Airlines Try to Balance the Number of Elite Flyers With Airline Capacity
Back in November I explained how frequent flyer programs manage their elite levels. “Too many elites” is a problem when a program can’t deliver benefits.
On the other hand, when elite ranks shrink (usually during bad economic times although also when an airline is going through problems like bankruptcy or a strike) airlines want to goose those numbers — such as with double elite qualifying promotions.
In recent times airlines have seen, overall, the problem of too many elites rather than too few. That’s because the economy has been good enough to support increasing air travel, while airlines have maintained capacity discipline — more people flying a whole lot more without a corresponding increase in available seats.
This could change with an economic downturn, or with airlines becoming more aggressively competitive now that fuel prices have fallen.
United Isn’t Balancing Its Elite Pool and Marketing Spend, It’s Aping Delta
With more elites and without more seats, upgrade percentages suffer. At the same time, airlines spend money on elites — such as giving out bonus miles — that they may not need to in order to fill planes.
Delta increased the hurdles to reach elite status with the imposition of minimum revenue requirements. Then United followed with the exact same criteria.
It did not strike me strange that United followed. Years ago before the Continental merger United seemed to follow American. Now they manage by doing what Delta does. Plus, for all their problems, they were likely seeing some of the same phenomenon.
What struck me odd is that they chose the exact same criteria. If they were managing their elite pool relative to capacity it doesn’t surprise me that they would adjust the criteria to earn status to give them a pool that made sense for their marketing spend and to be able to consistently deliver benefits. But with:
- Different route networks
- Different corporate contracts
- Different load factors
- Different fleets
And on and on, I would have expected the exact numbers needed to get to a similar proportional elite pool to differ. It seemed like United wasn’t analyzing the data, the were analyzing the Delta.
So after a year of revenue-based status requirements, Delta raised their revenue requirement for elite status by 20% and then United followed in doing the same thing one month later.
United Believes It Has the Same Problem as Delta, It’s Just Tackling It Wrong
Delta declared, when raising the spend requirement for status, that when everyone is an elite flyer, no one is. To a certain extent they aren’t wrong, although they are focusing only on benefits where members compete with other members are ignore completely that it’s as much about reducing marketing spend the airline deems unnecessary. Fair to do, of course, although one wishes Delta was more honest.
United too thinks their problem is too many customers or at least too many elites. Perhaps because they heard Delta say it. (In fairness, they also think their problem is their employees, too.)
But without the operation that Delta has, you’d expect that the same stringent criteria for status would mean that United would thin their elite ranks too much. And indeed United finds itself selectively waiving minimum spend requirements for status and offering 22 month corporate status matches up to 1K which bolsters their elite ranks.
What About American?
American may not need to spend as much to market to elites, American still gives 100% bonus miles to mid-tier elites which is a gain for US Airways Golds and Platinums and is more generous than United and Delta. I would expect some mean reversion there for 2016.
American certainly has the ability to track spending, likely better than United does, at least their data migration in late 2013 should have given them the capability. It’s not clear to me that they have the easy ability to do that on a backward looking basis for US Airways.
I’d expect that American will integrate US Airways Dividend Miles into the AAdvantage program in the coming couple of months. Then they’ll be positioned to start tracking spend across all members in the program. With a combined program they’ll learn just how many elites they’ll wind up with in the merged carrier (with a combined route network it could be even more than the two carriers had separately) and they’ll learn what requirements will be necessary to manage that pool.
I don’t believe American would just pick the same criteria as Delta if they were well-positioned to restrict their elite pools, they’d look at the data to determine what criteria gave them the right-size population at each elite tier. They may not have the data yet to answer this question, though eventually they certainly will.
Note that United is not giving confirmed upgrade instruments when they waive the 1K spend requirement, making this “exception” fairly worthless.
Since United copies Delta in everything they should at least try to recruit some Delta employees to bring some innovation to their corporation and maybe come up with some ideas before Delta does. Being a copycat with ZERO innovation is not the smartest move for a company in 2015.
I feel there is a fundamental disconnect at United in valuing loyal customers who give them repeat business. It’s actually worse than Delta. They think that minting corporate 1K’s will be as valuable to their bottom line as the customers they chased away.
The principal dial they’re turning to manage the elite population is how they market and sell paid upgrades to premium cabins.
UA doesn’t care who and how people get Premier status when the primary benefit (and cost to the carrier) is managed on a flight-by-flight basis.
Greg
The problem with the so-called revenue-based system as implemented by DL and blindly copied by UA is that they have wrongly equated high-value customers with big spenders. Under such a definition, elite status no longer has any meaning. Many of the folks that DL and UA feel need to be rewarded, i.e., those who can afford to purchase premium tickets, could not care less about elite status or “loyalty”. In fact, they are the type of people who would easily fly with any airline because they can afford to, especially when it is more convenient (e.g., more direct or short flight).
In sum, what DL and UA have done is to sweeten the deal for folks for whom everything comes so easily that they have no use of a nebulous concept like loyalty, while sharply curtailing the benefits for those that I consider to be the true high-value customers — i.e., travelers who, because they are not as well-off, do appreciate what elite status and loyalty get them. These are the folks who stood by the same airline through thick and thin in exchange for continuing to get the perks that actually mean something to them. Note that these are not necessarily people without resources. They are road warriors who work for companies with limited means and who, thus, do not have the luxury to purchase expensive tickets. But because they are frequent travelers, they nevertheless do contribute significantly the airline’s bottom line. Because elite status allows them to make up for the perks that they are unable to purchase outright, many would stick with only one airline, usually taking the long or inconvenient itinerary, etc, just to make sure that they would make top elite status to reap the associated benefits. For this type of high-value customers, elite status means something. For high-value customers as redefined by DL and UA, elite status is anathema…
I wonder how many frequent flyers understand the changes
I believe many do not and it will take some time before they realize how little US values their business. I think that it will take a year or two to make much difference for the masses.
@DCS – Well said. Probably the most concise description of the flaws in Delta’s logic.
@DCS: That summarizes the stupidity of Delta. As a business traveler I only care for convenience. Since my company pays for business class if total flight is 5 hours or longer I couldn’t care less if Delta values me. By paying business class I automatically get all the benefits Delta offers to its elite members so if I have the choice to chose (and I do) I will only fly business class on Delta if their flights and connections are more convenient. There is no way on Earth I will chose to fly Delta over Cathay, Emirates, Singapore, BA, etc… Delta only wins when they have a non-stop flight or a flight that will allow me to spend more time with my family. Thus, aiming at customers like me it is their biggest mistake since if I have a choice to spend $10k+ on a ticket it won’t be with Delta.
@Santastico — +1
Before @Gary Leff and I recently veered off on a tangent to argue about the economic philosophy of Friedrich Hayek, I had agreed with his assertion that one of the consequences of the revenue-based system (R-B.S.) is that it opens the consumers’ eyes and allows them to make decisions based on self-interest rather than “loyalty”: The low spender, now getting only a small fraction of redeemable miles that he got under the legacy FF system and thus feeling no loyalty, has no reason to stick with either DL or UA, and decides instead to hunt for better value. At the other end of the spectrum is the big spender with unlimited options, who compares DL or UA to the SQ or CX or even just the convenience itineraries and wonders why he should stick with DL or UA when he has so many options that he can easily afford.
When the consumers are freed of the yoke of “loyalty” and allowed to choose based on self-interest, the airlines should lose, right? Well, that is my wishful thinking. I am hoping that something like that will mark the fate of the R-B.S. 😉
Nobody outside of United management knows these numbers, but I’d assume that they crunched them and decided the 20% change was necessary. Perhaps they would have wanted to raise spending requirements a lot more (because they have so many 1ks – “too many elites” is a bigger problem at United than at Delta from my limited experience) but they may have decided that with all the other problems they simply could not go beyond what Delta was doing.
Also, it is very easy to make the spending requirements. You just can’t do mileage runs anymore, but those of us who are frequent flyers on economy tickets, can easily make the $12k spending for 1k! I usually spend about $15k a year and I tend to buy the cheapest flights. But what you can no longer do is buy a $500 ticket around the world for 25k elite qualifying miles – which was really, in a way, exploiting a loophole, a mistake in how the whole program was set up to begin with.
I don’t think UA has more 1k level fliers than the other legacies. If there are more people on the UA upgrade lists it’s because they have policies which allow people to gift to a partner or inherit status when on the same itinerary etc. They have taken steps to address this and perhaps it would be better for their bottom line if they take a few more steps. They also are more aggressive at selling cheap upgrades than the other legacies.
I’ve been 1-K since day one. Going back in time, getting an upgrade on any UA flight was a given. Not any more. Case in point: Flying from INC to SFO and connecting to BOS. I was number 5 for SFO – BOS upgrade and there were 27 behind me! That appears to now be the present and the future.
As there is now no real competition among US carriers – they each gain and lose the same percentage of customers – it just makes sense to fly the most efficient route and if an Asian airline flys that route, it becomes a no brainer.