A white paper from loyalty systems provider ICLP has been published, examining the various ways in which the financial services sector is making exceptional use of airline partners' frequent flyer programmes (FFPs) to strengthen their customer proposition.
The paper is based on research into the world's twenty most mature FFPs, and uncovered a number of surprising trends. For example, one of the key findings was that the partnership between banks and FFPs goes a long way beyond the standard co-branded credit card concept, with both sides usually seeking as many extra opportunities as possible to cooperate with each other.
This extended level of cooperation between banks and airlines, according to Alexander Meili, planning director for ICLP Switzerland, usually affects mileage accrual opportunities for customers, but is also increasingly taking effect in terms of mileage redemption.
As in everyday life, some things in business naturally go well together. Such is the case with the airline and financial services industries. Rarely do the interests of two markets overlap so neatly and beneficially to both. Banks make ideal partners for the airlines' loyalty programmes, and vice versa. The alliance of the two enables both to take advantage of an established reward structure to incentivise desired customer behaviour and optimise their marketing efforts.
According to ICLP, the compatibility of airlines and financial services has a great deal to do with their similarities: Both are highly competitive markets and provide a varied product offering for a wide range of income levels.
Both need to maintain an image of security and reliability. Both want to track customer behaviour and spending in the interest of tailored marketing and segmentation. And, most importantly, they both need to recognise and respond to affluent customers at all touchpoints. Both airlines and banks have strived, in the interest of cost savings, to drive customers toward the use of automated services and the e-channel.
And of course airlines have realised in recent years that their FFPs can earn money from partners while at the same time strengthening brand awareness and loyalty. Despite increased restrictions and limited availability, free flight awards are still viewed as very desirable, with members remaining emotionally attached to their miles. It comes as no surprise then that the practice of using them as an incentive to foster loyalty (a practice that's now 25 years old) still works well. In this time, banks have proved to be the airlines' most reliable and committed partners, and ICLP foresees this mutually advantageous relationship not only continuing but expanding.
What opportunities are ahead?
This common ground for the two industries creates exciting prospects for both. One obvious example is that of an airline selling miles to a bank, which in turn rewards its clients for the use of a specific credit card. This practice is widespread, with all but one of the primary US, Canadian and European carriers, and many Asian ones as well, partnering with a major bank on a co-branded credit card.
Increasingly however, airline FFP members holding these cards receive preferential treatment that goes beyond merely earning a mile per dollar spent. According to criteria that vary with each bank/airline partnership, they routinely collect extra miles for ticket purchases using the card on the respective airline's website (e.g. Qantas), and can receive such rewards as reductions on airport taxes and transaction fees for fare bookings (e.g. Air Berlin and bmi) or free companion tickets (e.g. Virgin Atlantic and British Airways).
The affluent advantage
In combination with increased income, airlines can also realise other advantages by collaborating with large banks. They can target the banks' affluent customers, with the aim of inducing them into becoming FFP elite members. They can make FFPs more attractive for occasional flyers by offering earning alternatives to actually taking flights. And it permits carriers to broaden their exposure by increasing brand and FFP awareness outside the travel experience. Working with a preferred bank, they can agree on lower credit card commission fees for all tickets bought with co-branded cards.
Benefits for the banks
And for the financial services sector the opportunities of partnering with FFPs are equally appealing. Studies have shown that, for banks in many parts of the world, traditional customer loyalty is a thing of the past. Customers now shop around for non-tangible banking services the way they do for consumer durable goods or a new car. Ties with FFPs enable banks to re-cement some of these weakened bonds, enticing loyalty from customers in the same manner that airlines have: through miles. Miles function as a differentiator and a decisive soft factor in an otherwise sterile environment: as a way of winning new customers and retaining existing ones, and of shifting both from expensive human interaction to the use of the e-channel. Incentivising the frequent use of ATMs with a business-class upgrade by means of miles serves as a strong driver in shifting bank customers' behaviour.
Interestingly, it is bank partnerships rather than flight activity that account for the majority of miles earned in most FFPs today, ICLP reports. The non-credit card segment of banking has contributed to this trend, with carriers such as American Airlines and United attracting over 12 partners each that provide incentives for using the full range of their financial products and services.
Banks, especially in North America, have replaced many hard cash discounts with miles. Miles are awarded for opening accounts and pension plans, for taking out mortgages and personal loans, for making e-trades and ATM cash withdrawals. In Europe, TAP Portugal allows their passengers to book tickets online, but to pay at any ATM in Portugal instead of sharing confidential credit card information over the internet. Nok Air offers a similar service in Thailand.
Smarter loyalty cards
The bank-airline alliance has also opened up fresh possibilities for up-selling travel insurance, for using the airline marketing channel to attract affluent customers and for creating so-called "smart cards" that offer tangible benefits at airports.
For example, Abu Dhabi-based Etihad Airways and HSBC have launched a co-branded credit card that doubles as a FFP membership card and, thanks to its embedded RFID chip, expedites owners through airport immigration and boarding. This ensures that it is always carried when the holder is travelling. The card comes in three versions that differ according to customer income and the miles-earning ratios offered. And in Germany the number engraved on Lufthansa and Air Berlin co-branded cards serves as an FFP membership number, as well as the credit card number.
The future of rewards
The mile has even made its way into the foreign exchange market. Some American and European FFPs, including Air France and Varig, offer a partnership with the leading foreign exchange provider TravelEx. Customers converting cash at TravelEx branches (or via the company's web site) can earn miles, and the option exists for TravelEx to offer additional perks (e.g. no commission) to FFP elite members. It is in the area of such extra perks that ICLP sees the next wave of growth and development occurring.
While there are now many new ways for customers to accrue miles. While earning as many, if not more, miles from purchases as from airline flights has become commonplace, what remains far less available are opportunities for customers to redeem them. The ability to pay one's bank, credit card or insurance fees with miles, or to deposit them in an investment fund account, is still in its infancy, but enhanced redemption options represent an appealing trend that is gaining traction.
Download the paper
The full white paper goes on to explain, by way of example, how bank and airline partnerships continue to develop not only mileage earning but also mileage redemption options, and how the trends being seen today could affect consumer behaviour and choices in the future.
The paper reports on the developments and trends that ICLP foresees within the market in the near and long-term future, and predicts the rise of the combined credit/smart card with a chip that enables FFP benefits, contactless payments, airport fast-tracking, and a range of other benefits.
The full white paper, entitled 'Giving you the credit you deserve: Collaboration between FFPs and financial institutions', has been made available for free download from ICLP's web site - click here (free registration required).