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Counterpoint: Jury still out on revenue-based FFPs

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By: RickFerguson |

Posted on June 15, 2017

Counterpoint: Jury still out on revenue-based FFPs We’ve been vocal here at the Wise Marketer about being largely on the side of the airlines when it comes to the evolution of frequent-flyer programs from mileage-based to revenue-based earn structures. We’ve also been critical of them for focusing so much on elite flyers that they’re losing the battle for customer loyalty with everyone outside of the one percent. There are, of course, dissenting points of view. One airline loyalty expert, David Feldman, claims that, given the complexities of measuring airline revenue and the often-contradictory goals of airline loyalty programs, our cheerleading of the industry is at best naïve and at worse dead wrong. Here’s this month’s Loyalty Counterpoint.By David Feldman
One of the biggest problems in the loyalty industry is that the debate over changes to the frequent-flyer Programs (FFPs) of American, United and Delta is polarized into two camps: Loyalty industry cheerleaders reacting to the concept of program changes being "revenue-based" with the same hysterical enthusiasm of a teenage girl at a One Direction concert; and the mileage-junkies over at Flyertalk and Boarding Area crying "Whaaa… I didn’t get my upgrade." Like with most things, the correct analysis sit in the middle of those positions. And opposition to the new programs doesn’t mean that the old ones were perfect either.   The Wise Marketer has been one of the loudest cheerleaders of airline loyalty program changes in the industry.

Here's one quote:

"We're on record here as supporters of the Big Three U.S. airlines migrating their loyalty programs from mileage-based to revenue-based earning structures. Grumbling and entitlements aside, the changes preserve the long-term financial health of the programs and re-focus them on the airlines' core constituency of high-revenue best customers."

And here's another:

"Those of us in the loyalty industry have long understood that the move to revenue-based earning was overdue; the legacy programs had grown too massive, and the program liability too untenable, for the airlines to continue to offer every flyer a mile per mile flown."

But in The Wise Marketer's latest piece, Rick Ferguson (in a somewhat contradictory manner), appears to question whether the new program strategy is 100 percent perfect. In the spirit of fostering discussion and debate, The Wise Marketer has invited me to provide an additional perspective and some different insights.

The crux of The Wise Marketer’s argument in the latest piece is: “We have long argued that the move was necessary both to the long-term financial health of these programs and to build long-term relationships with the airlines' best customers.” We’ll examine some of these concepts in detail below.

Do airline programs correctly focus on the right customers? Here’s another quote from Ferguson: "A loyalty program is only as valuable as its ability to drive incremental revenue. Absent such results, then you really are only subsidizing existing customer behavior." 

To deliver incremental revenue to the airline, the FFP needs to: drive uplift in core airfare sales (retention, yield, share of wallet, etc); and drive profitable third-party mileage sales and co-brand card engagement. Whilst there is some overlap, these two outcomes are primarily driven by two distinct program strategies. The single most confusing aspect for analyzing FFPs is understanding that there are two separate, yet related programs operating:

  • The Elite-Status-Program (which rewards an airline's most frequent and premium passengers with recognition and benefits such as free baggage, lounge access, upgrades, and VIP treatment);
  • and the Award-Mileage Program (which awards passengers with "miles" which can then be redeemed for free flights; these miles can also be earned via credit cards, hotel stays, rental cars and so on).

Award miles aren’t the only way to reward your best customers. In fact, both academic research and airline data show that top customers may in fact be motivated more by elite status benefits than by award miles. Elite status benefits are proven to increase retention as well as share-of-wallet. At the recent Loyalty@Freddies Conference in New Jersey, I presented data from a US airline showing that elite status qualification also drives significant goal-gradient behavior in the form of increased flight purchases (except from super-high-value customers). Ferguson argues that the program changes were necessary "to build long-term relationships with the airlines' best customers."

The first question needs to be "Who is an airline trying to move the needle with using its loyalty program?" Is it just the people who are spending the most dollars? And if it is - which is questionable - do the new programs actually reward them better? For all the talk of "rewarding our best customers," the airlines have capped mileage earning at 75,000 miles - which means someone buying a $15,000 first class ticket receives no more miles than someone spending $7,000.

American also halved the number of prized Systemwide Upgrades handed out to its top-level Executive Platinum members. Expensive-fare customers are indeed earning more miles when they fly, compared to the old programs.  But is this driving incremental revenue? Or are we just "subsidizing existing customer behavior?" Is it really as simple as giving more award miles to those who purchase more expensive tickets?

Let’s over-simplify passengers into two example segments:

Example 1: Joe. Joe is a business executive who travels regularly on the company dime. His company has a managed travel contract with American Airlines, and he only travels in paid first class.  Joe values access to airline lounges, priority security and boarding, and having access to premium airline representatives when things go wrong. He has no use for his free upgrades as he already purchases first class tickets, so he gives these upgrades away to family and friends.

Joe is so busy with work – and has so many miles in his account - he has no interest in the airline cobrand card (his business gives him a corporate card for expenses), nor the shopping portal, dining program or any other miles-earning activity. But when the airline surveyed him and asked if he wanted more miles, of course he said "yes." The last thing that Joe wants to do on his time away from work, is go anywhere near an airport. His last family vacation was a road-trip to Yosemite. So what does Joe do with the two million frequent flyer miles in his account? He buys tickets for family and friends.

Example 2: Mary. Mary is a self-employed consultant. She travels semi-regularly and has low-level elite status. She has decided to give 100 percent share of wallet to American Airlines but travels on the cheapest tickets, as she has to pay out of her own pocket.  She values the few elite benefits she receives, but holds the Citi AAdvantage credit card, and credits all of her hotels and rental cars to American. She tells all her friends that they should join the American program and earns as many miles as she can through shopping and dining. Mary dreams about one day flying First Class to Paris, or Hong Kong, or Sydney - but she’ll also be pretty happy just being able to use her miles to fly the family to Disneyland in coach, or to grandma's house in Wichita for Thanksgiving.

These examples are simplified and extreme, but not uncommon. Giving more miles to Joe isn't going to drive any incremental revenue whatsoever. In fact, Joe hates American, and when his boss tells him they are switching to United next year, he's elated, as he prefers flying Star Alliance airlines.  But to Mary, the miles encourage her to dedicate a higher share of wallet, and she'll even take an extra flight or two, or an inconvenient connection, to ensure that she requalifies for her status.

In my own work and discussions with FFP executives, two insights stand out. First, high-value premium fare passengers are more likely to opt-out from email marketing, and less likely to seek out co-brand and other high-margin mileage earning opportunities. Second, Most FFP executives privately concur that if you removed all flight-earning miles from super high-value passengers, almost all of them would continue to fly your airline the same amount (as long as you maintained or improved elite status recognition benefits).

The problem isn't awarding miles based on the fare paid. Best practice dictates that those who pay more, should get more. But we must include elite status benefits in that calculus, not just award miles. The challenge for the program is that mileage earning must remain relevant and compelling for all customer segments, especially those that are most motivated by the mileage currency itself.

Remember, US airline FFPs are incredibly profitable. And it isn't Delta's top 20 percent of Diamond members that are responsible for $2 billion in annual credit card revenue from American Express. The key to such profits is maintaining affinity for the mileage currency through a compelling earning velocity. As Barry Kirk, VP at Maritz Motivation Solutions points out, "The less valuable your points seem, the less likely members will care about working to earn them." The reduction in mileage earning for most customer segments puts profitable third-party mileage sale revenue at risk.

In fact, discount fare customers can be incredibly profitable for the FFP. Structured correctly, it's even profitable to generously reward once-a-year flyers, as they will either fly more often, engage with high-margin ancillary offers, or, ultimately, suffer breakage (and the airline wins when the miles expire unused).

Ferguson also claims that comments from Delta CFO Paul Jacobson at the Bank of America Merrill  Lynch 2017 Transportation Conference prove that the move to a revenue-based program worked exactly as The Wise Marketer predicted.  Ferguson also makes the unambiguous claim that the changes have benefited Delta’s bottom line. But are those claims backed up by facts?

American's devaluation of its AAdvantage program is already expected to cost the airline at least $20 million in lost revenue in 2017 due to lower than expected credit card acquisitions. This loss virtually wipes out the $24.3m in savings they achieved by slashing the miles being handed out for flying. United has also revealed that cobrand card acquisition is lower than forecast. As far as Delta goes, Jacobson made no such claim of increased profitability. All he claimed, was that "loyalty really took off." But he provides no details as to what that means.

At last year’s Loyalty@Freddies Conference in Las Vegas, I specifically asked Delta Skymiles Managing Director Karen Zachary about this claim. Whilst trumpeting some improved metrics, Zachary declined to claim that the revenue-based switch had driven increased profits. Gary Leff, author of View From The Wing, demolishes Jacobson’s claims here.

What Jacobson did do was explain that, by linking mileage-earning with flight revenue, it was easier for them to account for the cost of a mileage credit. When attributing the actual real-world cost of redemption to that mileage credit, of course Delta is agnostic as to whether you spend with real currency, or with devalued-mileage-currency. At best, we can say that the jury is out as to whether these program changes are driving increased profitability.

Contributing to Loyalty Marketing thought leadership is a tricky business. You have two choices: Publish re-hashed press releases or group-think syndication; or be bold, nail your colors to the mast, and stake your reputation and credibility on your position. The team at The Wise Marketer should be applauded for choosing Option 2 - even at the risk of getting it wrong. I am pleased to see Rick Ferguson coming around and starting to acknowledge the existence of cracks in the Big Three's strategy. I'll keep chipping away to highlight the flaws.

David Feldman is Director, Loyalty and Reward Program Strategy at Catchit Loyalty.