Southwest Airlines announced two significant changes to its Rapid Rewards program in October 2019. We wanted to allow time to see if this news landed safely with frequent flyers and competitors. With adequate time in hand to gain perspective, here are a few thoughts on the changes to Rapid Rewards.
Southwest Airlines, the largest low-cost carrier in the United States, centers much of its marketing message around simplicity. “No. Hidden. Fees. For Real.” reads the message on its website today. With that message, Southwest continues the pattern of delivering plain talk to customers at every level. While most of the commercial airline industry has sprinted towards deconstruction of the flight experience in search of ancillary revenue, Southwest has held firm to its message that it won’t nitpick flyers by charging for every bag, drink, and privilege that it offers.
Appreciating the less-frequent flyer
The announcement made effective on October 17, that members of the Southwest Rapid Rewards program will now be able to hold onto miles indefinitely with no set expiration date, is consistent with the airline’s brand promise. The rule change enables passengers who travel less frequently to accrue balances over time without the risk of miles expiring due to their behavior patterns or even inactivity.
Southwest follows United Airlines who earlier this year removed expiration dates from its MileagePlus frequent flyer program. Delta Air Lines has never let its miles expire. The practice of point expiration in general has been central to loyalty program operations in all industries and was a staple in airline frequent flyer programs since the inception of these programs. Setting time limits on the life of points has always been viewed as a mechanism to manage the financial liability associated with FFPs.
Len Llaguno, Founder and Managing Partner of Kyros Insights, commented, "Eliminating expiration rules will definitely increase the liability on the balance sheet, since there will likely be more redemptions under the new rules. It’s worth clarifying that eliminating expiration rules doesn’t mean that we now assume that all points will be redeemed. Some points will still never get redeemed, therefore, breakage will still exist. It’s challenging to estimate how breakage will change under the new rules, but it can be done with the right actuarial models.
"With that said, we all know that no good business decision has ever been made by just looking at costs. The cost/benefit trade-offs need to be examined, which means we can’t just look at the impact on breakage or liability.
"Ultimately, the impact on Customer Lifetime Value (CLV) is what we should be concerned with. CLV represents the expected future profit that members will generate. For loyalty programs, CLV measures profit net of redemption costs. The elimination of the expiration rules will certainly increase redemption cost, putting downward pressure on CLV. On the other hand, the change may result in increased long-term retention of customers, putting upward pressure on CLV. Ultimately, an increase in expected CLV due to this change would indicate that it is a smart economic move.
"Modeling how CLV will change under these circumstances is difficult, but it can be done and should be done. Monitoring CLV over time to validate that it is in fact increasing is also a best practice."
Southwest continues to put the customer first
Metering future redemptions that mitigated revenues seemed a sensible practice in the suite of financial executives at the airlines, though the practice has regularly incurred the anger of FFP members, even leading to member churn at times. As FFP program strategies mature and evolve and the commercial airline sector intensifies in competitiveness, Southwest’s announcement may represent deeper thinking than just seeking alignment with brand promise. Remember the customer? Well, Southwest clearly does, and they made this change in recognition of consumer feedback, competitive moves, and with a desire to avoid future member dissatisfaction.
We view this as a great move for members and the carrier — a victory for customer advocates and loyalty marketers over the accountants!
Companion pass threshold increased
As we mentioned, Southwest made two big announcements in October, the second related to its companion pass. The previous companion pass structure allowed frequent flyers to bring one friend along for a free flight based on hitting a mileage threshold. Prior to October, Rapid Rewards members needed to earn 110,000 qualifying companion points to earn the certificate; next year, passengers will need to earn 125,000.
Give some, take some, as they say. We would need to sharpen our pencils to estimate the cumulative net impact on the financials at Southwest when both rule changes are considered. If we figure out that complicated math, you’ll read about it here in a follow up article.