The modern frequent flyer program launched in 1981 first with American AAdvantage followed in mere days by United Airlines Mileage Plus. Airlines have been making changes ‘to better rewards their highest value customers’ since 1987.
Two decades ago U.S. airlines started the push to rewarding only full fare business travelers with their best benefits.
- United made systemwide upgrades redeemable only on nearly full fare (H and above) tickets in 2003. There was enough of an uproar that they even issued additional sweet spot certificates valid on nearly any fare for the same year, and had less restrictive international upgrades the following year (that still excluded the cheapest fares). That policy remains in force today.
- US Airways planned to count only full fare tickets towards elite status. The public face of the airline explaining this change became the CEO of Spirit Airlines. At the time he described customers buying the inexpensive tickets they offered as not having the kind of loyalty they were interested in. Ironically Baldanza only wanted the highest fare passengers, and now he only wants the highest fee ones!
- In December 2002 Delta announced they would stop giving full elite credit to discount fares. Two years later they rolled back the change and also rolled back award fee increases.
The modern era of revenue-based frequent flyer programs really began with Delta finally pulling the trigger nearly eight years ago after many IT problems slowed them down. United and American followed then because,
- Airline executives had Delta envy, they thought that Delta was the best-run airline and that their executives were smarter.
- Delta has been able to devalue SkyMiles without the same ill effects felt by others, a function of the airline’s strong brand reputation and relatively little competition at its Atlanta, Detroit, Minneapolis and Salt Lake hubs.
However rewarding customers who spend more on tickets isn’t the same as rewarding customers who are most profitable to an airline company, let alone incentivizing customers towards becoming more profitable.
Two months before United announced its foray into becoming a revenue-based program, then-Managing Director in charge of MileagePlus co-brands (and now IHG Senior Vice President of Global Insights and Analytics) David Oppenheim laid out the reasons this was a bad idea.
- A flyer may buy one expensive ticket with you because you are the only airline who flies non-stop on the route. Does it make sense to reward them? You’re essentially just lighting money on fire if they’re going to pick your airline anyway. Similarly, does it make sense to spend money rewarding flyers who ‘choose’ your airline because they’re required to by a corporate contract?
- In general a high revenue passenger is probably better for an airline than a low fare one. But a high fare passenger may trade off with another high fare passenger (for instance they both buy the last seat available on a flight). That high fare customer wouldn’t actually be profitable in an economic sense (opportunity cost basis).
- On the other hand a low fare passenger may fill empty seats and be pure profit — or they may ultimately displace a high fare passenger and be very costly if the airline didn’t get their revenue management right.
- Low fare customers may also engage with an airline’s ancillary products. Base airfare isn’t the only contribution to revenue that matters, and other products are often higher margin than the actual airline seat.
- Meanwhile third party partner customers are profitable too. A member who carries an airline’s credit card and uses it, credits points for their non-air travel to the program, and uses their shopping portal may be a profitable customer.
- Ultimately the program needs to try to influence incremental business. You may reward a high spend customer but not get additional business from them but you might be able to move the needle with some of your other customer segments.
Oppenheim is a very smart executive who understands loyalty marketing. I first spoke with him about 13 years ago when he was a principal at Boston Consulting Group working with Hyatt on what become the re-launch of the Gold Passport program, including full breakfast, no capacity controls on redemptions, and confirmed suite upgrades.
What American Airlines understands with their new elite qualifying model is,
- They make money on high margin products like selling miles, much more so than just selling airline tickets
- They can incentivize customers to earn more miles (generating more profit for the airline)
- The customers who want their miles most are the elite customers, so incentivizing that mileage earn through partners using the elite program is the most effective lever they have
A customer who engages the program across a variety of dimensions is more valuable than one who only flies the airline. That customer can be valuable too. But moves to reward only high airfare spend customers take the airline in the wrong direction.
It’s not just that credit card and other partners are taken into account in determining a customer’s value, but by determining upgrade priority based on the level of activity with partners as well as on planes they’re encouraging greater activity with those partners.
United Airlines, in contrast, has simply hiked the ticket spend required for status while the financials of MileaegePlus stagnated. The revenue growth that United’s loyalty program saw was being driven by transfers from Chase Ultimate Rewards. Right before the pandemic United did a new deal with Chase to improve its revenue but fundamentally MileagePlus is stuck in the old way of thinking that Scott Kirby advocated at American Airlines six years ago.
There are still some misses in the American Airlines elite qualifying program, like failing to count seat revenue, bag fees, and buy ups to first class (high margin products all) and imposing new onerous requirements on customers in regions without the opportunity to engage with as many elite-earning partners. However this is a step towards ‘getting’ both what customers are actually profitable to the business and incentivizing customers to engage in more profitable activity.