Every so often on the Ginger Travel Guru, I take a break from my normal staple diet of trip reports and news to write a longer article with my general musings on the travel industry in general.
Airline loyalty programmes are in an interesting space at the moment. There have never been more opportunities to earn miles, however the perception within the frequent flier community is that airlines seem to be paring back benefits and increasing award costs.
Most programmes have two key strands; the acquisition and spending of an airline’s currency, and the benefits afforded to various tiers of frequent flier. They’re both intrinsically linked but have very different audiences.
In this article I’ll take a look at a few of the areas that drive most airlines frequent flier programmes and provide a few suggestions about where they can improve.
Nearly all airlines have a number of tiers which offer a graduated set of benefits to fliers based on how much they fly. The general idea is two-fold, both to make customers feel that they are valued, but also to incentivise them to spend more than they ordinarily would, to maintain their current status or gain promotion to the next.
British Airways relatively recently (around three years ago) brought in their “Bronze” tier at the lowest level of the frequent flier programme. At the time, certainly in the online frequent flier community, it was looked upon with some derision, however I believe was actually a very smart move.
It created the perception of having attained something amongst the relatively infrequent traveller and cemented the British Airways brand as one that they should be loyal to.
The benefits were relatively modest and inexpensive – business class check-in and priority boarding, as well as some bag tags.
Conversely at the top end, British Airways have what they call Gold Guest List, a level above their traditionally highest tier Gold. There’s a reasonably long list of benefits (which I won’t go into here), however at this level of flying, it’s arguably the intangible benefits of just being able to help you get where you need to be, as seamlessly as possible, that they don’t seem to be terribly good at.
Having been one of these fliers for the past five years, there’s little flexibility when things go wrong. Certainly not compared to their trans-Atlantic joint-venture partners American Airlines who will generally move heaven and earth to help you.
It’s at this high end of travel that the personalised, high-touch, high-cost level of service really matters. Set against the general cost-cutting that has been the watchword of British Airways (and IAG) over the past few years does little to engender true loyalty from their most frequent travellers.
American Express reportedly pay Delta over $2bn a year under their credit card partnership. In the UK, the British Airways American Express card is rumoured to have monthly charges of over £1bn. Credit cards and airlines are very big business.
Frequent travellers are very attractive customers to financial institutions; after all, if you’re going to be travelling lots, then you’re going to spending lots. Coupled with the ability to place your brand in that customers wallet, so that every time they spend money your logo is there and front and centre is all very powerful.
However things are certainly changing in this market, albeit with a lot of regional differences. In Europe, the EU have capped the interchange rates (the amount that the banks can make from merchants) on Visa and MasterCard products. This has led to MBNA in the UK withdrawing all airline related cards, although it’s uncertain what will happen to their existing products. Also in the UK, the coming of open banking APIs is sure to disrupt the market, although I’m not quite sure how, yet.
In the US, the banks themselves have cottoned on to how lucrative the market is. Companies such as Chase have launched their own rewards programmes, such as the Sapphire Reserve cards in competition to the major airlines. These are high-end products offering not only points, but a variety of statement credits, lounge access benefits, concierge services etc. that you’d typically have associated with the high end American Express Platinum and Centurion products.
For me the interesting wild card in this market is the tech firms, such as Apple and Google with their ApplePay and AndroidPay products. Perhaps less so Apple who are extremely protective of their brand, but more likely Google, I could see them partnering to drive up-take by offering frequent flier miles with every purchase (for example). Partnerships such as that where particular banks may be unwilling (or prevented by local regulation) from doing so could be an interesting next step, essentially bypassing those financial institutions less willing to play ball.
Revenue Based Models
Delta started the trend of tying the amount of miles you earnt against the cost of your ticket as opposed to the distance you flew. On the face of it, if one were to invent a frequent flier programme today, it’s a much more logical linkage. Reward the people that spend the most, as opposed to those that fly the furthest.
United and American Airlines quickly followed. Lufthansa and Air France very recently announced changes as recently as a few months ago. British Airways, Virgin Atlantic and Qantas have always had the concept of tier points or status credits for earning status, being linked to cabin flown as opposed to distance for years.
Yet I’m not quite sure moving to a fully revenue based model makes sense.
People love to think they’ve got a good deal. The ability to get a huge reward for the appearance of very little cost is very, very attractive, and drives loyalty.
Redeeming miles for first and business class is a huge attraction. On the face of it, fares can cost many thousands of pounds/dollars/euros, so the perception of being able to redeem miles for a “free” ticket is very alluring.
Moving to either revenue based earning, or worse spending, diminishes that. You’re simply getting a straight £/$/€ per point meaning there’s very little possibility for arbitrage or thinking you’re getting an awesome deal.
Yes, there are a lot of programmes that allow people to use their points for a discount off a normal fare. These offers are typically terrible value but do give a good perception of value for those that don’t look too closely as the headline cost can be substantially reduced.
Nearly all airline award seats are quite tightly capacity controlled – they tend to only make them available when they have quieter flights that would otherwise go out with free seats. Revenue based redemptions creates the perception that the aspirational business and first-class redemptions are not only few and far between, but just as expensive as cash.
NDC and Dynamic Award Pricing
I wrote a few months ago about the upcoming development of what the airlines are calling NDC, or New Distribution Capability, where I argued that done badly, could potentially lead to the death of loyalty.
Variable redemptions are another the area that I believe that Delta are leading the industry in. I think it will eventually become the norm to more closely align the amount of miles needed for an award to the underlying cost of a flight.
Delta started this on this journey a few years ago by not publishing award charts, asking people to simply check the website for how much a flight costs. They and also competitors like American Airlines are now introducing advanced techniques such as married segments to better price the cost of a flight in miles, to reflect the underlying demand.
Where I think airlines miss a trick in their current implementation of variable pricing is the perception that these awards are only getting more expensive. I know airlines pride themselves on managing capacity to demand to ensure their load factor is as high as possible, however there are always flights that are less busy than others. Highlighting these less busy flights with great value mileage redemptions solves two problems at once.
Big Data and Personalisation
When it comes to passenger experience, sales, customer relations, in fact nearly all touch-points, airlines have a huge way to go in utilising the amount of data they have collected about passengers.
The potential is massive as are the privacy implications if done insensitively.
I mentioned earlier about credit card partnerships. Theoretically with the right agreements with the underlying providers, coupled with the open banking APIs, an airline could have a huge amount of data on me and my spending habits. They could use that to not only refine their existing partnerships but create custom offers just for me.
Looking at past travel habits, correlating them with various events, sensible, targeting travel suggestions could be made. For example, over the years, I’ve visited quite a lot of cities with Pride events. A well targeted offer could be to offer me a trip to a city where there’s an event going to happen, with a hotel included, and business class flights. That kind of tuning is going to take some time to get right, especially with a potentially sensitive topic such as that, but isn’t far off.
Pooling data from touchpoints across the customer journey is important too. Rather than simply tell me what movies are going to be on the flight, I’d love to be able to link my Netflix or Amazon Prime account so I can pick a selection that will be made available on the in-flight entertainment system. Even with the advent of higher bandwidth internet connections on aircraft, speeds are still limited so a full A380 couldn’t support 4K streaming for everyone.
Transport for London recently modelled the routes that passengers took on its network between two points. Airlines and airport could use similar techniques to see where and when I go in an airport to either offering me a smoother boarding experience by only calling me from the lounge when I actually need to go to the gate. Conversely presenting me customised duty free offers as I spent a lot of time in the electronics store and knowing from the credit card partnership that I spend a lot on Apple products.
Airline loyalty is complex and multi-faceted. There’s always lots of things that an airline can spend their capital budgets on. Frequent flier programmes are one of the most profitable parts of their businesses as airlines are literally printing their own currencies.
Yet, certainly from an outsider to the industry, airlines seem to be innovating much more slowly than I would hope. Websites remain basic and digital transformation seem more talked about than delivered upon.
Frequent flier programmes are in danger of becoming less and less relevant as the airline brands themselves do with a relentless focus on cost and the perceived dilution in value.
There is so much that could be done to drive customer loyalty and retention, however no-one seems to have nailed their colours to the mast and be investing in it fully. Whether that’s due to lack of vision, lack of competition, or lack of funds, I’d be interested to know.