Why Loyalty Programs Should Reward Frequency not Revenue

A Joe Sharkey column in the New York Times last week points to changing trends in air travel pricing and passenger growth. A slightly buried item, but perhaps the most significant, is

    A permanent change in the way business travelers plan most trips, to take advantage of low fares originally tailored to lure leisure travelers. “The business traveler has taken a powder” from dependence on the top-level walk-up fares that once supported the finances of major airlines, Mr. Boyd said, and airline executives who think the old fare structures will come back are deluding themselves.
This is precisely the argument used to justify recent changes in elite status at Delta and Continental — that the fares paid are changing and that they need to incentivize the truly lucrative traveler. That’s one bet.

But if Michael Boyd is correct, they’re fighting a trend that is inevitable and their efforts will fail. In fact, they’re going about things in exactly the wrong way.

They’re trying to hold onto an outdated pricing model instead of adjusting their business practices to new revenue models and new reality.

Instead of trying to bet the companies on bringing back full fare business travelers, they need to adopt more of an average cost pricing model. They need to bring down overall costs and charge prices which will compete for business travelers that now consistently have the option of paying lower fares.

And how do you incentivize loyalty in that environment? It isn’t by giving benefits to the few dinosaurs still paying full fare — because those folks just aren’t going to exist in sufficient numbers to earn a profit. Instead, since everyone will be paying fares that are closer to the mean, rewarding frequent purchases will make more sense than ever.

It’s ironic that mileage-based programs were developed as a best proxy for loyalty in an age when revenue was probably the more appropriate measure. Now, as the high yield business travel model is fading away, airlines are looking to adopt a measure of loyalty that was better suited to a different period.

Some would argue that Northwest is the airline best positioned to take advantage of this new pricing world. Northwest, more than any other major except perhaps America West, has transitioned to an average cost pricing model. Their premium services lag behind the other majors — they don’t offer domestic inflight entertainment, for instance — but that makes sense for how they’ve positioned themselves.

Northwest is facing a critical juncture. Their domestic partners, Continental and Delta, are leading the pack in shifting to a revenue-based loyalty model. Northwest is the airline least well suited to such a model, but the pressure to follow Continental and Delta must be enormous. Most observers expect Northwest to align its program with those carriers, but they haven’t announced a change yet. It will be interesting to see whether they follow their own path.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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