Airlines Are Killing Their Golden Goose: Words of Wisdom About Frequent Flyer Programs

As US airlines move towards revenue-based frequent flyer programs, they’re taking the most successful marketing innovation in history that managed to turn a commodity product (a seat that takes you from A to B) into something consumers had a strong brand preference for and they’re re-commodifying it.

I’ve remained genuinely surprised at the rush to do this given that the programs as they’re currently constituted are wildly financially successful. They’re billion dollar standalone businesses. It’s rather amazing, because for almost every other industry marketing is an expense line not a profit center. And they’re very much risking that.

Peter Sheahan, author of Matter (and a United Global Services member), thinks companies are missing the boat on loyalty program design.

I think we should be questioning what a loyalty program is and isn’t. More specifically, if the only value of “loyalty” is discount product, then you don’t need a loyalty program to compete with that. You just need cheap prices. In a way, we’ve kind of created a really objective measure of reward and a less branded and aspirational one. So I think true loyalty has to go beyond discounting. True loyalty has to move to the level of affinity and identity and brand. I think that’s part of the challenge.

In other words if you want to create loyalty, do more for your customers.

Revenue-based frequent flyer programs the way that Delta started, United copied, and American is about to implement reward the most loyal price-insensitive customers with the biggest price rebates.

Customers dedicating their flying to one carrier more than double the points earned per dollar spent. At Delta – and perhaps soon at United — redemptions are becoming more revenue-based as well.

That may work for Delta, who believes their airline itself is so good that marketing spend is unnecessary (except they spend a lot on marketing, like television commercials targeted at Seattle). Delta seems to think they can do it without a frequent flyer program. (They’ll tell you that their revenue-based program doesn’t contribute to higher revenue, and it isn’t designed to.)

Delta’s planes are older, but their on-time performance is the best in the US and they’re ahead of the curve ordering faster inflight internet that we’ll start seeing in a small subset of the fleet this year. Delta has a marginally better airline operation than their largest competitors, but I don’t think they’re as good as they think they are.

Nonetheless, in an environment of falling revenue per available seat mile, and for airlines not named Delta, that’s a harder proposition to argue.

And Sheahan worries that Delta, United, and American are destroying the value they’ve created by going revenue-based.

I think it makes sense to incentivize the behavior you want to encourage. … But they run the risk of losing the bread and butter of the airline – the people who fly every day and schlep it down the back and pay the cheapest possible fare. The risk is that the economics of the whole model starts to disintegrate if they lose any of that loyalty and they find themselves deep in a price war with other airlines.

It’s that price war — declining passenger revenue per available seat mile — that’s exactly the place they find themselves.

Sheahan also thinks that the trend towards low value, instant gratification awards isn’t just a nice add-on but a dangerous undermining of aspirational loyalty.

Real-time rewards make a great deal of sense because the user sees instant gratification. However, over time, what does it do to the true loyalty that you are trying to engender? How hard is it to replicate cheap prices? Is an immediate discount applied by United going to make you cheaper than Southwest, Jet Blue, Virgin and Frontier? I worry about the potential of eroding the underlying value of loyalty. Like, “We enable your dreams. We understand who you are. We create experiences that help you become more who you want to be, because we’re in partnership together.” In contrast, instant rewards create more functional loyalty and less emotional loyalty.

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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Comments

  1. Finally a post that adequate expresses the betrayal I feel after 50 years as a Customer of these majors, who was able to travel the world and enjoy rewards that prompted me to travel even more – possibly 50% more than I would have without the rewards incentive.

    My flights were monthly. When I first heard that Delta was considering destroying their brand by going mileage based, I called their program head and expressed myself as passionately as I felt. His response to a 40 year customer was to tell me that if I didn’t like it I could leave. They were and remain dead to me, a poisonous name I spit on at any chance.

    When United sent me an email summarizing the miles I’d expect to get from a trip a few years ago and it was about 1/4 normal, I immediately called in and cancelled the flight and have never flown with them again.

    I had hopes American would trump the others by not converting and even expressed to a top program exec the idea to advertise widely full miles in ads that compared to the others. This education is apparently necessary because they say customers are not raising a fuss at all about it and may not even understand exactly what they’ve lost. So at least those who value miles need to be organized and this could have been done by American in a brilliant campaign that stole DA and UA’s frequent fliers. Instead they want to behave like typical sneaky chiseling corporations that everyone in America hates and therefore are in line for a huge comeuppance. Dead to me. Hello Alaska.

  2. I personally love the traditional frequent flyer programs, but you’re kidding yourself if you think the airlines are hurting themselves by moving to a revenue-based loyalty program. Most customers don’t care and even PREFER revenue-based programs when they’re managed like Southwest’s. Most of the people who do care are the gamers (realistically, how else are most travelers going to earn those biz class award tickets?) and those aren’t the customers the airlines make money on.

    If there is one area that some airlines might be “killing the golden goose” it’s with award availability. For instance, AA’s availability has become pretty pathetic in recent years. I don’t know if this actually discourages people from flying the airline (I doubt it, since most people don’t even know about the availability problem), but it is very likely to hurt the sales of miles to the banks as AA credit cards become less desirable.

  3. I’ve cut my flying on the majors to a fraction of what it was before the programs went loyalty based. Now I buy based on schedule and price, and miles (and loyalty) mean nothing to me.

  4. Pet peeve: The goose isn’t golden; only the eggs are.

    That aside, these programs didn’t need to be run as if they were Ponzi schemes, but every airline has done so. Accounting rules encouraged airlines to pretend that redemption of miles earned by flying would cost them essentially nothing. Those rules are due to change in about a year. Perhaps that looming change is what’s upsetting the Ponzi scheme?

  5. Yeah, I {currently} fly about 100-120K miles per year – 90% of it or more for work. All on coach fares. RDMs are just about the last element of the FFP that I care about about, and have little to no impact on my decision to purchase a ticket.

    I have to fly for work – and it’s the elite benefits, those things that make the flying experience better / more reliable, that drive my “loyalty.” So AA’s cutting of SWUs from 8 to 4 hurts far more than their moving to a revenue RDM program. And it’s a important distinction that AA’s elite program is not {currently} revenue based (unlike DL and UA)

    I have more RDMS than I have use for. I travel enough for work (and to interesting places) that I don’t feel the need to be rewarded with the ability to spend more time in airplanes.

  6. They’re saying, we’ll attempt to win your business in a way other than the status quo.

    They still have to win it.

  7. I agree with a lot of what you say. Currently, the economy is doing well, travel is up and oil prices are down. Delta is deluding itself into thinking their better financial performance is due to a differentiated product, when really it is only marginally better, if ever. In addition, the Big3 are incentivizing business travelers to buy more expensive tickets than necessary to earn more miles. But there is little loyalty left.
    In the next downturn, companies are going to crack down on business travel and people will buy on price without loyalty. Let’s see how well Delta will do then, with their old, inefficient planes…

  8. We got a post like this every month. I still don’t buy it. Airlines aren’t stupid. These are problems that can be optimized. When times are good, like now, they’ll dial back the benefits. If times get bad, they’ll consider dialing them back up again.

    Oh, you’ll say, you were loyal for 20 years. Yeah, so? They don’t care, and shame on you for thinking they did.

  9. I disagree with this post.

    The elite portion of the program is for loyalty, while overall program membership has grown so much that the rest of the program already acts as nothing more than a form of discount to the price-sensitive, who has been trained to expect it, and have no loyalty other than price net of discount in miles (see first comment). Airlines just realized they were giving way too much value to this segment, and ironically had to recoup it through higher prices which made them less attractive to the segment. This is belatedly being fixed. While AS won’t change a thing while it’s battling DL, just like AA didn’t while working on the merger with US, but you bet that as soon as the battle cools down they will match the others and go revenue-based. Customers are simply unwilling to pay higher prices to subsidize more miles being given out!

    Incidentally, revenue-based has never hurt Southwest’s profitability, a mass-carrier. Nor its chance at winning the Freddie Award, and topping various surveys and “studies”.

    And in any case, miles have been effectively unbundled, since when you check-in online or at a kiosk you are typically offered to buy more miles if you wish. Why should those who don’t care about earning miles continue to subsidize those who do?

    What *is* innovative and brilliant is the introduction of instant gratification to programs. The mass american consumer is financially illiterate and impulsive, as exemplified with how they make, over and over again, their second-largest purchase in their life, a car: instead of ordering one that fits them exactly and waiting for it to be delivered, they buy whatever is on the lot (then often complain that they don’t like the color or that it’s lacking a certain option they wanted and had to pay for others they didn’t want). This is 100% irrational instant gratification!

  10. @Tim

    > We got a post like this every month.

    Yeah, simpler, more customer friendly, award-winning programs like Southwest translate into less pageviews for the blogger.

    Be prepared as we’ll get a post like this every month forever.

  11. That’s the $64,000 question nobody has an answer for but we all have opinions about.

    I think the best things the airlines have going for them in making these changes are the ignorance and indifference of their customers not to mention their limitless ability to change the programs without regard to prior promises and reliance on those promises by their customers.

    Even if airlines aren’t stupid, smart people do stupid stuff all the time. And the same airline management has repeatedly done dumb stuff in the past. Certainly no one should be shocked if businesses even an entire industry make the wrong business judgement.

    Although the problems inherent in telling the future make most prognostications less than accurate, I hope Gary’s and Shehan’s view of the effect of these program changes is correct. Time will tell.

  12. @Tony you said “Customers are simply unwilling to pay higher prices to subsidize more miles being given out!”

    Well I’m a UA 1k and AA ExecPlat, we just paid $300 more to fly AA to HKG over UA just because of mileage earning. $850 for 37,000 miles was worth more than $550 for 5,000 miles. When both earn the same I will buy based on price only.

    Then the airlines have to compete on price alone.

  13. Boo hoo. Loyalty to most folks here meant gaming the system. Purchase mistake fares and doing mileage runs/MS/churn CCs. That might have been great for a tiny fraction of people but it was infuriating to find a 20.Something blogger up front while full fare customers were crammed in the back. So kudos to Delta for saying enough is enough and rewarding the best paying customers – as they are the ones who should be rewarded – not the gamers.

    And what was ever aspirational about only being allowed to fly international buisness awards anyway? Delta always had a crap award program.

  14. This is what happens when there’s no antitrust enforcement, allowing mergers and reduced competition.

    The airlines have access to a lot more information than we do on the effects of their programs and the effects of the changes. Is there any reason to believe our analysis is any better?

  15. I lived in St Louis when AA pulled it’s hub from there. I was primarily a Southwest flyer at the time because of my flying needs and I really enjoyed the FF program. I flew AA as needed. Then Southwest turned to a revenue based program and I left them, moved my flying to AA. Now I may need to move on again.
    I agree that these programs can hurt themselves. I think it is more of a foolish business trend that isn’t isolated to the airline industry. It’s this theory that we need “change”. You know that cult that tells us that you must ” change” to keep up. Then if some folks in the organization argue the need to “change” they are labeled as anti growth or not a team player, etc. To me “change” can be good but to “change” just to “change” is stupid. Why fix something that isn’t broken. AA had a chance to differ it’s self from the competition but failed to see that opportunity I guess.

  16. I have NO Problem with a company deciding to run their business anyway they see fit. So “if your Frequent Flyer Program” isn’t bringing me in the door as a buyer of your services, meaning I can’t rationalize the expense due to the fact that I’ll receive some future benefit from having brought the business and revenue to your organization, THEN well i’ll have to evaluate your organization on the basis of customer service, cleanliness, the age of your equipment.

    Oh wait, you have been in bankruptcy several times, and your employees behave like a protected species, you’ve never heard of a Customer Satisfaction Index, HOLD ON, I’m on a plane that routinely moved people from Dallas , Phoenix, Chicago, Philadelphia, New York, San Fran, in 1989?

    HOLD ON , what’s this? You say that companies with new planes willing to fly american passengers aren’t allowed to fly their planes here because why ? It’s unpatriotic? Why again aren’t they allowed to bring true flight attendants over the border?

    Looks like I’m really going to do what I have been doing.

    Not flying you at all because let’s face it you’re rude and act like your revenue is a god given right.

  17. Regular folks don’t like the Southwest program because it’s revenue-based (I remember hearing about the uproar a couple years back when they further devalued the revenue-based earnings)…they like it as they can change/cancel the awards without fees.

    Which of course won’t happen with the majors (save for top tier / 75K+ mileage elites)…thus, a very different story.

  18. I have several points:
    (1) Loyalty. I feel that the airlines Loyalty is a one way street. If they raise their prices to the most loyal customers, those customers being loyal will spend more money.
    (2) Benefits. Bob’s post above is instructive. To summarize, he said he flies a lot of economy for business. As a result he has more redeemable miles than he can use, but was hurt by AA reducing Global Upgrade from 8 to 4. The point is, there is somebody at AA, Delta, United, that wants to squeeze the onion more and take away (ie monitize) whichever benefit you value. They are coming for you. The rationale repeated by rote by airlines that the change will benefit the remaining elite or redeemable miles customers should have the caveat “for now.”
    (3) Life-Time Elite. I know a lot of businessmen that have faithfully flown one airline for 20 years. The are lifetime elite members with United/American and so forth. Since they fly a mix of coach and business, they much spend over $0.20/mile. So a million miler will have flown at least $200,000 worth of tickets (I am guessing much more {like an average of $1,000,000 per million miler}). Right now they feel locked in. They are NOT happy. If the legacy airlines do not figure out how to keep these lucrative customers, who fly a lot of business, it will not be good. This is a case where you can monitize them in the short run, but in the long run, you will lose the benefit of their support.
    (4) Locked in. I am referring to Greg’s post earlier. Totally agree. I flew Continental/United 400,000 in about 5 years because of the program. I seldom purchased he cheapest ticket, because I was trying to maintain my status on the weekends. I also purchased miles more than once, even though it is not a good deal, but I wanted to keep my balance up. I put most of my household spending on a United Credit Card. The year they announced revenue based, I did a challenge to American, and have not flown a single mile with United since. I have switched my spending to another card. I have re-qualified executive platinum at AA this year, good through January 2018 (year I am irritated that they changed the expiration date of expiration from February to January). I am in the wait and see mode. I am probably going to make most of my major trips with points and decide if I want to re-qualify in 2018. Therefore, my revenue miles will drop to almost 0 until January 2018. Unintended consequences of the new rules. After than I will either bite the bullet and re-qualify or (most likely) decide to save the money and become a free agent, with a preference for Jet Blue with better seats and international airlines.

    I think Gary should continue to bring this up. Like United’s former CEO Smisek who believed that no-one cares about how cashews taste on his airline, airlines seem to believe that they can continue to charge more for a mile (via sales to credit cards or through revenue based systems) and return less and the consumers will not notice. Gary is the Canary in the mine, reminding the airlines that people do notice. Bravo!!!

  19. @Gary: Seconding the pet peeve about the goose v. egg situation. You write about this topic with regularity, and you similarly regularly screw up the idiom. How can this be?!? You are a native English speaker for cryin’ out loud. I mean, just think about it: if the goose is golden, then you have a golden goose. It’s a valuable asset, yes, but more-or-less fixed in value, tied to the fluctuation of the price of gold. If gold appreciates, your goose is worth more. Not that big a deal.

    A goose that lays golden eggs, however, is a perpetual income stream. It keeps generating goose egg-sized golden nuggets for as long as it lives. This is much more valuable than a single golden bird. Surely your economics understanding is strong enough to grasp this.

    Idioms are hard, but come on man…

  20. So, our largest legacy carriers (AA, DL, UA) expect us to fall in line like penguins to support their beef with the three gulf carriers benefiting from their governmental largesse; join in their protest to prevent Norwegian Air Shuttle from bootlegging the requirements of the Open Sky Agreement with Europe; AND, except for DL, support their push to privatize the FAA?

    Yet, these same carriers are racing to the bottom to devalue our miles as if they were Deutsch Marks from 1923–all this after they enjoyed bankruptcy at our expense; and now their highest profits ever in their history. Of course, if these same carriers run into turbulence in the future, you can be sure they’ll be lined up at the public trough, and dumping their union contracts again.

    When I just attempted to move my F Class seat at 75,000 miles one-way on 4 July between ORD-LAX to another day when it would be only 25-55,000 miles; after explaining I did not want to waste the miles or $150 change fee as I had booked the wrong date; asking to respect my loyalty since my first flight on a 707 Astrojet from O’Hare-Idlewild in 1959, American just responded, “nope, that’s our policy; part of our revenue program.” Really?

    So my response to this story is:
    1) To embrace Norwegian Air Shuttle and anybody else smart enough to break through the market constraints of the Open Sky Agreement.
    2) To encourage our three legacy carriers to figure out how they will compete with the gulf carriers, but without Congress holding their hands or wiping their…
    3) To encourage cabotage to allow foreign carriers to fly between cities in the US. If anybody has ever flown Lufthansa Business Class on its inter-European flights, to experience the level of food and liquor service in a 60-90 minute flight, you will know what I mean. Our legacy carriers cannot even produce at that level between ORD-LGA, ORD-BOS, or ORD-WAS.

    As a transportation pundit, I’m done feeling sorry for these legacy bullies of the sky who could care less about the American traveler, and who are more focused on their institutional investors who look at every expense, but expect their “comped” First Class ride.

  21. Why oh why would the airlines do this? Such a difficult question to answer…

    To find the answer, take a look in the mirror, Gary. They’re doing it because of you. Because bloggers are making a tidy living by driving crowds of ne’er-do-well, low-revenue (actually, negative revenue) passengers into premium cabins. They’re tired of being played for chumps. This is their answer (along with zero-redemption availability, tremendous increases in the cost of redemptions, “fuel surcharges” and other ways to stick it to your readers).

    And you profess to be shocked, SHOCKED! they react this way. Shouldn’t be, unless you think everyone working for these large corporations are complete idiots.

  22. If airlines were concerned about “crowds of ne’er do well, low -revenue (actually negative revenue) passengers” in premium cabins, they would stop putting non-rev employees and their families in those seats rather than paying elites sitting in back.

  23. @John re: David’s comments. Remember George Bernard Shaw’s famous quote. “Never wrestle with pigs. You both get dirty and the pig likes it”

  24. @John

    All the airlines have interline agreements, so while you are blaming the domestic 3, those non-rev passengers could be from any airline. To take a line from Flyertalk, if you want to fly first class, pay for first class. The gravy train is ending fast, for everyone!

  25. @JohnB. Thanks for pointing out that all those non revs flying in first probably don’t even work for the airline they are flying on while customers of that airline who pay for flying100,000+ miles per year sit in back.

    With respect to paying for first class (or any class for that matter), try taking your own advice.

  26. Delta has made its Medallion program pretty worthless. I am a Diamond level, which used to get me at least a Comfort Plus seat for myself and family at booking. Now Comfort Plus is an upgrade for me and I have to pay for my family. To make matters worse, even though the benefits chart says I get bags free for myself and companions, when booking I am only offered the option of paying for bags. I think the days of one airline loyalty are gone.

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