In my post about Delta’s slow lurch towards a ‘revenue-based’ frequent flyer program, commenter Ian asks
Gary, your post has raised a question I would love for you to answer, especially considering JetBlue and Virgin America recently introducing frequent flyer/loyalty programs which are revenue-based.
If you were running a airline would you advocate a revene-based program? Are revenue-based programs the future of all legacy airlines?
It seems this might earn an airline more money. As a frequent flyer who mostly benefits on the margin I do not like revenue-based programs but don’t know if I can argue with the business case
It turns out that this is actually easy. Revenue-based programs are a Very. Bad. Idea for an airline that already has a large, more traditional frequent flyer program.
Understand that JetBlue has the revenue-based program it does because it doesn’t really want a frequent flyer program, but it knows it has to have one. It’s been dragged out of necessity into building an elite program, because the traditional elite programs drive revenue. But the JetBlue model isn’t an attractive business case for Delta or for United or American.
First, it’s worth separating out mileage accrual and redemption from elite programs, these are two different things and need to be thought of separately.
On the earn and burn side of things, understand that the traditional frequent flyer programs are highly profitable under their current business model. They sell large amounts of miles, for more money than it costs to redeem those miles. Each of the major programs are worth billions.
The programs make serious money, they’re a huge profit center.
You’d think that would be reason enough to bias strongly against making wholesale changes to the underlying business model. And yet Jeff Robertson, who runs the Delta program, thinks his golden goose is a rotten egg.
“The frequent flyer model of over-awarding is not sustainable and must be changed. It’s either going to be redemption or accrual or both.”
If billions of dollars aren’t enough of a reason not to undercut the current model, then understand what the programs are trying to accomplish in terms of driving business to the airline. It’s a mistake to match points accrual with money spent because what you want to incentivize is behavior at the margin — to get purchases you wouldn’t otherwise get, not just add up the total dollar amount of purchases made by a customer regardless of the existence of the frequent flyer program.
An airline’s least expensive fares are often their most profitable. In fact they are almost pure profit. When the airline offers inexpensive flights it is because they expect seats to go out otherwise empty, they’re going to operate a plane anyway and any incremental revenue is straight profit they wouldn’t have gotten otherwise. That’s what you want to incentivize.
The full fare passenger may not be swayed by the frequent flyer program but by schedule or by corporate contracts. Rewarding that case is a cost without additional revenue. And the full fare passenger taking last seat inventory might displace another passenger who also would have flown full fare, so not economic profit. Fight for that passenger for sure, but don’t think for a second that low fare passengers mean low profit.
On the redemption side the fundamental reason why these programs are so successful is that they leverage being able to offer inventory that would otherwise spoil, buying those seats at a deep discount, and offering them to customers for points who wouldn’t otherwise spend money.
The saver award is key, and airlines have been reluctant to break the ‘25,000 domestic coach saver level’ even as those seats may get harder to find. Even that though isn’t a reason to revamp the program, because flights as full as they are today is an historical anomaly. And it would be a better investment to improve IT infrastructure and customer service training to do a better job at finding the seats that are available on the routes that current systems don’t think to check than to gut a profitable program.
On the elite status side of things, first remember the airline should be interested in revenue at the margin which is much more important than gross revenue. You don’t want to incentivize somebody that’s going to pick your airline anyway because of a corporate contract. You want to influence behavior with your benefits.
Further, elite status isn’t just about revenue and commodifying the relationship is a mistake. Customers form an emotional bond with their airline, spend so much time in the carrier’s metal tubes, and the elite program makes them feel valued well beyond the benefits themselves. Making it all about the Benjamins demystifies and undermines that relationship, and just makes it a transaction which will ultimately undermine the power of the program. An airline doesn’t want to just be a rebate or punch card, where once you’ve finished the card and redeemed there’s no reason to remain loyal.
No, revenue-based programs — the replacement of earning points and spending points based on zones or distance with earning and spending points based on the cost of a ticket — are not a good business model for the airlines to follow.
And they would be terrible for consumers, too, since they’re end of getting outsized value from points, which is ultimately what drives the success of what really are the most innovative and game-changing innovation in marketing history.
Premium cabin tickets become almost impossible to obtain, because their cash price is often so many times that of a coach ticket. (Remember that Southwest and JetBlue have only one class of service and limited international service.)
It’s hard to imagine the apocalypse to loyalty that would flow from this. While programs may wring their hands about rewarding the wrong people, or about high redemption costs that they need to manage, in the end these mileage programs are profitable and successful, and the revenue-based ones are not. Why in the world would a multi-billion dollar company risk its entire business model when it’s currently spinning off large sums of cash?
The consultants and analysts who sell this love it, and think it’s the next big thing, but it’s truly cutting off their own income streams.