and into “fraudulent”

    Add to that Aeroplan just started collecting YQ on most star alliance carriers “at the requesy of Air Canada” ( their words)

    1. Not only that, but the suspicious thing with AC is that Aeroplan says the fuel surcharge is passed on to the “ticketing carrier” which is AC itself, *not* the operating carrier. Talk about a “true but false” statement.

    2. Yeah the fuel surcharge is ridiculous. To be fair though, BA offers its 100,000 mile credit card to offset that. At least BA and AC offer bags and a semi-decent product.

      I would like to see one-way awards and true one-way fares on international flights from the US.

      Mileage programs don’t need to be about going to Milan, cause people need to go to Milwaukee too. I think every airline should have the interjet program: just get 10% of your purchase as credit for future interjet purchases.

    3. BA’s “fuel surcharges” are a total rip which in effect make you pay for the privilege of using your accumulated miles. In my own experience, there are never BA seats available until the last minute. I used my BA miles (Avios?? Please!) on Iberia and was still charged the outrageous surcharges. On a lark, I called Iberia and asked them if they charged fuel surcharges and was told no — so net net, BA has collected money for nothing. My solution? Burned all of the BA miles for this trip, cancelled the Chase BA credit card and if I have to use BA in the future will just claim AAdvantage miles. Shame on BA.

  2. Jason,

    Yeah, there are some paradoxes going on here. I think the hybrid “pay with cash and points on any seat” and “pay with points only for excess inventory” are probably the happiest mediums.

    Gary Leff (viewfromthewing) has mentioned (paraphrasing here) that United Airlines more or less exists as the aviation department of Chase Bank and United Mileage Plus. If we can’t chase those aspirational awards, those loyalty programs are screwed. If the programs are screwed, so is the revenue.

    But the airlines can’t complain about the lot they are in, as they created the mess. They chose to flood the market with miles, either through elite bonuses, or through massive credit card signup bonuses. BA did it with their two rounds of 100,000 mile Chase Visa offerings, AA’s doing it with their 100k/75k/50k offerings across *multiple* products, and United/Continental is/was doing, although a bit more discreet. (Last year, you could get a 50k UA card and a 50k CO card. Now, they’re marketing yet a new product, with yet another 50k sign up.) I don’t know anything about DL’s program, other than to say their miles are rumored to be the easiest to get.

    So, they’re all doing it, but doing it at their own peril. I’m happy to ride this party train while it lasts, but some day the music will stop and somebody won’t have a chair. It just might be the airlines if they do something stupid and go towards strictly fixed value programs.

    You also talk about distance based charts. Well, I’d say that every non-fixed value program already does that. Today’s regional charts (you know, domestic North America, North America – Europe, North America – Asia) are reasonably close proxies to that. BA has probably the most literal interpretation of a distanced based chart (every segment you take is priced by mile) whereas AA has a One World chart that is a bit more liberal (you can up to 16 flights as long as the total distance is less than X, where X is a function of the number of miles you want to redeem.) The problem with any sort of zone or distance chart from the airline’s point of view is that some of the biggest cash cows come from the shortest flights.

    Finally, if airlines are currently releasing seats that they truly expect not to sell, moving away from that model pretty much guarantees revenue dilution, no? It’s one thing to give away seats you don’t expect to sell, it’s another to give away seats you could have gotten cold hard cash for.

    1. DL is just the same. Amex has DL on a tight leash, but is also partly responsible for DL’s success in NYC. DL is by far the worst in giving out SkyPesos like candy, making them not expire, and then having the worst redemption availability of any airline on this planet.

      @David SF and Joe: Certain people are fiercly loyal to their hub airline. Cranky here has mentioned several times that given the travel he does, he just goes for the right price, schedule, and supporting underdogs like Frontier (which actually still has decent status tiers). This is why you see AA/BA maintain a Bronze tier to keep occasional flyers happy.

      For business travel, of course, you will get status with someone else paying for it. But depending on the business, sometimes its worth to switch airlines when the corporate rate for the preferred carrier is way above normal sale fares on other airlines.

  3. Makes you wonder how much more money people spend to fly a certain airline to get miles for that free trip/vacation? If they paid the lowest fare no matter the carrier the money they may have saved would have paid for that trip/vacation and not have to deal with all the airlines rules and trying to find space when they want to travel.

  4. Now, a 25,000 mile reward for domestic flights will get you on a flight that might cost $250, $350, ……..$750 in cash. Fixed value means that you only get $250 toward a flight and have to PAY the rest.

  5. Frequent flier programs should be banned, as a violation of the Sherman Antitrust Act. All they do is prevent competition based on price. Airlines use them to block new entrants on their routes. If a business is paying for employee travel, and the employee is choosing the airline based on a frequent flier program, then the miles are basically a bribe. Norway and Sweden have banned frequent flier programs, and they now have lower prices and more competition between airlines as a result.

    1. How can they be preventing competition based on price if you can go to kayak, expedia, google (now), or whatever website and search for flights to compare prices?
      If the problem is the difference in frequent flyer programs, then by that reasoning, every other feature of different airlines (aircraft, seat sizes, luggage allowance, service) should also be made identical, as they differentiate carriers as well and make it such that you get a different product on two different airlines for (potentially) the same price.

      1. They prevent competition based on price by using their frequent flier programs to suppress competition. For example, when Air Tran started to serve CVG, Delta drove them out of the market with predatory pricing, and the frequent flier program was a major part of this. A frequent flier program is like an exclusivity agreement, which makes it harder for airlines to compete on price and distorts the market in favor of the largest carriers.

        1. That has to do with the size of the presence of the airlines (how much of a monopoly it has) rather than the frequent flyer program. Enrolling in such programs is completely voluntary, and leaving them is too, so there’s no reason to treat it as anything except a ‘perk’, such as free baggage or whatever. Consumers still have choice if they want to.

  6. It’s all laughable and a rip-off, even if customers have a choice to join, stay or leave a mileage program. I personally wish ALL airlines would dump every mileage program and Eureka ! – go back to SELLING first class seats. Then on an individual basis, at time of boarding, it’s not too hard to upgrade only those who have paid the highest coach fares. Pay what you can afford and get what you paid for. Simple.
    Now we have a convoluted mess whereby every airline passenger feels “entitled” to an upgrade simply on the basis of buying a ticket (any fare) and being a member of a mileage program. There are so many Elite, Gold, Premier Exec level members that being “just” Premier is laughable. The only F class seat you’re going to see is the one you walk by through the F-class cabin on your way to the coach seat you have. Sheeple passengers need to wake up and smell the coffee (or what passes as such).

  7. There are also Qantas “Any Seat” awards, which are more expensive than classic awards and price at something approximating a certain $ value per point – however the pricing is dynamic so you can’t work out in advance how much such an award will cost. However, these redemptions with earn you miles as well as status credits.

  8. I would have loved to contribute more thoroughly to this debate, but alas travel experts do travel, and sometimes to extremely remote places.

    The message Peterson was trying to convey was that by tying revenue to award redemptions, everything became one big bucket. Every fare sale was an award sale, and so forth. This is the airline perspective.In this piece, I tried to focus on the airline perspective, but of course the consumers are playing an opposing game.
    SW program change was a big boon for those who would rather have 10 short round trip awards than one big one. A killer for others who desire the reverse.
    As for BA fuel, I was trying to be as generous and balanced as possible since writers are often held to account for defamatory statements. I think the fact that BA fuel surcharges are imposed on lap children speaks for itself. Now that Brett is a parent (congratulations to him and is wife!), perhaps he will have the opportunity to shed some light on this issue in the future.
    I can’t image making FF program illegal, then you would have to kill every sandwich shop that offers a punchcard. On the other hand, I have often seen FF programs essentially acting as kickbacks to business travelers who book higher fares for no reason other than to collect more miles, and stick their company or clients with the bill. How else can you explain the option of paying double or triple for a higher fare class on SW with scant priviliges beyond extra points.
    Finally, the great thing about distance based awards is the opportunity to pay a few miles for a short, but expensive flight. Use Avios for short hop out of MIA on AA to some exotic island, or some small regional city with limited competition, and you can redeem a few thousand miles for a flight that would have cost hundreds of dollars.

  9. Once again, as the author states in his CC Review, I must agree that for actual use for Reward flying AA is the best deal. You will usually find seats, the Reward levels are reasonable and the One World group gives good options. A Great Consumer loyalty program – IF you don’t carry a balance! In my opinion, no other program can touch it for earned flight rewards.

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