Airlines have historically been able to offer outsized value to consumers through their frequent flyer programs. Instead of merely offering a rebate on spending, where points are a modest currency that can be used to buy tickets at retail,
- Airline seats that go out empty can never be resold. As a result the incremental cost of carrying a passenger is about $30. But the retail value of that seat may be hundreds of dollars.
- It’s that spread that lets an airline give consumers a real value, they buy the inventory cheap and make it available to frequent flyers.
- Frequent flyer programs are also the largest buyer of seats from the airline, so they’re getting a ‘volume discount’.
The existence of seats that would otherwise go unsold, which can be liquidated through a frequent flyer program, creates a huge opportunity. Programs can avoid giving that same seats at a discount to paying passengers especially who are having their tickets purchased by a third party (usually an employer).
Programs don’t just make seats available they expect to go unsold, they may avoid offering some of that excess capacity to frequent flyers so that program members need flexibility to use their points at the saver level, further ensuring that members don’t spend points when they’d otherwise pay cash.
A problem arises, however, when there just aren’t many unsold seats. With airline consolidation and capacity discipline, load factors are at historic highs.
While there may be about 16% of seats going unoccupied,
- Some routes rarely see an empty seat, while certain undesirable flights go out half empty. While there may be seats available on average they aren’t likely where members want to go.
- With less excess capacity it’s harder to anticipate in advance which flights will have empty seats. Making award space available in advance carries a higher risk of trading off with paying passengers.
Airlines have to figure out how to satisfy member redemption demands. If the redemption experience is unsatisfying customers will get off the treadmill — and stop engaging with the program. For US airlines in particular that means stopping their spending on the airline’s co-brand credit card, which in the case of Delta, United, and American such spending drives 10 figures in annual value each.
They may charge members more points and spend more money to buy seats from the airline that do trade off with seats that would be purchased by passengers. They’re generally trying to get customers to use their points on seats that would have been sold — but sold cheaply. And they do this by tying the price in points to the price revenue management has determined they can get for the seat in cash.
- Delta and now United have eliminated published award charts
- They’re free to opaquely vary their pricing, hoping consumers won’t notice as they drive more towards average value rather than outsized value
- American has been making more award seats available when fares are especially low, both on a connecting basis (married segments) and on low fare routes during off periods.
That actually costs the program more money, think $100 instead of $30. But it also means providing less value per point, less reward for engaging in the program, to members because there’s no longer the same kind of leverage in spending frequent flyer miles.
What airlines are trying to do is spend incrementally more on redemptions in order to avoid chasing customers away.
At the same time they’re trying to hold down costs. What I’ve argued for some time though is that — given how much competition there is from banks offering their own proprietary rewards currencies that in many cases transfer to a choice of airline frequent flyer miles or can be used to buy travel directly — airlines are going to have to sacrifice margins to continue to keep customers.
Why spend money on an airline card whose points earn around a penny apiece instead of collecting a straight 2% cash back? The only way to retain the business is for the airline to continue offering superior value.
Frequent flyer programs are in some sense a victim of their underlying airline’s successes in holding down growth to sell the seats they’re offering. Originally started as a way to fill seats, if there aren’t excess seats to fill the model breaks down. And airlines are slow to realize that the era of truly outsized margins goes away with it.
Airline frequent flyer programs are the most successful marketing innovation in history, because they capture member imagination and offer the possibility of experiencing travel customers wouldn’t otherwise be able to afford. Pursuing non-transparent pricing and average value is a strategy for destroying the leverage in the programs that drives their success. A straight rebate (even when designed opaquely) puts a program on par with the sandwich shop punch card and at a disadvantage to cash that earns at a higher rate (and carries less devaluation risk).