More and more airlines are making the move to rewarding their passengers based on how much they spend on a ticket rather than the distance they fly. We spoke to Iain Webster, Head of Loyalty Consulting at ICLP to find out more about these changes.
Q: How have airlines traditionally rewarded passengers for flying with them?
When these frequent flyer programmes (FFP’s) began in North America in the early 1980s the airlines were awarding their members points equivalent to the distance flown per flight. These airlines were regional carriers with a maximum flight distance of around 3,000 miles and whilst distance was an imperfect proxy for ticket value, it was usually roughly proportionate.
Today however, airlines have recognised that flyers on very short routes usually “lose out” so award a minimum of 500 miles worth of points for journeys below that distance. Conversely, many passengers are accruing a far greater number of points on ultra-long journeys than what would be awarded if price of the ticket was used as a proxy.
Q: And why has this practice continued for over 30 years?
A number of reasons. On the airline side it is very easy to calculate; using IATA’s ticketed point mileage table, an industry-wide agreed standard, all that was necessary to calculate the number of points was a simple static database of distance. On the customer side it’s a very easy process to understand, particularly once the language around “air miles” was introduced. Passengers may not understand exactly how far they are flying but they do know that every minute they spend in the air adds a few more miles to their FFP balance.
Additionally there is no dispute about a mile. A mile is a mile is a mile no matter where you are or how long it takes you to travel the distance. With seats being sold at various prices on a number of platforms, it is much more complicated to calculate points based on passenger spend than distance travelled. A planeload of 200 passengers could have paid 200 different fares (with those flying on business having no idea of the actual cost paid by their corporate travel agent) but you can guarantee that they would all be travelling the same distance from A to B.
Q: So why are so many airlines now either changing or thinking about changing to revenue based reward points?
A: Quite simply, airlines have woken up to the fact that revenue is a much better proxy for customer value than distance. In retail loyalty programmes we are all used to receiving “x” number of points per pound or dollar spent and this simplicity appeals. A distance-based programme doesn’t work well if you only operate over long distances or you’re a network carrier where long distances have been offered at a lower price in order to sway customers’ decisions to transit via your hub airports – both of these results in airlines not necessarily rewarding their most valuable customers.
Further to this, many airlines also award tier status based on distance as well – and it’s not always the right solution either. ICLP has calculated that airlines awarding credits for attaining elite status based on distance consistently end up with around 20% of their member base being in the wrong tier compared to their value. So for example, 20% of silver members are likely to provide more revenue to the airline than the average higher tier gold member. Conversely 20% of gold member are likely to have spent less than the average lower tier, silver members but earned higher status for flying longer distances. This matters greatly when you are giving away expensive tier benefits such as lounge access or upgrades.
Q: On balance then it sounds then like a good idea to make this change. Does ICLP agree?
A: A definite ‘probably’! But here is the major catch; if you’re a new airline launching a new programme then yes, definitely. Awarding points based on revenue whilst at the same time providing a fixed cash value for redemption works perfectly. At Norwegian airlines for example, their Norwegian Reward currency is dubbed ‘cash points’ and members earn a transparent 2% on cheap tickets and up to 20% on fully flexible tickets.
But for the legacy airlines with huge member bases that already hold a massive number of miles in their accounts, the changeover is more complicated. One of the largest US airlines, for example, openly admits in their annual reports they are holding over $3bn value of unused miles and nobody wants to tamper with the value of these stored points for fear of upsetting loyal customers, most of whom have flown thousands of miles to earn them.
Q: How have the airlines that have made the change solved these problems?
Most airlines that have made the move have changed the accrual value but not the redemption value. If we try and relate this to the real world it means you can buy the same amount of “stuff” with the currency you earn but the rationale behind how much you earn has completely changed. A crazy analogy might be that from tomorrow you get paid according to your age rather than your seniority, skill level or length of service. You’d hope it works out quite well, but its bad news for young high-flyers who’ve made it to top management positions! Changes like these always create winners and losers among the membership base and this needs to be carefully considered.
Looking at the impact this could have, ICLP notes that most airlines have also crudely varied the new earning value by tier level i.e. elite members get more points for their money. Simply put, the more you spend, the higher status you earn and therefore the more points you earn. This now completely ignores fare class, distance, or number of flights flown and relies simply on spends level as the measure of value. While it ensures simplicity it’s not necessarily going to guarantee the most loyal customers are rewarded in the long-term.
The problem with revenue-based accrual is that most airlines would strongly prefer someone who flies twice, paying $500 per trip for an expensive economy class, but very short distance trip, to someone who flies once paying only $1,000 on a cheap business fare on an ultra-long flight. The actual cost of the former is likely much more profitable to the airline than the latter yet under the new scenario they end up rewarding the same number of points to both passengers.
In summary we’d advise a cautious approach to making such a change. While it may sound simple and logical, every airline is different and the reality is much more complex. Airlines need to use extensive data analytics to properly identify the winners and losers, and ensure that truly profitable customers are landing in the first category. They also need to ensure that they clearly communicate these changes so passengers understand why they are happening and how it is going to affect them.