Revenue-based frequent flyer programs are good for consumers — just not in the way airlines would have you believe.
Frequent flyer programs are the most successful marketing creations ever. And as such they get consumers to behave irrationally. Customers buy more expensive tickets than they otherwise would. And not even for the elite benefits, non-elites do it too and low level elites who may not get much incremental value from their status. Frequent flyer programs turned airline seats, which were otherwise commodity products, into differentiated products, and differentiated products consumers were willing to buy at a premium.
But when you commodify the relationship, and you turn the frequent flyer program into a straight rebate there’s little advantage to choosing one program or another.
What’s more, the leader in the revenue-based space — Delta Air Lines — actually turns out to be the loser in this game when all of their competitors reward high fares as well.
- Delta awards more miles to higher fares, but the miles they award are worth less than their competitors’ currency. That makes them the less rewarding airline program for the high spenders.
- Trust is incredibly important in a revenue-based program. And when consumers understand the program as a rebate in fares, cuts to the value of miles sting even more. Delta has reminded us over the past month that they begin with a huge trust deficit, and are doing everything possible to signal to consumers that they’re doubling down instead of doing anything to make up for it.
Delta runs a good airline operation, and it makes sense for customers in Atlanta and the Upper Midwest to fly them as a result. Planes are full so airlines don’t need to spend a lot to fill incremental seats.
Big data can even project what changes may happen at the margin, that a given cutback will save more on costs than it will cost in business. But there’s a temptation towards scientism, to believe that the data tells you more than it does, e.g. if there’s any misspecification of the question, or you’re just finding support in the data for your own priors and missing second and third order effects. (See generally, Karl Popper and also Hayek’s Counter Revolution of Science).
What’s more there’s a tendency to isolate a single change, and determine that there’s little customer attrition driven by that change. What customer gets driven away by American’s choice of domestic first class cookie? But taken together, a series of changes influences a consumer’s view of the product even if no single change moves the needle.
By taking away the loyalty aspect of frequency programs, the revenue-based approach takes the blinders off consumers and allows them to act more in their rational self-interest. That’s not good for the airlines, it’s not good for those consumers who could approach programs rationally in earlier eras, but it’s probably good for consumers as a whole. Of course no airline would knowingly go down that road. But their big data blinders and self-confirming hypothesis lead them inexorably towards it.