Will ALL the U.S. Legacy Airlines Adopt a Revenue-Based Frequent Flyer Program?

In the October 17 MilesLink newsletter, Randy Petersen declares that revenue-based frequent flyer programs are coming.

[I]t is not a matter of if the legacy carriers will follow the current trend, but when. I’m comfortable saying that at least one or all of the remaining legacy carriers will have announced a change or conversion to a “new normal” of how miles and other travel currencies are earned and burned within a year.

…Let’s be realistic, many don’t place Southwest Rapid Rewards in the same category as other legacy carriers such as American and United. But the fact is they are one of the largest domestic carriers and as such actually have one of the largest frequent flyer programs. Granted, its appeal and practicality isn’t for the global warrior and “upgrades” aren’t even listed in the in-flight menu. But nonetheless, they did make the change, and as strange as it seems to some, painful adjustment aside, they seem to have not lost members of that program to competing carriers.

Not if, but when the same happens to legacy carriers, there will be a larger adjustment for many to make. But keep in mind, it’s a change to the currency of the programs, not a change to the benefits and practices of the programs.

…the idea has now gained substantial traction with Southwest’s adoption and the rumors of Delta and US Airways following suit, as well as American and United. I can’t imagine any reason why any of the legacy carriers haven’t done some sort of research and developed contingency plans to adopt this “new normal.”

..”I feel a change comin'” and whether we like it or not we’ll have to get on board. But until we see what it really looks like in a legacy program, the stress and anxiety is wearing on us here at InsideFlyer.

(Additional line breaks added.)

My own bet is that Delta does this, announced in 2013 for 2014 roll out. Others think this is coming more quickly, and Delta has certainly shown themselves willingness to make changes to their program without notice I do not believe they would purposely generate the customer confusion that would come from doing this out of the blue. So my guess it happens, just not immediately. It’s certainly been rumored for awhile.

I also don’t think it’s coming down the pike with the rest of the legacy carriers as quickly as Randy seems to imply. They’re generally preoccupied with other matters, many of them do hop onboard and mimic each others’ changes once a program takes the plunge, but for something of this magnitude I have to think that other programs would be foolish not to step back and watch how things unfold for the first legacy program adopter.

I wrote last month why revenue-based programs are bad for both airlines and for consumers.

In that piece what I had in mind was the Southwest, JetBlue, and Virgin America model of earning a certain number of points based on your spending and redeeming those points based on the cost of the ticket. You get airline scrip on some sort of fixed rebate model, and that scrip can be used as cash with the airline.

That’s not the only way to do what might be called a ‘revenue-based program.’ And the devil in all of this is going to be in the details. If all programs did is increasingly bonus higher revenue fares (United already did this with changes to their program for 2012) and provide the option to book any seat desired with points at a fixed-value per point based on fare (in parallel to the award chart) this would be no big deal.

American offers something like the latter (“Dynamic Air Awards“) for its elite members only, presumably they rolled it out as a trial. United rolled out Choices to its co-branded credit card holders some years ago, it still exists but hasn’t gotten much marketing attention in awhile. Delta has pay with miles for co-branded credit card holders as well already.

Expanding these options — as long as these don’t replace the award chart, or coincide with greater restrictions on inventory at the saver level — would be a modest improvement in the eyes of some members. Not me so much, since at the point where I’m receiving foxed-point value I’m not longer interested, you no longer combine the rebate from travel or credit card spend with the leverage of the mileage program’s bulk purchase of distressed inventory that allows you to take a small number of points and turn them into the sort of aspirational travel that would otherwise be out of reach. In other words, taking away the award chart that allows consumers access to the sort of value that’s currently offered takes away the romance and allure of the programs and undermines their value proposition.

At the point where it’s a cash rebate, the mileage credit cards wouldn’t be better than cash rebate cards — and most consumers would be better off with a good cash rebate card

Furthermore, the romance would dissipate, taking with it the consumer motivation to participate heavily in the programs. The ‘loyalty’ factor would be undermined.

The key details to watch are hotel partner awards are priced, to the extent that airlines are still able to purchase those at a deep discount. If Delta adopts a revenue-based program, will they allow their points to be used at the same fixed value on partners like Korean and Czech to acquire revenue tickets? (And shouldn’t those tickets earn miles?) Other airlines around the world would -still be offering ‘saver’ award inventory. Will Delta custmoers continue to have access to that inventory? And at what price?

How will earning from non-flight activity be treated? We have some clues from credit cards and other partners of programs like Southwest, JetBlue, and Virgin America although in general those programs have fewer partners than the legacies do. Certainly the co-branded credit cards of these airlines (big Southwest signup bonuses notwithstanding) are far less rewarding than their counterparts at United, American, or for that matter the hotel programs.

It will be interesting to watch if airlines move in this direction, ultimately gutting the value proposition of the credit card companies that are crucial to their survival. Alaska Airlines takes in 10 times as much revenue from selling miles to Bank of America as they will make or lose in a single year as an airline. Both United and Delta pre-sold over half a billion dollars of miles to their credit card sponsors in order to provide liquidity. United’s debtor-in-possession financing and bankruptcy exit financing was provided by its co-branded credit card issuer. The banks hold massive sway here. It’s possible they just go along with change, or are convinced that change is good. But I’ll be curious to see how this plays out.

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 Milepoint.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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  1. The hybrid model of fixed value redemptions OR award chart redemptions would not be bad. My main question is: what will airlines do with premium international seats if their currency is fixed value? No one will want to redeem one million points for a trip in international first.

  2. A big reason Southwest would not have been affected adversely in terms of program loyalty is that people active in that program never were those interested in aspirational travel – first class seats, trips to worldwide destinations, great hotels. If you were ever focused in the Southwest program you were after free domestic seats on Southwest – very worthwhile to many, but not at all what many people are after in the United, American and other legacy airline programs.

    So the other airlines could hardly see that as a model. If United were to follow the Southwest model, I’d be all in with American in a minute, and vice versa, since they both serve my home airport equally well. The first legacy carrier to adopt this model will see a significant exodus to its rivals.

  3. I was a little confused by the sentence “The key details to watch are hotel partner awards are priced”, but then I figured it should probably read “HOW partner awards are priced”, is that correct?

    Although you believe that revenue-based models would be very bad for the airlines, they all seem to feel such a model would be a substantial improvement for them. So that comes down to whether you believe that the industry as a whole is run be competent people who are able to make rational business decisions or a bunch of self-destructive nudnicks.

    It would be very disturbing (but not particularly surprising to this observer) if the industry turned out not to have any idea how to manage its own long-term interests.

    Finally, while a revenue based program _might_ damage the loyalty of existing aspirational customers I presume the airlines would still retain their elite status systems. Isn’t that, really, the major driver of loyalty? What if the redemption value were substantially better for elite customers?

  4. It seems to me that the international carriers are seeing a modestly improving economy, and are creating a constrained supply. They are improving their premium cabin competitiveness at the same time. Their hope must be that the front cabin fills faster with revenue fares and there is some evidence that this is happening.

    In that context, where the airlines have some confidence that they can actually sell business class seats, and a time horizon where they might be able to sell First Class on the few routes where that still flies, then I can see that the premium mileage awards on those seats will increase further. Or, same difference, the awards in economy decline. Ultimately what they want to do is align the rewards with the profitability to them of taking those passengers. I don’t see that revenue is the key here. A cheap seat from SFO to SYD may not be profitable at all in $ terms than a relatively expensive seat from SFO to SAN – so I would imagine that they will want to incent the more profitable fares. The only sensible way of doing this is to offer mileage gradations by fare class.

    How this comes about is more difficult. The howls of protest will be huge from infrequent flyers, so I would guess that it will be done by inflation at the top end, rather than diminution at the bottom. It’s possible also that the distinction between miles and elite qualifying activity will be magnified. But I should also imagine that the ultimate aim will be significantly less value to be earned from deep discount fares.

    On the redemption front, I should think that the only real issue at present is managing the expectations of mile holders – managing those expectations downwards to not expecting seats to be available nearly as often as was the case when capacity was higher and demand was lower.

  5. Well….might be a good time to start seriously planning to burn up a hunk or two of my Sky Pesos. Gary, start looking for an upcoming email from me.

  6. Well…might be a good time to startseriously planning to burn a hunk or two of my Sky Pesos. Gary, start looking for an upcoming email from me.

  7. Certainly my usage of Southwest is way down.

    “But nonetheless, they did make the change, and as strange as it seems to some, painful adjustment aside, they seem to have not lost members of that program to competing carriers.”

  8. I think these are good points and I think Randy will be proven wrong in large part. WN and foreign carriers are apples to oranges compared to mainline domestics

  9. “My own bet is that Delta does this, announced in 2013 for 2014 roll out.”

    I find this highly unlikely if not down right absurd. Delta is much more likely to roll out in 2013 and announce in 2014.

  10. I think WN flyers just care less about status and FF programs in general. From my observation, there are a lot of them.

    They are attracted to WN by:

    No change fees
    No cancellation fees
    All-737 (what is F on a Barbie jet worth?)
    Lower fares on certain routes
    Hidden City allowed
    Refare your flight if price drops and keep the difference as credit
    More frequency on certain routes
    2 bags fly free
    Historically more on-time (not so much now)
    Faster turns
    No assigned seating (some of us actually prefer this)
    Better co-branded CC for many purchases (double pts. with partners)
    More value for hotel stays/car rentals (600 WN vs whatever legacies give)
    Less snotty behavior by employees
    Better phone service (by far)
    Less drama overall
    Last-ticket availability on pts. (though maybe very expensive)
    COMPANION PASS (best FF deal there is IMO for domestic flyers)

    I could probably add 10 more if I thought a bit.

  11. Revenue basing just kills the allure of frequent flyer programs. Given that so many miles are not flown miles, but credit card, mileage mall, etc., I suspect that many folks would move to credit cards, online shopping portals, etc., that provide, of all things, cash one can spend on anything at all.

    I know some consider it a heresy, but I can see tying the amount of RDM’s to the fare – either granting a number of miles based on the price, or to quell complaints, tie the multiplier to fare buckets to a greater degree than is done at present.

  12. It really makes me wonder whose side Randy is on these days….. ok, actually I stopped wondering that a few years ago.

  13. It’s interesting that, to my knowledge, no airline has yet announced changes to their programs for 2013. Could they be waiting until after the election, when a Republican sweep would cause a sudden shift to revenue basing with little chance of government objection?

  14. I realize legacy airlines have a problem with the spend low redeem high crowd. I hope they just put in modest spend thresholds first to cut out or reduce benefits to the “over-entitled”. I don’t have a problem with this, or revenue based programs. They just need to realize they will be driving certain customers to their competitors.

  15. I agree and disagree w/ Randy. I agree Delta will roll it out; Delta has always seemed to be the first; in 2002 they rolled out the 50% EQMs, the next year they raised the minimum to 750m before scrapping.

    DL will roll this out and it will fail and it fails for different reasons. I have a GS friend whose wife travels to see him, but not always on same days/flights, he may be GS, but he won’t spend the $$ for her to make spend requirements, hence his wifi may fly 100K but only make Silver or Gold depending on the spend, kids may only make silver. He said that’s a deal breaker for him and he’d leave UA if they did it.

    Revenue based programmes work for airlines that really don’t need a FF programme, people will fly WN FF programme or not, I fly UA for the FF programme, same w/ AA, take that away and no reason to fly them. I don’t want to worry about extra $$ out of my pocket to reach a level.

    I think families can be the unravelling of this idea, and there are a lot of flyers that will cut their flying. I’d go from 200K a year to maybe 40K, I’d just be done flying or there would be no reason to fly any airline, but the lowest price one.

  16. While it’s not implausible that a legacy airline will try a revenue-based program, I think it will either be a failure or essentially the end of valuable frequent flyer programs.

    The beauty of most frequent flyer programs is that there is a massive difference between what customers perceive the points to be worth (and what they may be worth if everything goes in the customer’s favor) and what they really cost the airline from an accounting viewpoint. By making the awards difficult to redeem and mainly restricting them to distressed inventory, the airlines constrain the real cost – while giving consumers something aspire to, and providing a currency that they can sell to credit card issuers and other marketers who use miles as a reward.

    If the programs turn directly into a 2% rebate or something similar, then the magic is gone, corporate customers can just negotiate to get the 2% themselves, and why would consumers ocntinue to find the credit cards attractive?

    The airlines with worldwide partners and aspirational destinations and partners and upgrades have a much more attractive offering if value of the points and awards is decoupled

    As to earnings rates, the key is to influence marginal behavior. Most people book high fare classes when nothing else is available, either because advance purchase deadlines have been missed or few seats remain. Is there a need to give them a higher reward than earlier bookers? If revenue management does their job properly, then it’s not necessary to give a higher reward to a late booker.

  17. I am both a UA million miler and a WN advocate. My flying on WN increased with the new program (since points bookings are de facto fully refundable for everyone – not just top tier elites), which gives me the flexibility I sometimes need.

  18. When SWA changed Rapid Rewards we stopped flying them entirely and cancelled our SWA credit cards. We flew them almost exclusively domestically. No more. The RR program has totally lost its value for us.

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