Over the weekend I quibbled with a financial analyst’s claim that airlines make more money selling miles than selling air transportation.
- There have certainly been times when this was true, when United was in bankruptcy years ago the mileage program was the only profitable part of the airline.
- In most recent times it hasn’t been quite true as low fuel prices have driven profits from actually flying.
Nonetheless, airlines have discovered a true holy grail. In nearly every business marketing is an expense. To major airlines marketing is a (huge) profit center.
Most competitive businesses work hard to offer a continually better product at lower cost while US legacy airlines with Basic Economy fares are striving to provide less at the same price in order to get customers to pay more.
Alaska Airlines, the airline with the nation’s second highest operating margin behind Allegiant, and one of the best on-time performances to boot, seems to understand the value of its frequent flyers.
Key points Alaska makes:
- Something that I missed in the announced future of Virgin America and strategic plans for Alaska Airlines moving forward is that (as reported by Airline Weekly) “30% of its Mileage Plan members hold an Alaska-branded credit card.” (Of course it’s possible that only 10% of Mileage Plan members have the card, but they have three each – hah.)
- MileagePlan members are 65% more likely to book direct than non-members and generate four times as much revenue for the airline. (Whereas American Airlines has been emphasizing the 85% of people flying once a year who generate half their revenue, to the exclusion of the 15% of more frequent flyers generating the other half, Alaska seems to be interested in the reverse.)
“MileagePlan members are 65% more likely to book direct than non-members and generate four times as much revenue for the airline.”
This stat alone speaks volumes to Alaska’s strategy, and how its fliers respond with loyalty. Imagine that, a frequent flier program that could be mutually beneficial in some regard.
All those years I was loyal to American Airlines was a waste. Alaska is loyal to me, so I’m loyal to Alaska Airlines.
Seems like a lot of wishful thinking, and confusing causation with correlation. The reality these days is that high-paying customers need airlines more than airlines need high-paying customers. There isn’t that much competition to get you where you need to go — especially if you’re a high-paying biz traveler. Sadly, there is zero evidence of an airline ever making more money by having a more generous frequent flyer program (have you ever seen an airline say they made a mistake by cutting back benefits and restoring them?).
Honestly, if not for the billions made from selling miles, I think these programs would be retired.
@iahphx
Actually Continental cut benefits for frequent flyers in the early ’90s. CO cut lots of things. Bethune came in and he changed many things back because CO couldn’t compete with other airlines. So it has happened before. But will it happen again? Alaska knows where its bread is buttered. The big 3 are management by committee, where each committee is totally cut off from the others.
@iah —
“The reality these days is that high-paying customers need airlines more than airlines need high-paying customers. There isn’t that much competition to get you where you need to go”
Glad to see we finally agree that competition should be legalized, lifting limits on foreign ownership of US airlines!
“have you ever seen an airline say they made a mistake by cutting back benefits and restoring them?”
Yes!
Here are 5 examples: http://viewfromthewing.com/2014/04/24/five-times-consumers-won-frequent-flyer-program-changes/
And one from 2014: http://viewfromthewing.com/2014/07/29/proof-mileage-programs-roll-back-devaluations/
“Honestly, if not for the billions made from selling miles, I think these programs would be retired.”
Well gosh, ‘if the programs weren’t profitable airlines wouldn’t offer them’. I’m not sure this is as insightful a claim as you seem to think?
Those are some pretty small — and pretty old — “adjustments”! These frequent flyer programs are so insanely complex these days that airlines will always tinker on the margins with them (with a bias to making them less-generous, of course). I’m talking about whether, in the modern post-merger era, a USA airline has ever reversed a major devaluation in a frequent flyer program benefit.
I don’t think so. This is in contrast to SERVICE cutbacks, which are sometimes reversed. Like US airlines putting free Cokes back in coach. Or better food/drink in lounges. It seems like the USA airlines still feel a need to compete on service, but not so much of a need to compete on frequent flyer benefits — except in a race to the bottom. The thinking still seems to be that frequent flyer programs are overly generous, and don’t drive new business. There is nothing to suggest this is not true.
AS has some work to do with their Elite members. With the acquisition of VX, they have status matched VX elites and given them all the perks that go with it. AS Elites cannot get the same on VX metal. They do not get 2 free checked bags and Economy Plus seating (or even aisle or window) without additional charges. those of us with loyalty to AS are not too happy right now. AS is also allowing VX Golds to have free access to AS Lounges , which are so crowded, that no one with PP is able to get access.
It is a never ending source of amazement to me that airlines are fighting to make themselves a commodity business rather than a known commodity business.
Frequent fliers view your airline is not a commodity. Once a year flyers, you’re just a commodity.
It is interesting you mention Alaska Air. They seem to do things a little different. With all the great mileage redemption options and non revenue model earnings on most flights, they are a great airline to travel with.
@JohnB – correct CO cut benefits in early 90s to the point they eliminated all upgrades except for full fare Y and H tickets. While other airports continued to offer elites upgrades on all fares.
Yes Bethune went back to basics – like meal at meal times, upgrades, and the standard perks and CO recovered and survived. He bought lots of new Boeing aircraft, retired old ones, and introduced BusinessFirst. At great plan that turned around CO.
@IAHPHX et al, I’m amazed that the prevailing wisdom in the airline industry is that the best way to make more money is by screwing a big segment of their best customers which is exactly what the Big 3 have been doing. This speaks not only to the lack of real competition but also the perverse way executives, boards, consultants and analysts sometimes think. At one time Enron was the smartest company in the room. Utilities copied Enron’s business model or risked being viewed as out of step and punished in the market.
So far, airlines have gotten away with their “follow the leader” rip-off tactics by eliminating competition and also by making the programs so complex many actually believe it when the airline tells them a program devaluation is an enhancement.
AS, if it can achieve sufficient scale and scope, will throw a monkey wrench into the conventional industry wisdom. Then and only then will we be able to tell which strategy is the most successful. DL seems intent on crushing AS in SEA and elsewhere. What is it so afraid of?
With respect to CO, I was familiar enough with that airline in the 1980s that I avoided it at all costs. To use an overworked phrase, it was a disaster. Then it became a NW partner in the 90s after Bethune came in. It was a whole new airline then. The most important change that Bethune brought to CO was not new planes, meals, or service, it was a complete change of corporate culture. Without that change the rest of his strategy would have failed.
I agree with Greg D about the airlines commoditizing themselves. No smart businessman wants to be in a commodity business … “moats” (like popular FF programs) make for good investments. Yet the MBAs are all over themselves filling in the moats so they can sell the alligators.