Airline frequent flyer programmes earn billions of dollars selling miles to programme partners, but most invest little in making redemption options more attractive to programme members, according to a white paper from Loylogic.
As a result of a lack of investment in rewards, mileage currencies have become devalued and frequent flyers have started to redirect their attention toward other more fulfilling loyalty programmes.
It's no secret that the airline industry has accumulated a liability of more than twenty trillion frequent flyer miles (that's 20 million-million). It's also a fact that frequent flyers face increasingly difficulties in redeeming their miles for flight tickets.
But what is new is that frequent flyers are moving their card spending to credit card and hotel programmes where they find greater value for their currency and loyalty. This trend could potentially be devastating at a time when leading airlines are considering spinning off their most valuable asset - their frequent flyer programme - to fund airline growth.
Rewards define the value
Among the success factors in a loyalty programme, rewards are the most important marketing tool available to loyalty managers. The core mechanism of any loyalty programme is the process of consumer spending consolidation: putting their business with one company or programme in return for a reward (and not to receive miles or points).
The more attractive the reward, therefore, the more control programme managers have over steering members toward a desired behaviour. The same theory applies to frequent flyer programmes (FFPs). No matter how simple the programme concept, how diverse the partner network, how advanced the consumer insight, how targeted the campaigns, or how friendly the call centre staff, if members can't book their flight reward tickets or get an attractive reward alternative then the mileage currency and the programme itself become a waste of time and effort in the consumer's mind.
Keep selling miles
About thirty years ago, FFPs were developed as a marketing tool for the airline. Over time, FFPs developed communication channels to millions of affluent consumers. By selling miles to programme partners (e.g. credit card companies, hotels, retailers, and so on) FFPs have given marketers access to their frequent flyer community. Today, leading FFPs earn billions of dollars and have become their airlines' most valuable asset.
However, the decreasing value of airline miles puts the very profitable miles-selling business at risk. Why should frequent flyers keep earning miles on programme partners if they don't get relevant rewards? As a result, some hotel and credit card loyalty programmes have identified the opportunity and give their members better value for miles. Some hotel programmes, for example, let members book any available hotel room with points. Credit card programmes have started to cooperate with leading travel web sites to offer flexible travel options without blackout dates. As a result, in a recent survey, 18% of frequent flyers indicated that they had switched from an airline cobranded credit card to a stand-alone credit card programme, and 42% said that they were thinking about doing so.
Airlines need to offer attractive non-flight rewards. It's a marketing truism that every challenge is an opportunity for differentiation and future growth, and the observation rings as true as ever in this case. To reinforce the value of frequent flyer miles, FFPs have two areas they can focus on: flight rewards or non-flight rewards.
- Flight rewards
Increasing the number of flight rewards remains a difficult task. Airline load factors are high and most airlines are expected to cut capacity even further in 2008. This means that offering more reward seats on an airplane will heavily impact airline displacement cost (i.e. revenue lost when a reward traveller pre-empts a paid ticket holder).
- Non-flight rewards
The only remaining option for airlines to reinforce the value of frequent flyer miles is to offer attractive non-flight rewards. Non-flight rewards provide several advantages over flight rewards - for example:
· FFPs can define the cost per mile redeemed;
· They are easy to integrate, manage and scale;
· They are attractive for any member profile;
· They come at low or no fixed costs;
· They free demand on flight rewards;
· They drive programme member growth;
· FFPs can steer redemptions to recognise deferred revenues.
While there is no doubt that flight rewards are the number one reward option, 16% of frequent flyers already prefer non-flight rewards and 35% consider them to be a valid alternative to flight rewards.
The full white paper, entitled 'Reinforcing the value of frequent flyer miles: How non-flight rewards drive mileage currency and FFP value', has been made available for free download from Loylogic's web site - click here (PDF document, 1.01Mb).