Mileage Versus Revenue: Frequent Flier Loyalty Programs

Tim Winship of FrequentFlier.com wrote an article found on page 6 in the September 2012 issue of Loyalty & Rewards — being distributed in as a supplement in USA TODAY until Sunday, September 30, 2012 and via the Internet as well — discussing the advantages and disadvantages of frequent flier loyalty programs based on mileage versus revenue.

Winship notes that low-cost carriers such as Virgin America, Southwest Airlines and jetBlue Airways tend to have frequent flier loyalty programs based on revenue, whereas legacy carriers such as Delta Air Lines, US Airways, United Airlines and American Airlines tend to have frequent flier loyalty programs based on mileage. Simple, right?

Not so fast. It has been rumored for months that Delta Air Lines may switch from a frequent flier loyalty program based on mileage to a frequent flier loyalty program based on revenue — and while some FlyerTalk members are happy about that prospect, many are not. Could other legacy airlines adopt a similar approach in the future?

Some FlyerTalk members argue that the amount of time spent as a passenger on an airline demonstrates loyalty — what some experts in the loyalty industry describe as loyalty program member engagement, implying that engagement defines a successful loyalty program — while others argue that revenue generated from the passenger is what is more important to an airline. Which is actually more important? I tend to believe that the “sweet spot” is somewhere in the middle for many airlines.

To be sure, there are ultra-low-cost airlines such as Ryanair and Spirit which tend to “nickel-and-dime” their passengers, seeming to care more about gaining as much revenue as possible, supposedly at the expense of brand loyalty. Ryanair even charges many of its customers a fee just for the privilege of paying for an airline ticket. Does the idea of saving money to the extreme win your loyalty? Is Ryanair profitable with this strategy? Would any parts of that strategy work for any other airline that is not an ultra-low-cost carrier?

The news may not be all bad for you, depending on your preferences. Winship summarizes the advantages and disadvantages to both types of frequent flier loyalty programs as follows:

Where, then, do the best interests of consumers lie? When choosing between mileage and revenue programs, there’s no definitive “best.” Each has its strengths and offsetting weaknesses.

The primary benefit of traditional mileage programs is the ability to squeeze exceptional value from them. Earn miles for long, cheap flights. Then redeem them for pricey tickets. If this were high finance, we’d call it arbitrage.

The downside: Award seats at the most desirable price points are heavily restricted and may be non-existent on popular routes during peak travel periods.

By contrast, there are no restrictions or capacity controls on award seats in revenue programs. Every seat on every flight may be booked with either cash or points. No more stressing out over scarce availability.

On the other hand, you’ll never get outsized value from your points. With the value pre-set on both the earning and redemption sides of the programs, the return-on-investment is pretty much set in stone. (The exception is Southwest’s program, where some leverage can be had by earning points for high-priced Business Select fares and redeeming them for low-cost Wanna Get Away fares. But that’s a strategy that will only work for business travelers whose companies foot the bill for pricey unrestricted fares.)

In the end, what works best for you depends on which set of tradeoffs best suits your purchase and travel behavior.

If you insist on squeezing outsized value from your program and accept scarce award availability as part of the challenge, then traditional programs are your best bet.

If your preference is for a reliable but modest rebate and unfettered access to award seats, then a revenue-based scheme will suit you better.

Do you agree?

Comments (Showing 1 of 1)

  • dliesse at 10:23am November 13, 2012

    One of my hobbies since my age was expressed by a single digit has been to create airlines on paper. While I don’t spend nearly as much time on it 40+ years later, I do still think about it from time to time. I also have an MBA in aviation management, so I do have some academic knowledge, at least.

    In recent years I’ve been thinking about this very topic. What’s the best compromise between what’s best for the airline and what’s best for the passenger? My conclusion is that a hybrid system is in order.

    My thought is that rewards — free flights, upgrades, and so on — should be based on spending. These could be structured as a form of rebate, which also completely eliminates the taxability question (in the US). I’ve not come up with a reasonable rate, but as an example perhaps every $100 in revenue generates $1 in rebates which can then be applied to whatever fare is appropriate.

    Non-reward perks, on the other hand, should be based not on mileage but on the number of trips. Not segments, but one-way trips (in other words, until there’s an X in the stopover column of the flight coupon — electronic now, of course). These programs are called “frequent” flyer programs, not “distance” flyer programs.

    Of course, one of the perks can be that what you pay in reward dollars for an upgrade is based on different fare buckets. Top tier would pay the difference, say, from full-fare coach to discount first, while someone with no elite status would pay the difference from actual fare purchased to full fare business or first, as appropriate.

    I believe a system like this is the most equitable possible. Current programs tend to favor those who fly longer distances less often at lower fares over those who fly frequently over shorter distances. For instance, someone flying DSM-DTW weekly is rewarded less than someone who flies JFK-LAX monthly, although the JFK-LAX fare is almost always far below that of the shorter route. Someone in the Midwest has to fly more often than someone on either coast to have the same potential rewards.

    It just seems to me that the perks should go to those who fly more often, rather than those who fly greater distances, and those who spend more should get more back. My plan may need some tweaking, but it does satisfy those goals.

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