How United, Delta, and American Fail Basic Business With Revenue-Based Frequent Flyer Changes

When frequent flyer programs were first introduced, they were a huge advance:

  • More effective marketing than anything that had been done before
  • More cost-effective, too.

That’s because they let airlines track individual customer behavior, and market directly to their customers. They replaced ‘take an ad out in a magazine and hope that it helps sales in a few months’ as a marketing strategy.

Frequent flyer programs weren’t just a cost, they were a cost savings. And that’s before airlines learned they could sell their miles to third parties at a profit.

Many programs began by rewarding distance flown with an airline. There’s nothing sacred about the distance you fly. Distance was easy to measure and indeed distance was more closely correlated with revenue than it is today. Total distance flown, though, correlated with the amount of your life you spent with an airline and was an imperfect proxy for wallet share, how much of your business you were giving to an airline.

For 30 years airlines have been claiming that the changes they make to frequent flyer programs have been to ‘better reward higher-spending customers. Yet not only did United, Delta, and American move to a revenue-based program they made the miles even high fare customers earned worth less by raising the number of miles it takes to redeem for most awards.

I’ve contended that the shift to revenue-based programs (earning based on cost of a ticket) combined with award chart devaluations (making the miles earned worth less) is about spending less on marketing, when planes are running full. There aren’t many incremental seats to sell, so they spend less marketing dollars to fill those seats.

But just as distance is an imperfect measure of customer value, the only way to call total revenue a good measure of customer value is to misunderstand the difference between marginal and average, and to fail to understand opportunity cost. (Unsurprisingly then Delta says this change doesn’t drive their revenue premium.)

The person who buys full fare tickets but doesn’t pick their own travel provider (either because they ignore it, their corporate travel department buys the tickets) isn’t going to spend more money on an airline because the loyalty program is slanted to high revenue travelers.

Yet a program can influence both choice of travel provider and total amount of travel. A business traveler is less reluctant to travel if she’s being rewarded for it. They may not fight against travel when they aren’t just getting their expenses covered but they have something to cash in later. Without a rewarding scheme, business travelers become more reluctant to travel.

  • A high fare customer isn’t the same thing as a profitable customer
  • You don’t want to “reward” a high fare customer you want to “incentivize” additional business you wouldn’t otherwise get. In other words you want to increase profit (or avoid loss).

It’s interesting that a $300 Los Angeles – Las Vegas fare is rewarded under a revenue-based system the same as a $300 Los Angeles – New York one (and the same as a $300 Los Angeles – Tokyo fare).

  • A flyer may buy one expensive ticket with an airline because they’re the only one that flies non-stop on the route. Does it make sense to reward them, if the customer was going to buy the ticket either way?

  • In general a high revenue passenger is probably better for an airline than a low fare one. But a high fare passenger may trade off with another high fare passenger (for instance they both buy the last seat available on a flight). That high fare customer wouldn’t actually be profitable in an economic sense (opportunity cost basis).

  • A low fare passenger may fill empty seats and be pure profit — or they may ultimately displace a high fare passenger and be very costly if the airline didn’t get their revenue management right.

  • Low fare customers may also engage with an airline’s ancillary products. Base airfare isn’t the only contribution to revenue that matters, and other products are often higher margin than the actual airline seat (priority boarding, seat assignments, extra legroom, checked bags etc). Third party partner customers are profitable too. A member who carries an airline’s credit card and uses it, credits points for their non-air travel to the program, and uses their shopping portal may be a profitable customer.

  • The program needs to try to influence incremental business. An airline may reward a high spend customer but not get additional business from them than you would otherwise have gotten. They might be able to move the needle with some of your other customer segments.

All things equal, knowing nothing else about a customer, I’d guess that the higher revenue one is more valuable than the lower revenue one. But the whole point of the programs was to get better data on customers, to understand and reward them and market to them. They were early revolutionary efforts at big data. So ‘knowing nothing else’ isn’t ever a position a loyalty program should be in. And airlines should at least try to do better.

Ultimately if you take your business seriously, instead of just repeating platitudes, then frequency and wallet share matter — and especially driving greater frequency and increased wallet share — and not just total revenue.

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. @Gary
    Gary, excellent post, right on the money, and probably too complex for any airline executive (and Melissa) to understand….
    tks!!

  2. Even “business” travelers (of the non-Global Services variety) suffer…I’m at 18 CPM on my UA flights for work travel, right below the break-even. For every short CMH/DTW trip where I might make out a bit better, I feel burned on my TCONs.

    I now give int’l premium cabin spend to superior OUS carriers…loyalty runs both ways.

  3. Great post, unfortunately the lemmings running the big 3 won’t heed it.

    Without low fare customers, there would be no high fare customers.

  4. The United Executive looked at the Delta Executive who then looked at the American Executive sitting at the same table for three boardrooms. Who, What, I dunno.

    None have Krug, Dom Perignon, Lobster Tails….wait, AA once had Lobster Tails in 1st JFK-LAX, but that was B4 revenue based, and B4 Bush/Obama’s 2008 self-induced collapse for socialism.

  5. 1. The “last-minute buyer” is relatively price insensitive as they are already spending a ton of dough and buying based on schedule, convenience, and price. Rewarding them with 75,000 miles (max) per trip is stupid. You didn’t generate any incremental business for your airline. Imagine this scenario:

    LAX – LHR (r/t J purchased for travel tomorrow returning anytime in the next week)
    AA/BA/UA: all $7,943 ($7,600 when taxes are excluded)

    Let’s say I choose AA or UA. They will both award me 38,165 base miles (+ status multiplier). So they are giving me (at 1.5 cents/mile) about $572 back on my purchase. That’s a hell of a lot for no real decision I had to make. I just choose the cheapest fare.

    2. The notion that people who buy tickets earlier are cheapies who don’t help the airlines is just a.net and FT myth. These are all folks who don’t understand how business operate and what the value of cash flow and getting customers to pre-pay is. Airlines are generally low-margin businesses with substantial capital expenditures and cash flow constraints. Having cash flow from customers buying ahead of time is awesome.

    I agree with Gary here. DL has shown 0 improvement from its move to being revenue based. Sure, due to the average CPM vs. the breakeven with revenue based, airlines will give out fewer miles from flying their planes each year but will they actually do any better financially? I doubt it.

    Unless someone else is paying for your travel (agency problem with revenue-based programs), you have no reason unless you’re a very top-tier flyer not to be a free agent.

    Good for me. I’ll put tons of miles on AA, UA, and WN this year. They all have hubs in Chicago and I’ve been flying whomever is cheapest and most convenient. Sweet!

  6. more business cares about cost of flight and reducing that benefit for their corporate traveler. As for the airlines the money is made at selling miles to the banks the margin on selling miles are extremely high. Can you say 80% margin. What is the margin on selling seats?

    Frequent flyer miles are just Glorified stamp collecting. Remember blue chip stamps?

  7. It’s true that miles are an imperfect measure of loyalty, as is revenue. What’s your alternative? The only one I’ve seen is revenue times a fare class factor running from 0.25 up to 1 or 2 or 3. That structure is subject to criticism too. In fact whatever earning method you propose I can point out weaknesses.

    What nobody has shown is a structure which is almost always better than the others. I doubt such a structure is possible. We need Kenneth Arrow’s Voting Theorem for loyalty programs.

  8. The Economist estimates that there are 14TRILLION outstanding frequent flight miles out there. Any business with that many points/miles/tokens out there is going to do 2 things:
    1 Devalue the current points/miles/tokens
    2 Reduce amount of points/miles/tokens generated.

    The airlines are trying to slowly make these changes as not to alienate their most profitable customers while trying to increase revenue from the remaining 90% of the other customers.

    The argument that they don’t know/value/understand their clients is naïve, myopic, self centered and galactically incorrect.

    Come on Gary your stuff is usually better then this.

  9. For the vast majority of Americans a program incentivizes them to flying the same airline enough to get 25,000 miles for a discounted domestic flight (which they’re led to believe it’s free). That’s $5,000 “fare” dollars,, or about 11.5 average domestic roundtrips (BTS average roundtrip “fare” is $432). To the average American who takes 2 trips per year, it will take them 6 years if they stick to the same airline, 18 years if they split it between 3 airlines.

    Given that the vast majority of airline revenues comes from this demographic, what DL/UA/AA makes eminent sense. They just got late: most global airlines have been doing this for eons (using booked fare classes, some of them earning as little as 20% of miles traveled, as a proxy due to historical bad IT who could not track revenue). Global airlines never adopted the US model in all these years as it turns out it was the superior one.

  10. When will a carrier start taking small mileage award amounts for things like bag fees, or a day in the lounge? It would seem like a great way to engender loyalty from people that fly once or twice a year.. I take AA or SWA because of bag fees. I like Delta, but typically use only when flying in First Class. When I get punished by flying United, my miles are worthless.

  11. Same post complaining about the same thing, never mind a good 90% of the world’s frequent flier and loyalty programs are all revenue based. People like the author and his followers have gamed the system for years with things like mileage runs and getting elite perks by spending the bare minimum and reaping the same rewards as the guy who spends tens of thousands of dollars. Now that the good times have ended, lets all cry foul. A loyalty model designed in the 80s is not sustainable in today’s environment.

  12. Good post and I agree. I also think what gets lost is the bottom line loss in loyalty and the Don Draper model of they are selling an idea. An idea for business travelers that they slug it out in the air travel trenches all year long so they can take the wife to Hawaii and lay on the beach as a reward. When the airlines make that harder to achieve or become equal with all other airlines they become dream killers. Without that dream you have less loyalty and fly less but you also use that credit card less, the rental car code less, the hotel partnership less, etc which devalues your miles to the traveler but eventually to the credit card and other companies that buy the miles . I’d love to see a “stock value” of each mile to these third parties.

  13. Great article that shows why Delta is poorly run and lacks strategic vision. But…why do you only refer to business travelers as “she” and “they?” Are men not capable of being business travelers?

  14. It is such a no-brainer that on balance, higher revenue passengers are more profitable for airlines than lower revenue passengers. One could pick every statement in this post to shreds, but it would be too long. Might you find an exception or two, of course, but this post seems all about broadly generalizing from exceptions.

    Sure there is theoretically no need for the airline to give anything to the business traveler who flies on a full-fare ticket when the airline is selected by the corporate travel department. But if that is going to drive policy, then don’t give that flier miles at all. The whole premise of giving miles is that most travelers do have the ability to choose. Including most high spend travelers.

    I will give one response to this quote: “It’s interesting that a $300 Los Angeles – Las Vegas fare is rewarded under a revenue-based system the same as a $300 Los Angeles – New York one (and the same as a $300 Los Angeles – Tokyo fare).” I take it that Gary’s critique is that given that these three fliers are not of equal value to the airline, why give them equal miles under the revenue system? But even if revenue is not a perfect proxy, Gary’s own example shows how the prior system was far WORSE for the airline. The $300 LAX-NRT flier perhaps loses money for the airline and yet he or she is given oodles and oodles more miles for the trip than the LAX-LAS traveler (assuming elite status, probably 10,000 versus 1,000). That makes more sense???

    If the airlines truly wanted a rational approach, they’d also go more purely revenue based on elite status and eliminate the $200 mileage run for people to get 10,000 EQM and overwhelm the elite programs.

  15. Any system can be gamed. So it’s no argument that the old system could be gamed. I know I have some discretion in how much business travel I do and being rewarded for hours spent in a cramped plane matters to me. I have no control over the ticket price because I have to use close to the lowest cost option. So there is no incentive effect from rewarding me according to the ticket price. Fortunately I usually have Alaska Air as an option.

  16. Gary when are you going to get over this and move on? We get that as a low fare, low value discretionary passenger you alsong with much of your readership don’t like it. Show some gratitude for all the free travel you’ve gotten out of AA. You said you’re LT Plat when you’ve only been regularly flying for 4-5 years now-after the 12/2011 changes so you accumulated a ton of miles before 11/30/2011. You don’t understand how airlines view FFPs today you are like a dinosaur and need to wake up and smell the coffee.

  17. I’ve only been an Executive Platinum for the last 6 years, I’ve been an AAdvantage member for 20 years. What makes you think I’m a low value customer? I’m pretty sure I do understand ‘how airlines view frequent flyer programs today’ I’m also making *an argument* that you aren’t responding to about how that view is lazy thinking and counterproductive.

    I’m not complaining, I’m offering analysis and suggesting that the way the 3 major US airlines have structured their revenue-based programs is lazy thinking, that Delta concedes theirs (which United and American simply copied) doesn’t drive a revenue premium, and that while there’s nothing sacred about miles flown as such simply looking at total revenue misunderstands the role of marketing, marginal versus average, opportunity cost and economic profit.

  18. Gary, if you were a high value passenger you’d welcome the changes as you’d be awarded more miles and it will prune away the low value elites (revenue requirement). To me you sound delusional and ungrateful AA or any airline doesn’t need your advice there are large corporate departments, consultants, marketing and EXPERIENCED industry professionals running them. Get over it, the changes have been implemented and more are coming with revenue requirements next year, leave the “thought leadership” for the professionals.

  19. @joshg
    Clearly you are an attack chihuahua for one of the big 3….
    Not sure who’s shoes are you licking, dallas chicago or atlanta, but the reality is that you don’t realize that most of the high value flyers are also screwed under the new system and many examples were given
    If your bisses were so smart and professional they would not copy each other or hammer back door deals between them
    Now go and try to lobby the us govt against the ME carriers…. Thats what useless lobbysts like you do

  20. @Josh G – being awarded more miles isn’t helpful when the award chart now costs more miles and award availability has fallen markedly so you’re usually looking at standard awards. high revenue flyers are NOT better off with aadvantage today than they were, say, two years ago.

    Furthermore, the additional changes that are next up are basic economy fares that’ll exclude elite benefits, and high revenue flyers are affected here too because BUSINESS TRAVELERS *ARE* LEISURE TRAVELERS and how you treat them when they’re with their family is at least as important as how you treat them on business travel if you want to retain their business.

    It remains interesting that you do not address the actual arguments being made in the post. And in any case many of the ‘professionals’ at American (AAdvantage marketing) disagreed with the some of the decisions that were made, and had recommendations overruled by Andrew Nocella and Scott Kirby (who was personally involved). For whatever reason you seem to persist with this idea that I somehow am not regarded broadly as an expert, I’ve keynoted several loyalty industry conferences, served as a paid consultant, and as an expert witness on the subject. You never offer your qualifications?

  21. The comments against Josh G are revealing — in a world where the Donald can run for president, too many folks don’t want to hear the other side of things. Right or wrong (and I think they have it right for their business), the airlines are run by people who have spent decades running quantitative analyses. Even if you disagree with their conclusions, I think it is pretty clear that whatever self-interested ideas some bloggers may have did cross their minds and were analyzed. They will never be able to design a system that gives out maximize miles to people who spend a lot only because of the miles and minimum or no miles to people who were not influenced by it at all. But looking at it from their perspective, the new system seems far more rational than any other.

    And no, I don’t work in the airline industry or anything close to it. But I did spend more than $25,000 on United this summer solely due to a targeted promotion based on spend combined with elite bonus miles when I otherwise would have spent the same amount flying AA instead (where I have equivalent elite status).

  22. Gary, you know very little about the airline industry. I won’t deny that you are successful and effective at self-promotion (often shameless) but in today’s day and age that’s not especially difficult. Bottom line is that the changes are here to stay and will only further segment and separate low value FFs from high value! The biggest disappointment is that’s it’s taken this long and the industry has showered low value but frequent buying elites so long with benefits, upgrades, free travel, etc. I mean people moan when they *don’t* get upgraded. You come across as delusional and ungrateful.

  23. @Jeff “Right or wrong (and I think they have it right for their business), the airlines are run by people who have spent decades running quantitative analyses. Even if you disagree with their conclusions, I think it is pretty clear that whatever self-interested ideas some bloggers may have did cross their minds and were analyzed. ”

    That’s not really how it happened, except at Delta where they report their experience has been that the changes haven’t driven a revenue premium.

    Delta designed the system. Despite some objections from the people running the numbers at United, former Chairman and CEO Jeff Smisek said he wanted to do this. They got their marching orders from the top, rather than doing this because a dispassionate look at the data led them to it. And American AAdvantage had some of their own suggestions to do things differently, but Scott Kirby said no, do what Delta and United have done. Monkey see, monkey do.

    Kirby also thinks that Basic Economy and premium economy will drive $1 billion in revenue, when Delta (over-?)claims that basic economy is worth $80mm to them. You give the airlines too much credit for their decision-making.

  24. I am 1k on UA, Plat on AA and Diamond 360 on Delta this year. Don’t agree with Gary’s opportunity cost analysis for a variety of reasons not worth getting into.

    However, I am strongly seconding his comment that biz travelers are leisure travelers too. Just returned from family vaca with wife and 3 kids last night. How I am treated while traveling with family is in fact more important than what is being done for me when I am traveling by myself, partially because traveling alone is almost always paid biz and fairly easy as a result.

    All five of us were in the nice coach seats on AA yday. The last two family trips on Delta we were wedged into no recline back row.

    This leaves me wondering why I did 100k spending on Delta last year and only 15k on AA when my flight options for work are pretty similar as between delta and aa.

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