elitetraveler

Just read this in Global Traveler's weekly e-newsletter---


Frequent-Flyer Programs: What Really Matters?
There’s a lot of dissatisfaction with airline loyalty programs, as the recent Congressionally mandated DOT report showed. But how aware are the executives that manage those programs? A survey of more than 100 registrants for the third annual FFP Conference showed that while they are all too aware of consumer resentment, other issues may be driving the train. Essentially, the programs aren’t about loyalty any more.

Those surveyed — executives from large, medium and small airlines around the globe — say they try to measure their customers’ satisfaction, but almost one in three only track complaints; the rest attempt to ask their customers about their experiences, at least occasionally. They readily identify reward availability as the biggest problem; 57 percent say that “it’s a major problem and members are very upset.” Only 6 percent say they think their program members are happy.

The biggest frustration among their members, executives say, is a lack of available awards at the lowest “saver” levels. This was named as the primary frustration by 65 percent of respondents. Despite this, more than half said that availability of reward seats was not increased in 2006, and more than 40 percent will not increase availability in 2007. The biggest surprise of the study, according to conference co-organizers IdeaWorks and Airline Information & Global Flight, is that [U]the primary mission of frequent-flyer programs is no longer to create loyalty among passengers; now, it’s the bottom line.[/U]

The rise of co-branded credit cards has become a big generator of cash flow for the airlines; more than 40 percent of program execs say that revenue is the primary interest of their management, while keeping customers loyal now only counts for 15 percent. Miles sold to the credit-card banks now account for almost half of all mileage accrual. So while individual frequent flyers are less important to the airlines, management is beginning to see that dissatisfaction with availability could negatively impact the bottom line if credit-card participation begins to drop.

The study also provided an interesting insight into airline revenue management — what IdeaWorks calls “the dark art.” So far, revenue management is conducted at a higher level of airline management than frequent flyer programs. Priority is given to cash-paying customers, so mile-redemption seats are those most likely to go empty. Only a few loyalty programs control their own availability by increasing or decreasing mileage award levels.

The one area where improvement can be expected is international redemption. The explosion of new alliance memberships and partnerships with international carriers can help take the pressure off redemption dissatisfaction, as more program members save their miles for more meaningful and more available international rewards. Seventy-three percent of the mileage programs represented at the conference will likely increase their international rewards activity in 2007.

itsme

Appreciate the post, but not entirely sure what it means. Was there ever a time when "profit" was not the paramount consideration? Perhaps it is the airlines once thought that the way to "profit" was by encouraging "loyalty," that being repeat business, and now there is less focus on keeping customers brand loyal and more on FFPs as profit centers in themselves, that primarily through selling miles to credit card companies and others to hand out (and holding down award redemptions).

Most importantly, what does this mean to us as FFers (and credit card users)? Any thoughts? Perhaps it is reassuring, since it seems that FFPs are unquestionably valuable to the carriers, producing substantial profits for them, so they want let them become less and less attractive.

Would have liked to hear more about "revenue management" and the release of award seats, as well as release of cheaper buckets. But little said about this, and that not very insightful. I think the carriers could do a better job of making award seats available (announce reduce mileage awards each week to a great number of destinations with unsold seats) and doing better by themselves too. (Why not put together air-land packages with hotels that aren't selling out that could be had for a combination of miles and $s. Enough $s should cover the airline's and the hotel's marginal costs, and the airline could reduce the overhang of unredeemed miles, while pleasing some of its FFPers.)

Nesta

These programs began because airlines surmised they could use loyalty to drive profits. Loyalty was never a goal unto itself. The whole premise was to instill a "switching cost" into decisions about flying. Otherwise one would just chose the cheapest fare.

In the beginning, I suppose, the relationship between the airlines and its frequent flyer passengers was not as one-sided in favor of the airlines as it is now but the airlines only goal was and is to make more money.

RustyC

The only co-branded mile-earning card I have is one without an annual fee and only a mile earned per $2 spent and 3K intro miles bonus, and I don't use it that much. But I get tons of mail solicitations across the board for the "official" card for every program I'm in, so they're really pushing the things hard.

The way I read "profit" here seems to be all about selling miles right and left for the non-flight activity, which adds to all the unredeemed miles chasing too few seats. It's becoming more like a raffle sale than a sale of anything of real value, and the secretive nature of the airlines and cavalier attitude about it doesn't help. No doubt some of that is encouraged by the current pricing environment and cartel-like behavior.

But if the word gets out on availability and the programs lose their luster, the legacy carriers risk another punishing round of market-share losses to LCCs.

Efrem

That's it in a nutshell. It's easier to keep a customer you already have than to get a new one. If you can develop a program that will let you keep a customer for less cost than getting a new one, you're ahead of the game. Loyalty is a means to that end.

lavalyn

I guess the only real difference was that then, FFPs were to drive repeat business, while now, FFPs are to bring in direct revenue per point (via credit cards and such). Which is in itself not surprising in the least; aeroplan's prospectus made that fact very clear when it revealed that more than half its revenue came from branded financial instruments.

RustyC

I think one very important angle today that a lot of people miss is the legacy vs. LCC one. Most of the mile-selling, problems, etc., are concentrated in the LEGACY programs. Most of the LCCs have programs, but they're not nearly as developed and probably won't be anytime soon. Having the FFP and with it the possibility of going to Hawaii or Paris is a major competitive tool the legacies still have. If they lose it, it could really accelerate the market-share loss, as the original vision of price being everything rears its head again.

Could also be that this thing will get a Congressional investigation now that Congress is in the oversight business again.

Jakebeth

Any airline exec who thinks that he/she can continue to generate revenues by selling miles while beating back clients from using them on the other side of the transaction is employing facile thinking.

I don't suggest any particular airline is there yet, but people understand that in effect, they're buying miles. An airline that ultimatley fails to reasonably accept them as currency is doomed to eventually lose customers.

Who knows which or how many airline execs are actually as small minded as this, though. It's just an article.

CPRich

Actually, he/she is employing thinking that will bump up this quarter's revenue and profits, thus the share price, thus his/her bonus. Investing in long-term relationships will only pay off for the next CEO and will do nothing to please Wall Street.

Jakebeth

Sad and true.

BearX220

There shouldn't be any distinction between promoting loyalty and earning profit... one should lead to the other. That was the initial rationale for FF programs.

The key change, though, is that the FF programs are now being leveraged as profit engines -- without much focus on the negative effects on loyalty and customer satisfaction (that is, issuing far more miles than are possible to redeem, or advertising awards that are for all intents and purposes nonexistent).

The airlines are more interested in making money this quarter by retailing miles than creating loyal customers for the long term.

The inevitable end to this, of course, is what happens to any currency when it turns out to be worthless and people lose faith in it: a crash. These programs thrive on belief. If the miles are perceived as not worth having, they're not.

Kiwi Flyer

SQ's PPS programme is joining the ranks of FFPs much more focussed on revenue/profits in their (re)qualification criteria. link

RustyC

Given the secretive nature of the whole game, it also seems fraudulent because inevitably the miles will be represented as being worth more than they actually are. I don't see any of those credit card commercials showing people using their miles to vacation in Des Moines (though that may be a place with seats on the "reward travel forecast"). The bit about having plenty more seats if you spend twice the miles also looks like a stealth devaluation.

Am reminded of the ticket policy they had in Atlanta for the 1996 Olympics, a policy that really soured a lot of people on supporting the games. You had to order tickets some 9 months in advance, your credit card got charged right away, and you'd learn in 6 months if you got them or not. And if you didn't, you had to send in a form to get a refund; otherwise it'd be assumed you wanted to donate the money to the Olympics. People would front $2,000 and get only a few hundred worth of tickets; they made more off interest from people who didn't get tickets to the most popular things (like women's gymnastics) than they did off the paltry number of tickets left for public sale for that or other popular events. And, coincidentally, the numbers available were kept secret. Seems like a number of parallels with how airlines are trying to run the FF programs.

iahphx

A lot of this stuff parallels the discussion about redemption availability. Only UA and AA seem "serious" about trying to maintain a plausible amount of award inventory at the "saver" level. All the other airlines are pocketing the credit card money and not worrying too much about customer dissatisfaction.

http://flyertalk.com/forum/showthread.php?t=667765

Of course, the current situation is not sustainable long term. How many flyertalkers now use their airline credit card as their primary one? I don't, and I suspect I'm in the majority. We know an airline mile isn't worth that much anymore. Instead, we run around pocketing the incredible sign-up bonuses (20,000 miles is pretty typical) and move on to the next deal. Eventually, the less sophisticated travellers will also "get it" -- especially when they find out the trip they've been saving for is unavailable.

I'm not sure how this will all play out. Seems to me that the most likely outcome is an increase in cashback and general credit card award programs, leaving the airlines out in the cold. Of course, the airlines -- pinched by a decline in miles sold to credit card companies -- might tinker with their programs a bit to keep the cash coming.

BearX220

I carry CO and NW credit cards, but I rarely use them anymore for the reasons to which you allude. Our everyday household card is a fee-free Hilton HHonors Visa, and our backup is a Marriott Rewards card. I've come to have much more confidence in those two alternate currencies.

All currencies suffer from inflation, too, which is why the standard domestic award has gone from 20,000 miles (20 years ago) to 50,000. But the big difference between miles and dollars is that we can't invest our miles on account and earn interest -- so there's no good reason to bank/hoard them. Earn and burn.

As you suggest this will eventually become clear to all those poor occasional flyers who save for years to achieve 50,000 or 100,000 miles for that one free trip they want to take, only to learn that (A) redemption is impossible or (B) the redemption levels go scooting skyward just as they get close. That kind of broad-based dissatisfaction, when enough people stop believing or caring, will take the whole system down.

It happened to S&H Green Stamps, it can happen to FF miles.