Airlines: from miles flown to money spent

19 September 2014

The raison d’etre for airline frequent flyer programs (FFP) has fundamentally changed and it is time for their customer value propositions to catch up.

At their inception in the 1980’s, FFP’s were an added value benefit supposed to entice particularly high value business travellers to spend their company’s money with one airline over another. With the rise of 121 customer relationship management, they very quickly became tools for data collection, effectively incentivising any customer to identify themselves.

In today’s environment, all travellers accept the need to provide personal details in advance of travel regardless of their frequency. Similarly the significant shift in behaviour to more online and direct engagement means FFP’s are no longer so important for data collection.

With this, their purpose has evolved again – now they enable large scale offer distribution, incremental ticket sales, third party revenue generation and, in many cases, are more valuable profit centres than the airline itself. A case made painfully clear by the well-publicised situation at Qantas.

Running FFP’s as commercial entities requires different skills, thinking and experience to running a successful airline as they are mass retail, customer experience and deal brokering entities. The recent announcement that United Airlines is following in the footsteps of Delta Air Lines, SouthWest and JetBlue reflects an increasing awareness of the continuous need to re-evaluate the FFP’s customer and commercial value proposition. The journey to revenue-based rewards started over a decade ago and whilst the majority of airlines continue to use miles flown to reward customer value, customer spend as a primary reward metric is likely to gather momentum for airlines in the coming years.

Considerations in making the change

It has been reported that Delta began working on their transition plan to revenue-based rewards 5 years prior to making their announcement. Clearly the commercial opportunity it presented for them and those airlines adopting this practice outweighed the challenges it created. The key considerations and challenges for making the move away from distance-based accruals are likely to include:

1. Determining the commercial opportunity: significant financial modelling will identify the risks and opportunities and key inputs needed to conduct this exercise will be insight on existing individual passenger profitability, earning and redemption behaviour, current and future liability scenarios, in addition to evaluating what investments are required to implement and deliver against this alternative reward dimension.

2. Impact on alliances and partners: evaluating the implications in the bigger context of global alliances where programmes are already splintered into accrual by miles, kilometres, point’s zones, and ticket values. All three major Alliances currently steadfastly trade their bi-lateral FFP redemption seats based on distance as a standardised measure so an acceptable solution has to be found and managed across a disparate collection of carriers via their centralised management committees.

3. System set up and changes: Thanks to the decades old structure of using ‘ticketed point mileage’ (‘TPMs’) to calculate IATA fares, most airlines have the systems to calculate distance and TPM tables can easily work with FFP systems. In contrast, fare pricing data contains complex and dynamic value ranges, housed in systems that might make integration with others more difficult, and time and investment is likely to be needed to change the reward calculation to be based on fare price.

4. Customer perceptions and understanding: Miles flown is both understood and appreciated by the majority of airline passengers. However those same customers probably also appreciate that in virtually any other sector, they are rewarded based on how much they spend. Significant thought needs to be given to how airlines educate, communicate and manage the change with their customers. What is important is that a generous period of time is given between communication and implementation and that it is easy to understand how many points they will earn from a booking. SouthWest Airlines is a great example of transparent and helpful booking process that shows customers not only the different prices but the associated point’s accrual and other benefits that are available. Customers are able to make a much more informed decision on the fare price they want to buy on that basis and those prepared to purchase higher yield flights can also see an amplified differential in earnings based on the higher fare being paid.

5. The competitive risk of lower yield customers: there needs to be a very careful change management process put into place, looking at different customer groups under a single reward currency value to identify the winners and losers under the new structure. Tactics therefore need to be in place to ensure that at least in the short term, sufficient alternative compensation is in place for those lower yield yet high volume of customers who might see themselves losing out in a revenue-based world and question their loyalty. Incentives and bonus offers are common tactics but thought might also be given to widening the availability of lower threshold rewards so it becomes easier for them to redeem or even allow members to obtain the benefits they might risk losing using a combination of points and cash, which also has the added possibility of generating incremental revenue.
Our view?

From a commercial business perspective, revenue definitely trumps distance as a key reward metric. However it is complex to implement and requires a new management approach to ensure customer understanding and the commercial optimisation of the entire journey. The implication appears to be that these airlines, and more in their wake, will be moving their FFP’s back towards their original objectives of rewarding and retaining their most profitable customers and as a result, they serve to strengthen the foundations for rebuilding long-term commercial success.