Should Frequent Flyer Programs Reward Based on Distance or Spending?

There’s nothing sacrosanct about miles per se. Sure, it doesn’t make sense for a program that gives out points based on how much you spend to call those points ‘miles’. But Capital One does it, so why can’t Delta?

At best miles are a proxy for a loyalty relationship: more miles flown is more of one’s life spent in an airline’s metal tube.

That loyalty relationship goes well beyond rebates or punch cards in getting people to prefer one airline’s product over another. When airlines boil down rewards to percentage back on transactions they lose the psychological leverage they have over consumers.

Still, I’ve also written that rewarding money spent, when it’s someone else’s money, does incentivize at least some customers to spend more. Frequent flyer programs are about two things:

  1. creating product differentiation out of something that’s inherently a commodity, a seat between point A and B, and

  2. creating incentives for passengers to make purchases based on their own interests rather than their employers’. And revenue-based does exacerbate #2. So it may increase revenue at some margins. It amazes me that big corporate customers don’t resist this.

“Customers who spend the most” aren’t the same as “the most profitable customers.” It’s a misunderstanding of average versus marginal. They should be trying to compete for the wallet share of frequent travelers.

And sure you award miles to those once a year travelers too if they bother to sign up, but at United and American you still have expiring miles (theirs will expire, and of course Delta had expiring miles before they didn’t.. expired a ton of miles from their balance sheet and then declared miles shouldn’t expire). Of if the points don’t expire it’s because the traveler may have signed up for a co-brand credit card, shopped through the online portal, credited rental cars to the program — in other words, became a profitable customer.

The metric doesn’t have to be miles per se, but it should focus the customer on choosing one airline over another. Delta and American do an interesting job of this with their small business programs, actually: earning is greater for connecting flights than it is for hub city flights they figure they’re going to get anyway.

Up until earlier this year American even prioritized upgrades for connecting passengers over those originating in hubs. Downsides there of course is the resentment of hub captives. There may be only so far you can push it, but the airlines already do it.

Frequent flyer programs changed what are essentially a commodity to be sold at the lowest price – an airline seat between any two cities – and turned them into a differentiated product with brand identity and customer loyalty.

Frequent flyer programs are – themselves – highly profitable as standalone businesses. That’s a testament to the way they have taken an aspirational good, and put it if not within reach than at least imaginable for tens of millions of people. And it’s channeled consumer behavior well beyond the sub shop punch card ever could.

By re-commodifying the experience, revenue-based earning (and burning) is merely a transaction; a rebate instead of a reward. And that undermines the key insight that made frequent flyer programs the most successful marketing innovation in history.

Good luck with that, US airlines.

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 »

More articles by Gary Leff »

Comments

  1. Due to technological issues they have to apply a percentage against flight miles for partners, from 25 percent of flight miles to 200 percent in some programs. It’s not perfect, but it effectively handicaps discount economy buyers by nature. There’s a reason why all major euro and Asian carriers do it this way

    Reworking your entire IT system just to calculate revenue based rdm earnings is a complete waste of money when you can achieve similar results just by reducing the miles earned on some fare buckets

  2. Here is another way to look at it, going revenue based makes the customers that used to spend $50-75 more 2x per year to fly a specific airline because it was sort of like a punch card. Now, they will realize they have to spend $5,000 to get that free flight and they are better off flying the cheapest airline each time and after 5 flights having a free flight anyway.

    Those are the passengers the airlines need, the ones that are willing to pay $50-75 more on the bottom end to differentiate. First Class/Business Class don’t care as much about miles (sure the OPM people do), a good friend just started being able to afford F/C tickets and he was a HUGE mileage person before.. Guess what, now, he buys the best F/C product that fits his schedule and screw the miles.

    Imagine if Starbucks went Revenue based, would you really pay $2.75 for a cup of coffee? This is going to cause all 3 airlines to compete soley on price now; there is no differentiation.

  3. Gary and Scott –

    Excellent, valid points. Very succinct and spot-on.

    I switched all of my flying as a United Gold to AA when they went rev based. Now as an AA Plat, AA gets it all – even when they aren’t the cheapest – and United gets $0, no matter how low their fare. How do these airlines not extrapolate my example to thousands of other customers using the same logic and realIze that’s a LOT or revenue to willingly give back to the commoditization Gods vs the Loyalty ones ?!?!?!

  4. Under that logic elite status should be calculated on flights/segments only., not miles.

    Isn’t the person who chooses the airline 120 times/ year more loyal than the one who chooses 30 times? Why does the length of the flight make someone more loyal? Choosing connections when direct flights exist demonstrate loyalty as you mentioned.

  5. The question is: Are you going to move your travel to another provider or not if the ff program changes?

    For the infrequent traveler who takes a couple of trips a year, price and schedules matters much more than loyalty since they know they wouldn’t be able to accumulate enough thru flying one airline anyway.

    For the weekly business traveler, flying is a ‘need’. Even if all airlines decided not to award any miles or loyalty benefits to travelers, these people would still fly. Obviously, if there is a skewed ff program, them the scales may tip in favor of that airline; but it does not matter when they all become almost the same. AA had not gone the way of DL and UA all this year, so they had a good opportunity to see if the FF itself causes people to shift business to the airline. It is unlikely they saw a significant uptick, which made them decide to ‘follow the herd’

  6. Not all business travelers have the option to choose a more expensive flight. I make my own travel plans but I have to use my company travel agency and I have to choose the least expensive flight option. If I don’t, I have to send in paperwork detailing why I didn’t choose that least expensive ticket. Do that too many times and I probably won’t have a job. (I will say that, so far, my company has not made me choose the “basic” fare that delta has been offering. If it did, I might be the one choosing to find another job.)

  7. @KP for me, my buying patterns, I won’t come out too far behind. The relevant issues are those we don’t know the answers to yet — fares with no mileage/benefits (basic economy) and what happens to the award chart.

  8. Last minute bookers get more miles but less upgrades due to how things are prioritized. I will lose roughly 50% of theiles. If award availability stays this bad, little reason to care about RDMs other than miles plus cash upgrades.

    Maybe I can credit to Alaska?

  9. There is nothing about transportation from A to B that has to be a commodity!

    The differencr between Emirates and AA shows this, as (domestically) is DL vs. AA/UA vs. Spirit/Frontier.

    DL got it right: they reinvested the savings from changes in their commoditized frequent flyer program into achieving superior performance and a better product which consistently surveys higher than AA/UA in every large customer satisfaction poll, and reaped financial rewards. A win-win.

Leave a Reply

Your email address will not be published. Required fields are marked *