Airlines need to satisfy their frequent flyer program members or else those members may jump ship to another airline or start using a bank’s proprietary credit card. That means offering rewards customers want, at a price that’s attainable, and that’s available when members want to redeem.
They’ve become something of a victim of their own success, printing more and more miles even as airlines have held capacity in check and load factors have increased. There simply haven’t been as many empty seats to make available to loyalty program members. While demand has increased, supply has not.
I’ve argued that airlines need to make more seats available to satisfy members, even though that would mean sacrificing profit margins for programs. There’s no reason to believe that order of magnitude 50% margins for loyalty programs is sustainable in any case. Instead we’ve seen cut after cut, which would seem to jeopardize the airline’s golden goose.
For years I’ve called frequent flyer programs “the single most successful marketing innovation in history, and profitable multi-billion dollar businesses in their own right.”
- Fourteen years ago I explained the success airlines have had in creating their own private currency — no small feat.
- I’ve been writing for years about the incredible profits of frequent flyer programs, such as this piece from a decade ago. Those profits have only grown.
- United Airlines largely flew through bankruptcy to preserve their lucrative credit card product.
- Today American Airlines financials show they lose money flying passengers and only make money selling frequent flyer miles.
It’s this success that left me perplexed — why would airlines continually devalue their frequent flyer programs? These are highly profitable multi-billion dollar businesses. Yet each cut risks undermining that business.
Fundamentally frequent flyer programs are about trust. Customers are promised a future benefit if they engage in a set of behaviors today.
The move to low value redemptions, one penny a mile redemptions, and instant gratification like using miles for airline fees or toasters is a huge step away from offering customers aspirational rewards — the dream of travel that continually motivates them to accrue for a future benefit.
Customers earn miles rather than other currencies because they value travel they couldn’t otherwise afford or luxuries they wouldn’t allow themselves greater than their cost. And they’re high enough value that they’re motivating. Back when people had screen savers they’d put Hawaii, or Bali, or iconic imagery of Europe on their computers and dream about the day they could make that happen.
When frequent flyer programs delivered their loyalty was locked. When customers cleaned out their accounts they didn’t walk away from a program, they increase their rate of accumulation having demonstrated to themselves the value of their loyalty behavior. That’s why redemptions aren’t just a program cost, their an investment in future growth.
Indeed devaluations can be worse for programs than they are for members because they undermine that loyalty relationship and risk the billion dollar business. Even Delta recognized that risk which is why they didn’t go with straight revenue-based redemption when they introduced revenue-based earning.
This risk is the point that the former head of the Malaysia Airlines Enrich frequent flyer program is sounding the alarm about for his loyalty marketing colleagues. Mark Ross-Smith, who found that Cathay Pacific’s revenue-based loyalty program changes hurt its bottom line leading them to roll back those changes, warns that death by a thousand cuts to mileage programs causes flyers to choose carriers based on price and this benefits low cost carriers.
Airline Loyalty Programs sell THE DREAM – whether it’s connecting loved ones, or taking that aspirational holiday to Hawaii, Paris or the South Pacific.
The ability for airline loyalty programs to sell THE DREAM, and in the process make their points currency irresistibly desirable – is nothing short of magic.
…The ‘trick’ to all of this working – is that the currency value is opaque. The minute that the currency is worth, say, 1c per point – all of the desirable aspirations evaporate, along with desired consumer behaviour.
…Each time the programs devalue or remove benefits for members, there is a small behavioural shift in a subset of the member base. …In reality – not many airlines are using data effectively, and this can lead to missed revenue opportunities, a $1B annual loss in ticket sales, or perhaps even being blind to what threats are looming ahead.
Loyalty program executives — and their airline bosses — need to realize just what’s at stake: “As more full-service airline loyalty programs strip away benefits, devalue the currency and make it more challenging to earn meaningful rewards, the cracks in the dam will continue to grow, more rapidly, until one day the game will be over and full-service airline loyalty programs, and their billions in revenues – begin to wash away.”