Jackstay

At one time (pre-1978 deregulation) we were all "best" customers since everybody paid the same fare, set by regulators, for a given service. There were a fixed number of airlines that were assigned specific routes and it was not uncommon to change airlines when connecting en route. Infrequent service was also a reality because not many could afford the fares of that time and there was no way to fill up the otherwise empty seats by encouraging kettles to fly (everybody paid the same = average fare). Deregulation changed everything, and in effect created frequent flier programs.

Suddenly there was a need to create loyalty, not just to create a brand's customer base (in the previous era, there was little need for such a thing) but more importantly for major legacy airlines to use their larger route structure in combination with the loyalty program to suck the oxygen out of any new, upstart airline's marketing -- and the smaller legacies as well. Yes, the primary goal of the frequent flier program is to strangle nascent competitors in their crib. The original FF programs were more like “green stamps” -- buy tickets and get some freebies. If your job requires you to fly back and forth across the midwest, you are unlikely to use a midwest regional if you want to use your frequent flier points to go on vacation to Hawaii or Europe. Many new start airlines have been killed off this way since the early 1980s.

Note the original name of these programs -- "frequent flier." The infrequent flier does not fly enough to need an affinity to an airline and likewise the airlines didn't have enough leverage with them to change their behavior, which is primarily influenced by cost. (These days, credit card promotions are a way to both influence behavior and to pull in additional income through the relationship with the credit card issuer.)

Imagine how different things would be today if the Deregulation Act of 1978 had forbidden loyalty programs. What if each airline had to compete for your business one trip at a time? Would service be better across the board? Would there be a plethora of small, specialized airlines each offering a particular type of service? It is arguable that economies of scale and pricing pressure would have made this prohibitive, but p.s. and various flavors of bizjets are close to what I mean.

So where do elites fit in? Elite status is not really about rewarding the “best” customers at it is simply a way to ration/allocate limited service. I believe that once price became a big factor, it made sense to cut service and its costs. This is easy to do for kettles because they don't fly a lot, are relatively unaware going into the deal, and probably aren't flying on business.

Its harder to do for true frequent fliers. The irritation of poor service seem to me to accrue geometrically the more one flies and this is particularly irksome to business fliers who have an added element of time pressure. Elites get preferential treatment in exchange for “loyalty” and the “golden handcuff” effect helps bridge any bad experiences on individual trips.

It's not so much that frequent travelers are higher yield (although it cannot be true that they are on average low yield since the fare rules are generally rigged to demand higher fares for the purchasing patterns of business travelers), it's that they reliably and consistently buy tickets, and do so even when the price is high. They need to travel and they know that loyalty to an airline in the framework of the airline-defined elite program will give them more tolerable service in terms of reservations, wait lists, special non-kettle lines and boarding, customer service, upgrades, etc. Airlines generally like having consistently high volume customers and are willing to cut their margin at least a little in order to get and keep them. Corporate contracts are a testimony to this. This situation engendered the elite levels, which evolved over time and are still evolving.

One problem for the airline is that "frequent" or "high mileage" means different thing to different people. At the beginning of the FF program, the major legacy airlines were primarily domestic and definitely not the global behemoths they are today. Using miles as the metric must have seemed like a good idea at the time, but is probably much less suitable today. Comparing equally-loyal and perhaps equally-profitable domestic, TATL, and TPAC travelers will yield hugely different results in terms of accrued PQMs. The airline still has many tools at its disposal to calibrate the elite levels, however, such as COS/fare bonuses, etc. The bottom line is that the elite programs are about loyalty; that is, you bring all/most/enough of your business to an airline in return for special treatment.

There is also the question of the high mileage but uncommitted frequent flier. Let's call them "elite kayakers." If 25K is a lot of flying for a non-road warrior, then silver is a reward and comes with its perks. But a high mileage flier can easily be a silver or even gold on more than one airline, in other words, unloyal. Now that we are down to a handful of airlines, it may make sense for some to keep at least silver or gold at several airlines for the perks and then shop them on a trip-by-trip basis. The "adjustments" we saw at the silver level last winter may be a results of this change in the FF climate. The existence of both the 75K level and 100K level at the merged United is another acknowledgment. I personally am not a kayaker of any sort, but if I weren't based in a CPU-friendly city I might consider becoming an elite kayaker. But the elite kayaker is no more loyal than a kettle.

Another, although rare, creature is the "premium kayaker." If you always buy premium fares, do you really need to be an elite? Is this person a "good customer"? By definition they would have little loyalty, yet the premium ticket should get them good service. Do they influence the pricing of premium fares? If so, is it for good or ill? The rack rate on premium fares are really high. Is that because a significant number of people buy them at that fare? Or is it a bargaining ploy so that big contracts get a big discount and still leave good margin? What about those of us who aren't privy to a corporate contract and aren't offered that sort of a deal? If the rack rate were lower, would more people buy them at full price? Maybe the answer is found in looking at Z fares (more reasonable when available but stuck with the change fee) or up-sells to F/C.

What about those situation when the airline becomes impossible to deal with? Example: A few years ago, I would fly between LA and San Jose once a month, usually flying up on Friday during the day and returning Sunday evening. Usually, the outbound would be reasonably priced, but very often the return leg would drive the price to a stratospheric level, like four or five times what Southwest wanted for Business Select. I suspect the pricing algorithms were looking at the number of seat available on the Sunday evening flights and just jacking up the price to satisfy an objective function that wanted to max out revenue. The problem was that fewer and fewer people wanted to pay this, so fewer and fewer people flew United. Yes they got big bucks for those last few seats, but pretty soon we were right-sized to a CRJ still at that price, and who wants to pay 4x or 5x as much to fly in a CRJ as a 737? Maybe the elusive “best customer”?

So who is a good customer? Anybody who consistently shows up and flies United (and doesn’t misbehave). If United didn’t want to sell a ticket at a certain, lower price, they wouldn’t offer it. Most elites are probably buying a mix of tickets throughout the year. I know that I do. As far as elite status goes, it is actually a framework for negotiation and United has complete control over their end of the dealing -- as they have reminded us several times this year. We as customers can accept their offer or walk, as many who have left for AA or Delta have demonstrated. Airlines evidently need a certain sized stable of various elites or they would never do DEQMs. Remember that rationing perks and service is what the elite programs are about. Another question is “how good is the service you get if you get the best service?”

Who are the “best customers”? That question implies a cutoff of some kind. If you make the qualification too stringent then there aren’t very many of them and for a huge airline they become kind of insignificant.

Maybe the real answer is for the airline to provide consistently good service for at least some of its customers, and provide clear, consistent information as to what degree of that service you can expect given your fare and your status Then we can decide where we want to be in the hierarchy or if we want to play at all.