The Mystery of Airline Loyalty Programs | Silver

At the end of my last blog, I mentioned how airlines have become so adept at differentiating their products that in a foreseeable future, a greater level of customer-driven customized flight experience can be expected. In fact, not only is this phenomenon a significant trend in the airplane seat development, it also represents a unique feature of the industry’s revenue composition. When I was building an eco-hotel business model in my Business & Society class back in the fall, I noticed that approximately 10% of hotel revenue comes from sources other than regular room rates. This seems quite reasonable: after all, meals, laundry, mini-bar expenses are often an important part of travelers’ hotel bills. However, I was surprised to find out that according to a consulting firm IdeaWorks, the ancillary revenue of traditional U.S. air carriers (non-inclusive of those low-cost competitors like Southwest) had 11.9% share of their total revenue in 2015, meaning that in average, when a major U.S. airline sells a $1,000 ticket, it would later get $119 more revenue from somewhere else. While these numbers seem to illustrate the power of the “customization” I have previously mentioned, they indicate something far more profound. A deeper look into IdeaWorks’ report suggests that nearly 55% of U.S. major airline ancillary revenue came from “sale of FFP (frequent flyer program miles).” In fact, aside from the seemingly excessive baggage and seat selection charges, airlines increasingly found frequent flier programs to be just as lucrative. Arguably, the proliferation of loyalty programs in airlines has become a definitive feature of the industry, shaping the modern-day air travel landscape in so many ways.

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American Airlines AAdvantage Program

While the actual frequent flyer programs (FFP) only has about 35 years of history, the idea of using “rewards” to secure loyal customers and, therefore,  increase customer retention rate is certainly not new. According to McEachern, back in 1700s, American merchants had started distributing cooper tokens, which could later be exchanged to manufactured goods at a certain rate, to their customers. It is also not hard to imagine that in a less formal and smaller-scale situation, a retailer might promise, though probably in conversational ways, to give its most frequent customers additional discounts or better services to make sure that they are buying there again. In 1960s, the American trading company Sperry & Hutchinson thought of something new. It developed a customer rewards program based on “S&H Green Stamps.” Customers would get these green stamps from numerous retail counters that the company had partnered with and put them in a catalog. Without surprise, people were able to redeem their “rewards” from these retailers when they had a certain number of stamps collected in their catalogues. Little did Sperry and Hutchinson know that this creative business scheme would inspire American Airlines to almost replicate the same idea a decade later, except that this time, virtual “miles” have replaced the concrete maps and electronic accounts have replaced the paper catalogues. As airline deregulation rolled out and electronic revenue management system became unveiled, American Airlines launched the world’s first frequent flyer program, named “AAdvantage,” in 1981, soon to be followed by United’s “Mileage Plus”a week after.

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S&H Green Stamps Saver Book 

A few years after American Airlines’ first move, numerous carriers around the world joined this game offering their customers opportunities for rewards. At that time, their motives were simple: airlines wanted to use some “perks” to attract or consolidate their customer base. These programs, in fact, became important incentives for many passengers to choose air travel, as they were assured that they would get something back for each mile they had flown. Statistics also indicate that within the last 30 years, customers responded positively and enthusiastically to this tremendous marketing scheme: in 2011, the total number of participants in the AAdvantage program exceeded 66 million. According to Tim Winship, “in 2010, American Airlines cashed in more than 165 million miles for almost 7.2 million awards.” This frenzy of frequent flyer programs resulted in customers’ frenzy of seeking alternative ways to earn miles, and airlines saw the demand quickly. They partnered with co-branded credit cards, hotel chains, stores, and restaurants to which they would sell their miles, generating billions of revenue every year. It is not hard, therefore, to understand the previous statistics on airline ancillary revenue: these virtual numbers in passengers’ electronic accounts actually became a huge revenue generator for carriers. The size of this particular business (of selling miles) has grown so quickly that many frequent flyer programs have already become independent of their affiliated carriers, operating on their own.

You may wonder why a passenger can be so addicted to getting more miles. The attraction to frequent flyer programs is two-fold. First, a certain number of “elite qualifying miles” enables passengers to reach a certain airline status. The perks of being a top-tier flier in an airline can typically include priority travel handling (reservation, check-in, security, boarding, baggage, and even phone call), complimentary upgrades, better award availability and even, for a few people at the top, access to most exclusive airport facilities and travel experience. Second, for people who travel less frequently, the slow accumulation of miles could finally lead to an award ticket free of charge on that airline’s flight. Premium cabin tickets, in particular, seem more practical and accessible by using miles than by using tons of cash.

It seems like this is a perfectly fair trade: airlines treat their most frequent passengers the best; customers choose to be loyal to one airline and get rewards accordingly. A deeper look into FFPs suggest more about their profitability. On one hand, suppose that you are a “elite-tier” member on Delta. You are buying a round-trip ticket from Philadelphia to Los Angeles. You find that American non-stop flight would cost you $430, whereas Delta flights with a connection in Detroit would cost $520. You would still probably pick Delta and enjoy the sense of being “on the top” as you fly, notwithstanding that directly buying these priority services from American might cost you less. In a sense, you might be paying more for your good feelings, and you are still “forced” or allured think that your purchase is nice and smart. On the other hand, the marginal cost for an airline to issue an award ticket is usually small to minimal, as these award tickets typically only fill in many of the unsold seats that could have been empty.

Recent years with a more connected commercial aviation network around the world and the establishment of airline partnerships and alliances, frequent flyer programs are, arguably, more prosperous and convenient than ever. Many travelers, as a result, are starting to find loopholes in different FFPs’ rules to maximize the gaining and use of their miles. In 2015, Delta announced that the award miles its SkyMiles members received would no longer be based on their actual flying distances. Instead, only dollars spent would be taken into consideration. This much more practical revenue-based earning model was later endorsed by two other major U.S. air carriers – United and American. The fun of “mileage run,” which many hyper-mobile 21st century world travelers enjoy, seems to fade day by day, and airlines are re-centering their ever-more-complicated programs around money, the only real token of loyalty in the capitalist world. After all, the transaction of miles as a virtual currency can be viewed as a lack of transparency in air fares and the related costs. Customers, on a larger scale, would not be able to outsmart the well-educated analysts sitting in airline offices plotting their latest FFP market schemes. Statistics do not suggest that FFPs are dying out, but it is for sure that the future of these programs will certainly be more grounded on practicality as both consumers and sellers of this relatively new market grow and mature.

Click here for a deeper analysis of the consumer psychology of loyalty programs.

Thanks for reading. See you next week. (I’ll address “airlines as cultural representations” in my later posts.)

References: 

http://www.ideaworkscompany.com/wp-content/uploads/2016/04/Press-Release-103-Global-Estimate.pdf

https://www.sweettoothrewards.com/blog/a-history-of-loyalty-programs/

https://www.theguardian.com/business/2016/jan/05/argos-story-green-shield-stamps-tesco-sainsburys

http://www.al.com/living/index.ssf/2016/04/whatever_happened_to_sh_green.html

http://abcnews.go.com/Travel/airline-frequent-flyer-miles-30-years/story?id=13616082

http://www.kobie.com/thought-leadership/history-of-loyalty.pdf

Picture Sources:

https://www.useaamiles.com/carhotel/contactus.asp

http://flashbak.com/livin-the-dream-with-green-stamps-a-1975-catalog-26187/

7 thoughts on “The Mystery of Airline Loyalty Programs | Silver

  1. yihengxie

    As a flyer, would you rather stick to one airline for loyalty, or choose the ticket with the lowest offer for each flight? Are frequent flyer programs really worth it, financially? What if a 3rd party website, say, cheap-o-air develops a loyalty program, though they are pulling all airlines’ tickets together, would that be potentially appealing too?

    Reply
    1. Silver Fu Post author

      In my previous years of air travel, I have chosen to stick with one airline. But I would say that there is a possibility that I go for lowest priced ticket every time. To answer your second question – I definitely believe that if frequent flyer programs are used prudently and judiciously, they are definitely lucrative even for passengers. Currently, even tickets booked through 3rd party travel agent website are eligible to earn miles (as long as they are in certain fare classes.) So the loyalty program developed by another 3rd party can potentially overlap with current FFPs; they don’t necessarily conflict with each other.

      Reply
  2. wbdrisco

    It’s interesting to see an analysis of the frequent flyers program, as I have a frequent flyer account myself. Do you think that the use of frequent flyer programs will continue to expand in volume?

    Reply
    1. Silver Fu Post author

      Yes. The detailed marketing strategies of frequent flyer programs are reaching an unprecedented level. Also considering the certain aspects (elite perks, award tickets, etc.) inherently attractive within FFPs, I believe they will certainly continue to grow and expand.

      Reply
  3. rickyyu1999

    Great blog post. Very interesting topic this week. Do you think the results of the analysis will change with the difference of long and short flights?

    Reply
  4. kevinwang11

    Very interesting blog post! I have been a frequent flyer with United for over 5 years. It’s surprising that I have never even thought about how FFPs can actually help the airlines to profit. Do you think that FFPs are successful because they manipulate the minds of their customers?

    Reply

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