United’s current program is designed to reward high spenders.
- They award mileage bonuses for buying full fare and premium cabin tickets.
- Elite status requires a minimum spend on airfare ($2500 for Silver, $5000 for Gold, $7500 for Platinum, $10,000 for 1K) or driving value to the airline for other activity like credit card spend ($25,000). Ancillary revenue and partner activity is much less expensive for United than air travel.
- Global services. Their top tier of status is based on revenue, not miles flown.
Now they want to make redeemable mileage earning based on ticket price, too.
And while there’s a case to be made for focusing your greatest investment in your best customers (although in my view a better case to be made for focusing your greatest investment where you can generate additional business at the margin intead of rewarding business you’ll get anyway), you want to focus on the money your customer is spending. The last thing you want to do is make your customer focus on just how much they’re spending with you.
Airline frequent flyer programs have been incredibly successful doing three things:
- Getting people to choose what seems like a commodity product – an airline seat getting from A to B – based on brand. It makes customers brand loyal.
- Getting people to spend more money – often someone else’s money – to stay with their preferred air travel provider.
- Becoming a universal currency — customers love travel, it’s motivational, and so miles become real reward dollars that are leveraged by selling to other businesses for big bucks.
Asking customers to focus on how much they’re spending is precisely what you don’t want to do if you’re running a business trying to get your customers to spend more money on your product when your competitor is selling it for less.
And rewarding customers for spending — giving them more if they spend more — upends what’s already an uneasy relationship between travelers and their employers or clients.
Already travelers choose an airline even if it’s more expensive, which may not be in the best interests of the entity paying for the ticket (although it may be given the value of elite benefits conferred).
Employers and firms have come to live with frequent flyer programs influencing traveler choice. But what about when the transaction becomes even more crass?
When airlines are directly giving passengers more back in their mileage accounts in exchange for spending more money. It’s no longer a reward disconnected from the financial transaction itself.
- Get your employer to buy full fare instead of a discount fare and we’ll give you more miles.
- Wait to buy your airline tickets, give your bosses the excuse that schedules had to wait to be firmed up, and the price of the ticket will likely be higher and we’ll reward you more for acting against your employer’s best interests.The revenue-based earning model is a kickback. And it’s bound to create uneasy relationships at work.
American Airlines should be sending its corporate sales staff out tomorrow to all of the best customers they’ve wanted to sign on, and say
We’ll take good care of your employees, and especially so when they spend more time with us.
But we aren’t going to sign you up as a customer, and then kick back to your employees a percentage of what they spend with us.
We won’t pay your employees to spend more of your money than they have to.
You wouldn’t tolerate that from any other vendor, so don’t tolerate it from Delta or United.
United and Delta are exacerbating what’s already a principal agent problem created by frequent flyer programs, where a traveler wants to make spending decisions with their employer’s money that aren’t the same decisions the employer makes. This just brings it all back into stark relief.
Update: Apologies that comments are off on this post, it wasn’t intentional and trying to fix that.. Update 2: Fixed.
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The closer we get to assigning an absolute value to FF miles, the closer we get to the IRS stepping in and taxing them as a benefit. What you have spelled out in this article could catch the eye of the feds, especially if they see these new revenue based scheme as you have described as a “kickback”.
First comment! Couldn’t resist, Gary ;).
You are 100% correct. Thank you for posting this.
As the owner of a growing business with real client-related travel demands (and we do not bill travel back to the client as we are a SaaS business), I worry about this going forward. We have an official policy that one must book the cheapest, most direct ticket regardless of FF status but I worry about policing this as we grow bigger.
When Delta went revenue-based, corporate sent a memo saying all FF miles on Delta flights paid by the company were now company property. They said the goal was to remove any incentive for us to fly a more expensive ticket to earn FF miles. The company now uses them for business-only travel. I suspect the United memo will be coming out soon.
So now we have a DISincentive to fly Delta because we get to keep the miles on United and American, but not Delta. Sigh…. bye bye United miles. Hello American.
How is this different than hotel reward programs that are revenue-based? I am curious to hear your take on those too.
Gary, I think your analysis about this situation is spot on, and think that AA could create a tremendous competitive advantage based on DL and UA’s moves. I hope you’re using some of the backchannel/high level contacts you have at AA to shove this message right in front of their noses!
simple, Denise: Stays/nights count towards elite status, not spending. A $100 per night room earns the same status as a $500 per night room.
what hotel reward program is revenue-based, anyway???
Denise L. I agree with you. What the airlines are doing is exactly what the hotels have always done. This is not a new concept. The only difference I see are that the dollar differences of waiting to buy May be larger with airline seats and also there are more cancellation expenses in general with airline tickets. Few hotel rooms are non cancellable but unless you buy a much more expensive airline ticket, in general that ticket has big cancellation/ change fees.
Gary, would also love to hear your take on it.
Mrredskin: elite airline status will still be based on distance, not spend.
Hilton and IHG offer elite based on points earned, so money spent.
@Andrew – I’m not so sure about the whole “everyone run to AA” solution that everyone is touting. It’s not like airlines are running super low load factors and have tons of seats to spare. They can’t ramp up supply overnight. It’s not like they are grilling burgers or something. Expanding supply involves huge amounts of capital, long lead times, and a need for more skilled labor and logistics. And in this industry there is a huge fear of getting tied up and pulled underwater by too many expensive assets.
If there is a run on AA, in the short term, all it means is that AA will drive prices through the roof until it equalizes as people are pushed back to DL/UA or to LCCs.
Any increased demand on AA will disincentivize them to add or maintain value on Aadvantage. What’s in it for them? As UA and DL race to the bottom, AA just has to be only a little better, and that’s not hard to do. I think the consumer is likely to lose out no matter what. AA isn’t a charity.
@Denise L @ACB:
The pricing structures of airfares and hotel rooms are very different. There’s already a tension now between loyalty programs for both airlines and hotels and with employers. But nothing on the level that’s created by the direct rewards structure being put into place by these two airlines.
* Hotel rates don’t change dramatically (10x!) the way airfares do. So the difference in benefit to the travel paying full fare vs advance purchase discount is small.
* Hotel rates aren’t as gameable as airfares are in terms of waiting until the last minute to drive up price.
* The difference between rack and discounted rates is smaller but also more obvious. There’s almost never a need to pay rack for a room, outside of extreme documentable circumstances. The same isn’t true for airfares.
* Hotel elite status is not based on spend for the most part.
There’s already an uneasy relationship between the incentives that airlines create for travelers, and the duties travelers may owe to their employers or their clients. That same uneasiness exists with hotel programs.
But the magnitude of difference in price, and the extreme ability to game those prices, as well as the opaque nature of airfares which makes playing the games easier and more likely, makes this a significant departure from what is already a tension (that has more or less settled over the course of the past two decades, frequent flyer programs and their existing structure was quite controversial at the beginning).
The UN opperates with it’s own travel agents in order to control costs. For the traveler it can be difficult who may find that the lowest cost option has difficult timing, more connections thsn necessary or inly middle seats available. Having more control taken away from the individual traveling might be the way companies act to control costs.
As far as earning points:
Ritz Carlton and
are all revenue based. Corporate payers may have an easier time policing abusive employees with respect to hotel rates than the cost of flights, however.
@Lack Hilton and IHG also offer elite status based on nights.
Now in fairness, Expedia’s rewards program offers status based either on hotel nights or airfare spend. Not that there’s a material benefit to their elite program, but it does exist out there.
Very good point. If I were a corporate travel manager, I’d be telling UA and DL that this will count against them when deciding on corporate travel contracts.
Seems to me that ANY program that encourages loyalty between a vendor and an employee ought to be a no-no from a business’s point of view. If AA were to write to businesses saying “Hey, we bribe your employees a bit less than UA and Delta” I’m not sure how that would be received.
The CORRECT thing for them to do (from the business’s point of view) is to write to the business and offer them a program in which employees earn NO benefits from flying, but the business gets either a lowest fare guarantee, a flat rebate on spend, or accrues the “miles” received from the flight to be applied against future travel.
Not sure that’s a road we all want to go down.
Southwest’s Rapid Rewards made this change 3 years ago with hardly a peep from the business community. Correctly or not, business leaders perceive Southwest’s prices to be at or near the lowest. What works for a low-priced supplier will not necessarily work for an airline with a reputation for opportunistic pricing.
As FlyerTalk readers know, Southwest’s prices can be substantially higher than competitors’ prices in two situations: Purchases within 7 days of travel and Purchases several months in advance for peak travel times. I believe that the former costs Southwest money but the latter makes money for Southwest.
Business travelers should do the math on revenue-based earning. A Business Select fare (full fare coach plus early boarding) on Southwest earns 12 points per dollar for a non-elite, 24 points per dollar for a top elite.
That’s a 34% effective rebate at the high end, far above what United offers. Provided that you are happy with mostly-domestic coach tickets as your only reasonable redemption option.
Until Southwest’s recent devaluation, the effective rebate on Business Select tickets was up to 40%, sometimes 60% during bonus point promotions. Yet businesses never complained about the huge kickback.
TravelSummary said the exact same thing yesterday, and I agree with the both of you!
Gary- Did you read AA president’s comments about this in today’s WSJ? “It certainly makes sense to reward your best customers the most,” said Scott Kirby. It sounds like he likes the idea! You better work on him.
@John he’s not going to publicly criticize another carrier’s move like this, and the quote is “conceptually.”
The piece also says America n”recently said it couldn’t make such structural changes until it integrates its two loyalty programs” which they said will be “2015” but no indication when, which sounds like late 2015 to me.
As I’ve written, that gives a long lead time for them to watch the competition, how this all unfolds, and consider what to do. There’s a lot of data. If they see these changes pulling customers away from American because high yield customers like this, they will need to make a competitive response! And that competitive response could be a similar program, or it could be going their own way like bigger bonuses. I’m quite certain they don’t know yet, that all of the work being done now isn’t on a secret new program but just to get the airlines and the programs merged.
This is exactly why I have taken away my Elite Loyalty from USA airlines and given it to Aegean Airlines. I don’t care about the upgrades and other perks by US airlines anymore.
These fixed kickback schemes from DL and UA are going to make it easier for employers to clawback miles from employer-paid tickets.
Our firm already disallows employee purchases of DL tickets. One can only fly DL if the company agency buys the ticket (and enforces travel policy). I have no doubt UA will now be added to the list. I think this will come back to bite DL and UA.
Um, except that AA Business Extra is revenue based.
@Jerry and that program is meant to reward someone other than the traveler
This is yet another example of an American business stepping over dollars to pick up pennies. Wall Street demands EBITDA performance and these programs, with their more tangible ROI, meet the criteria that feeds into EBITDA.
Are they good for the long term health of the business?
Well, Gary, you’ve summed that up pretty well and the answer’s “NO”.
Is anyone else amused by this constant drumbeat to lobby AA executives to keep their program intact?
Gary let me lay it out for you – they don’t care what we think and they never have. You are right that AA probably won’t overhaul its program immediately due to the IT challenges of integrating US/AA. But you are delusional if you think that the constant cheerleading will somehow alter the inevitable changes to the industry. Mileage based FF programs are toast as we know them. You may have a short grace period with AA, but you’re going to have to come up with a new long term strategy. Of course, that’s a couple of years off.
@Boraxo wrote “Gary let me lay it out for you – they don’t care what we think and they never have”
Except they just rolled back changes to meal service after the bulk of complaints received in September were about their meal changes.
See also http://viewfromthewing.com/2014/04/24/five-times-consumers-won-frequent-flyer-program-changes/