As the airline industry endures one of the most difficult periods in its history, loyalty programmes are set to become even more strategically important to airlines, according to a white paper from ICLP.
The paper, entitled 'FFP horizons: Top ten trends for 2009', identifies the top ten trends which are likely to affect these programmes during 2009. ICLP believes that these trends present some interesting challenges and opportunities for both airlines and their customers. In brief summary:
- Value trumps distance as the reward mechanism
Many of us forget that, when loyalty programmes were first introduced in the industry in the early 1980s, the original airlines did not support inter-continental networks, and the greatest distance flown was around 3,000 miles. Under those circumstances, distance made sense as a basis for awarding points to be exchanged for free flights: It was simple to calculate, simple for the member to understand, and the economics worked fairly well.
However, problems arise when the network grows and, at the same time, specific customer segments are defined, creating the need to tailor the programme reward structure. The most valuable members in the elite tiers of the programme need to be rewarded as such, and so distance no longer works as well as it did before. As a result, 2009 will see more airlines considering at least a partial move to value-based reward structures.
- Diminishing value of a mile
In 2009 members will continue to be confused about the perceived value of a mile. In general terms, the feeling will be that a mile is worth less than it used to be. A 2006 study estimated the decline in value at as much as 44% over the previous 8 years. This highlights the importance of benchmarking the cash payable for redemptions versus the ticket price of a low cost competitor, as most FFP members will have already made this comparison for themselves.
- Dynamic redemption
Just as there is a move to make the accrual side of the mileage equation closer to actual value, there will also be a rising trend toward equating points to cash for redemptions.
- Ancillary charges
As more legacy carriers move toward separate charging for elements such as checked baggage, this has provided the opportunity to waive charges and offer this as a free benefit for elite tier members. This is already the case for several US airlines and is an excellent way of demonstrating to top tier members that the airline recognises them as special and valued customers. And, for the majority who have to travel with at least one checked bag, it means every round trip on their preferred airline will be at least US$30 cheaper than with a rival who charges for the privilege.
- Hotel programmes
Hotels are increasingly examining their involvement and performance in airline programmes and, as a result, many are questioning why they are paying their airline partners for every mile issued without achieving any benefit from the breakage. Large hotel groups such as Starwood, Marriott and IHG are encouraging or insisting that the airline FFP member enrols in the hotel programme first before opting to have loyalty credits converted into their airline FFP of choice. By default, this often means that many guests no longer earn airline miles and this trend will continue to erode airline partner hotel mileage revenues. This trend will make it more important to ensure the existing portfolio of hotel partners is working to best effect for the airline programme.
- Bank credit card programmes
In a similar way to the hotels, banks are also waking up to the fact that running their own credit card programme can be a lower cost option than partnering with an airline. Many have already found that a major frustration for FFP members is the restricted access to redemption capacity, and to this end there is an increasing trend toward banks offering 'any seat' availability as an integral part of their own programme's redemption offering (something which they can do simply by buying airline seats on the open market).
- IFRIC-13 (see 20 July 2007 and guidelines)
Much has already been written about these new accounting rules which now govern the way in which mileage costs must be shown on the balance sheet of an airline. In a nutshell, for countries where these rules apply, it is now mandatory to use a 'deferred revenue' approach rather than the previously widespread 'liability cost' method. In most cases, the finance department will already have embraced an approach to manage this requirement.
- Integrated versus sell-off
There are number of airlines that have made the decision to detach their loyalty programme from the airline, making it a company in its own right. In doing so, they plan to sell part or all of the equity in the new company. The first to do so was Air Canada (which floated Aeroplan some years ago). Thinking about this strategy is clearly becoming more prevalent, with Qantas declaring its intention to move toward this approach sometime during 2009 (after initially postponing the project in 2008).
- The rise of peer-to-peer communities
The past few years have seen an outbreak of peer-to-peer web sites such as MySpace, Webflyer and TripAdvisor, allowing customers to socialise, discuss issues, and trade among themselves without going through a middle man or directly involving any airline. The potential impact of this trend on loyalty programmes is significant. For a start, travellers are tending to become less interested in one-to-one relationships with airlines, and instead are beginning to appreciate more direct connections with other airline passengers.
- Going paperless
The trend toward a paperless relationship and travel experience has been much talked about for at least the past three decades, but only now is it beginning to become a reality. Aer Lingus, Jet Blue and Virgin America are good examples of this in practice. Remember that 'paperless' can also mean 'plasticless', there is an increasing realisation among airline marketers that the mobile phone has the unique ability to play a greater part in travel loyalty because (a) almost everybody has one, (b) it knows who they are, and (c) it knows where they are. As the use of paper declines, so mobile communications will increase, meaning that 2009 is likely to see more airlines evaluating and implementing mobile technology not only to enhance the travel experience but also to engage their FFP members.
All of these trends offer exciting possibilities for both the airlines and their members, and they also give rise to some interesting challenges that will need to be addressed in order to retain the interest, engagement, and loyalty of customers in an increasingly competitive market. The complete white paper can be requested for free directly from ICLP.