Revenue-based frequent flyer programs are good for consumers — just not in the way airlines would have you believe.
Frequent flyer programs are the most successful marketing creations ever. And as such they get consumers to behave irrationally. Customers buy more expensive tickets than they otherwise would. And not even for the elite benefits, non-elites do it too and low level elites who may not get much incremental value from their status. Frequent flyer programs turned airline seats, which were otherwise commodity products, into differentiated products, and differentiated products consumers were willing to buy at a premium.
But when you commodify the relationship, and you turn the frequent flyer program into a straight rebate there’s little advantage to choosing one program or another.
What’s more, the leader in the revenue-based space — Delta Air Lines — actually turns out to be the loser in this game when all of their competitors reward high fares as well.
- Delta awards more miles to higher fares, but the miles they award are worth less than their competitors’ currency. That makes them the less rewarding airline program for the high spenders.
- Trust is incredibly important in a revenue-based program. And when consumers understand the program as a rebate in fares, cuts to the value of miles sting even more. Delta has reminded us over the past month that they begin with a huge trust deficit, and are doing everything possible to signal to consumers that they’re doubling down instead of doing anything to make up for it.
Delta runs a good airline operation, and it makes sense for customers in Atlanta and the Upper Midwest to fly them as a result. Planes are full so airlines don’t need to spend a lot to fill incremental seats.
Big data can even project what changes may happen at the margin, that a given cutback will save more on costs than it will cost in business. But there’s a temptation towards scientism, to believe that the data tells you more than it does, e.g. if there’s any misspecification of the question, or you’re just finding support in the data for your own priors and missing second and third order effects. (See generally, Karl Popper and also Hayek’s Counter Revolution of Science).
What’s more there’s a tendency to isolate a single change, and determine that there’s little customer attrition driven by that change. What customer gets driven away by American’s choice of domestic first class cookie? But taken together, a series of changes influences a consumer’s view of the product even if no single change moves the needle.
By taking away the loyalty aspect of frequency programs, the revenue-based approach takes the blinders off consumers and allows them to act more in their rational self-interest. That’s not good for the airlines, it’s not good for those consumers who could approach programs rationally in earlier eras, but it’s probably good for consumers as a whole. Of course no airline would knowingly go down that road. But their big data blinders and self-confirming hypothesis lead them inexorably towards it.
It certainly has freed me to look for air travel in my own best ($$$) interest! I’m now booking travel on carriers I would never have under the old program.
Spot on. I think I will eventually just fly less and buy discounted F from whichever airline offers the best price. I am already forgoing upgradeable DL Y for discounted UA F on about a dozen transcons this year. At only $700 r/t for F SFO-ATL-SFO, why bother with $550 for economy? If there is an IROP, no worries about lost upgrades, and any re-bookings to other carriers will generally be in F. Screw airline loyalty…
Excellent analysis, Gary! I indeed now spend less per mile & when the airlines realize what they’ve done which you’ve spotted years in advance, we’ll have long ago become the real winners.
Yes, absolutely. I used to be a loyal DL customer, not a road warrior, but still qualified for Silver several times, and Gold once. After they pulled out of my home airport (ALO), and have devalued their program so heavily, I really don’t care who I fly these days. I just maintain accounts with DL, UA, AA, and SW and let the miles fall where they may…
Some great points. I just said goodbye to my US Airways gold status today.All about diversification now for me and flexibility. Shifting everything to the lowest carrier or when I need more flexibility I book with Southwest with their more customer friendly cancelation policies.
Of course ‘loyalty’ programs have never been about actual loyalty. The airlines use the word ‘loyalty’ to invoke an emotional response, but the programs have always been about incentives. Delta and United have chosen to stop incentivizing the ‘gamers’, and increase the incentives for the business customer (well, United probably hasn’t thought ti through completely, but the effect is the same).
Whether the change in incentives works or not for the companies’ bottom line is a testable assumption, with all the potential complications you enumerate. The anguish that ‘frequent flyers’ are experiencing over the changes, however, seems akin to withdrawal, and is just as emotional and irrational as any loyalty they felt toward a business entity that never had any loyalty to them. Feeling spurned doesn’t necessarily mean that the other party actually loved you…
A more rational market is, as you said, better for consumers in general, and worse for those who used the previous incentives to reap outsized rewards – at least until they figure out how to game the new system.
While I fully agree with the conclusion that “the revenue-based approach takes the blinders off consumers and allows them to act more in their rational self-interest” [I am one of those who’ve vowed to start shopping around for best value rather than to give all my business to one airline as in the past], I believe that the larger dynamic in commercial aviation recalls Friedrich Hayek’s more famous work: “Road to Serfdom”. The reason for this is that the same mega-mergers that turned DL and UA into oligarchs and convinced them that they could concoct a monstrosity like the revenue FF system and get away with it, have so decreased competition that the commercial flyer, who has no choice but to keep flying with the same large oligarchic carriers despite their increasingly unfriendly practices, is trapped, turning him ultimately into the “serf” of the airlines and the big loser…
If one travels more than 100,000 miles a year, then chasing elite status makes a lot of sense. But 25,000 to 50,000, I just can’t see it being worth all the effort. As far as Delta, I think they are changing too many things at once. “Like too many cooks in the soup.” As Gary says, multiple changes may have unintended consequences. It may take a year for the effects of the changes to be notable. I still hope it blows up on Delta. Delta and the CEO have become so arrogant!
It’s not just the revenue approach. Smisek ripped my blinders off when he took away my lifetime benefits. And now I buy the cheapest business or F ticket instead of being blindly loyal to UA.
It has been a beautiful thing.
The days of $800 fares to Singapore upgraded at time of booking have been dead for a long time anyway. I just hadn’t realized that I had been sleeping with a corpse.
The concern, as DCS points out, is that the mega-mergers and attendant significant reduction in competition are going to lead to fare hikes and ‘soft’ price setting and collusion.
The next few years are going to be a crappy time to be a frequent flyer.
I am planning to cut back on the use of my BA-linked charge card because the fuel surcharges on award tickets render the miles considerably less valuable than one expects. A card whose points can be used to purchase tickets on any airline as if using cash seems the better option–and will even earn miles on the redemption.
Long ago the miles earned have been an insignificant part of the flying decision. Unless you’re flying 100K+ per year, a significant majority of your miles will be coming from credit cards. Loyalty has some benefits, but as one poster pointed out, unless you’re flying over 50K+ miles per year: (1) the low level benefits aren’t worth it and (2) you’re not flying enough to get a lot of value out of the status anyway.
I think the key dagger on loyalty will be when Delta/United go revenue-based on the redemption side. At that point: (1) the miles have the same value no matter how many I have so there’s no incentive to save for a big redemption and (2) the “value” of miles earned from one airline on a flight will be essentially the same as every other airline. Right now, I might prefer 1,000 AA miles over 1,000 DL miles, but if I know both are worth $15 then I’m not sure I care anymore.
If you mean revenue based programs don’t reward nor foster loyalty, then you hit the nail on the head. Once the planes are full, the airline neither needs nor rewards loyalty.
I expect the future of reward programs to be completely focused on areas an individual airline needs to beef up: ATL? No DL Skymiles for you, but Sea-Tac, you get 10x Skymiles as an enticement because DL has lots of new routes to fill.
@DCS I think you’re merely taking the word ‘Serfdom’ from the title of that book and using it for your own purposes, I do not think any reading of the work would support this take… 😉
@Gary,
Well, why not? The work has been used to justify or explain even fringe ideas, including the modern American political right. I did read the book, and picked elements I chose. His deploring of “Bigness for bigness sake.” Did you read the book? 😉
@DCS the book is about the growth of the state and economic planning, that the roots of Nazism are found in socialism, and a warning that Britain at the time was heading down the same road. It is not an argument against mergers. (Others have taken Hayekian insights into the ‘knowledge problem’ and applied those to corporations, the challenges that come along with bigness, although they’ve also offered strategies for overcoming these — that’s a whole different discipline, the theory of the firm.)
A simple google search of me and you probably wouldn’t ask the question whether I’d read the Road to Serfdom. 🙂 Unfortunately I’m just too young to have had an opportunity to met FA Hayek, though I did meet his son Laurance (and Laurence’s wife Esca) many times.
@Gary – Thanks for the nice summary from Wiki! You may be aware of this but many scholarly books on any topic almost always underlie the scholar’s overall philosophy. Sartre’s “Huis Clos” (“No Exit”) can be literally read as a play about some chap’s punishment in after life, but it is profoundly about the author’s philosophy (Existentialism). In short, Hayakian is a way of thinking!!! “Serfdom” is no different, despite what the topic is about. One can see, big government (including Nazism) leads to collectivism and loss of individual freedom == serfdom. The bigness of the airlines leads to oligarchy, which leads to loss of consumer freedom == serfdom. I think I have made my point 😉
Click Bait is bad for loyal readers but it IS for the reason you think.
@DCS Again, tortured reading of Hayek to say that the Road to Serfdom is about corporations getting large. And CERTAINLY a tortured reading of Hayek circa the Road to Serfdom (his later works skew a bit more conservative)
@Gary – Let’s put an end to this. Despite his becoming the darling of the American political right, Hayek was a Liberal (capital “L”), also known as “classical liberalism.” Central to Liberalism is “individual freedom” — a them that permeates “Serfdom.” Your narrow reading of it as about Nazism misses the point about a piece of work like Serfdom. Nazism and the European political climate at the time were simply a vehicle or a metaphor for Hayekian defense of individual freedom. Nazism was the perfect metaphor because it was an extreme case of collectivism – the ultimate anti-individual liberty. So, I will just leave you with this quote that supports my point. Serfdom was s repudiation of collectivism: “Criticism of collectivism comes from liberal individualists, such as classical liberals, libertarians, Objectivists, and individualist anarchists. Perhaps the most notable modern criticism of economic collectivism is the one put forward by Friedrich Hayek in his book The Road to Serfdom, published in 1944.”
See it in the very last sentence? It is exactly as I said. Big government (including Nazism) lead to collectivism and loss of individual freedom, i.e., serfdom. That was a central theme in “Serfdom.” I do not have to spell out what this has to do with big airline mergers, loss of competition and individual freedom (serfdom). You probably would not see the connection unless Hayek himself made it. So, I am out because I have nothing else to say.
Hayek was a classical liberal or in modern parlance libertarian, though in old age veered a bit more conservative (ironically, as the author of a piece entitled “Why I am Not a Conservative”) with the assistance of W.W. Bartley in authoring later works.
His concerns were about the state, and not about corporations merging, and certainly didn’t the lack of anti-trust action against private business as a problem (!!!).
State action against mergers is precisely the kind of collectivism that Hayek wrote against.
I should add that in writing on issues of the growth of corporations, Hayek definitely did distinguish between those companies who had succeeded through unfettered competition and those which had grown as a result of political connection. He was very much against crony capitalism, and was at least open to the idea (or wasn’t a priori opposed to the idea) of taking action against those companies.
“Allowing mergers” isn’t crony capitalism, although it’s possible in some areas (Hayek did engage in dialogue about banking for instance) where companies succeed through their relationships with government and in those cases he had no special hands off proviso.
The “state” approved the mergers, creating oligarchs at the detriment of individual liberties, is how Hayek would have put it as a Liberal. This is consistent with this: “The classical liberals advocated policies to increase liberty and prosperity. They sought to empower the commercial class politically and to abolish royal charters, MONOPOLIES, and the protectionist policies of mercantilism so as to encourage entrepreneurship and increase productive efficiency.”
It is simply wrong to view Hayekianism as one-dimensional (it was all about being against the state). That is where the hiccup seems to be…
G’day
@JEM, you’re wrong. For me it was about loyalty. I hitched my wagon to Delta, and went FO, GM, PM, PM, and now DM. Delta, OTOH, has gone from good upgrade rates, to a really crappy one. The result?
Well, since I became an FO I bought every single ticket on Delta.com. This year, I have not bought a single ticket there, using the Chase Ultimate Rewards portal for all my ticket buying.
Because “screw you” is a game that everyone can play.
And no, the fact that the planes are full right now (and I’ve only been on one completely full flight this year, out of ~20) does not free up an airline to ignore its “self locked in” customers. not unless you live in a fantasy land where “good economy now” means “good economy forever.”
And someone like me, who buys his tickets ahead of time, but buys them himself, so can decide “I’ll pay more for Delta, and the upgrade, rather than less on brand X airline” is realistically a more valuable customer for Delta than someone who’s paying more because he’s buying at the last moment, but doing it for a company that requires he buy the cheapest flight available.
Because only he is treating Delta as a commodity, rather than as a preferred supplier. And the way you make money is to not be a commodity supplier.
@DCS the state didn’t ultimately stop the mergers (after extracting various taxes). Hayek was concerned with monopolies achieved through government support, not monopolies per se. And the absence of government standing in the way is not government intervention on behalf of the business.
@Gary — LOL. What hair-splitting! That the mergers happened at all means that they had ‘state’ support, otherwise they would not have happened!
Your understanding of Hayek would, in fact, lead you to conclude that he would have been against the ‘state’ busting monopolies — clearly the wrong conclusion since the Liberals did want monopolies gone due to their propensity — like collectivism or central planning — to infringe upon individual liberties.
Echec et mat. Give up!
@DCS you call it hair splitting but it was an important distinction to hayek for sure whom you’re trying to interpret (see for instance Hayek’s letter to Walter Lippman reproduced in Ben Jackson, “Freedom, the Common Good and the Rule of Law: Lippmann and Hayek on Economic Planning,” Journal of the History of Ideas, 73 (2012)
@Gary — At least you now seem to be finding the multi-dimensional Hayek!
This is the same BS as in “airlines fees are good for you”.
I’m happy to see hotels eliminate fees instead (like Wi-Fi) — customer have spoken, and fee sucks. As do frequent flyer program devaluations.