Why Frequent Flyer Programs Make Sense — and Gutting Benefits Does Not

Airlines are jumping on the ‘reward revenue not miles flown’ bandwagon and they are cutting back the benefits of their frequent flyer programs. I’m not sure this decision makes alot of business sense.

That’s a very broad statement, and since I’m often critical of other travel writers from making unsupportable overbroad generalizations, let me outline the scope of this shift.

  • USAirways was first out of the box with the idea that loyalty is about absolute revenue generated rather than frequent purchases. They tried to alter their frequent flyer program accordingly, but backed off as a result of negative PR.

  • Delta has gutted it’s frequent flyer program in an effort to restructure it to reward only high fare passengers.

  • United has its own entry into this game, creating a new frequent flyer program level run out of World Headquarters called ‘United Global Services’ which gives highest priority in benefits as a result of high revenue regardless of frequent flyer status level. And United has also restricted the international upgrade awards it gives to its most frequent flyers, so that they can no longer be used on the lowest fares.

  • Continental travelers are even worried about the OnePass program being terminated. (Hint: it won’t be.)

  • In one of the most extreme moves out there, starting July 1 British Airways won’t even allow you to signup for their program unless you buy a high fare ticket or get a British Airways credit card. (That’s why you need to get a British Airways frequent flyer account now, so that it will be grandfathered in.)

So does this make sense? I’d argue not.

The idea behind a loyalty program isn’t actually to reward total revenue, but to reward (and induce) incremental revenue. You don’t want to reward the folks who spend the most money in absolute terms. You want to reward the folks for whom the reward will generate more dollars than they would otherwise give you. That is a subtle but extremely important business difference.

The person who buys full fare tickets but doesn’t pick their own travel provider (either because they ignore it, their corporate travel department buys the tickets, or whatever) isn’t going to spend more money on an airline because the loyalty program is slanted to high revenue travelers. For them, changes are a wasted benefit — “an inefficiency in the system.”

Moreover, scaling back loyalty programs reduces revenue. That’s because current revenue takes current benefits as a given. Since those benefits were designed to generate incremental revenue, reducing those benefits reduces that incremental revenue.

So what is the value of a frequent flyer program? Empirically we know that frequent flyer programs generate more trips and stays. Why?

Let’s leave Mileage Runners out of it — they aren’t what drive loyalty programs. (For example, while United publicly says mileage runners should go for it, in one-on-one conversations they don’t value the mileage runner at all.)

A business traveler is less reluctant to travel if she’s being rewarded for it. This is true in my own case — I won’t fight against travel since I not only get paid expenses but I have something to cash in later. Without a reward scheme, business travelers would be more reluctant to travel (and more likely to find alternatives to travel).

In additional, brand loyalty – independent of high fares – generates revenue. An airline wants it’s frequent flyer currency to be a consumer’s preferred currency, because airlines sell their currency to myriad of vendors. Credit card companies, home mortgage lenders, phone companies, supermarkets, gas stations, and even blood banks purchase miles to reward their customers. Many frequent flyer programs are making money even when their associated airlines are losing money, because they sell miles for much more than their cost to redeem awards. Randy Petersen even estimates that the Mileage Plus program of bankrupt United Airlines may be worth more than $3 billion.

Cutting back a program reduces loyalty to that program, and hurts the program’s position in the marketplace of selling miles to other vendors. That means cutting back a program hurts the only profitable business that many airlines are in.

This doesn’t mean that airlines should ignore their high revenue travelers. They want to pour resources into generating marginal revenue, and many of the folks who will provide them with that revenue are the same folks providing high revenue now. My point is that total dollars spent is only a proxy – and not necessary a good one, and potentially even a dangerous one – for the likelihood of generating marginal revenue.

The most profitable course is to (a) design programs to incentivize marginal activity and (b) do so while maintaining current benefits for the rest of the members of a program.

We’ll see if anyone is listening…

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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