The impact of high oil prices on FFPs

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By: Wise Marketer Staff |

Posted on October 13, 2008

A white paper from Carlson Marketing examines how the anticipated rise in fuel prices (IATA estimates to some 36% of operating costs) will affect how FFPs are run.

Despite the recent drop in oil prices, the average price per barrel of oil is still US$40 more than it was in 2007. As a result, IATA expects the total fuel bill in 2008 will increase by US $50 billion to a grand total of US$186 billion. With increased fares, and fewer carriers to choose from, consumers (many of whom are members of FFPs) are feeling the pinch too.

Airline problems and solutions
As profits have disappeared, airlines have had to cut costs and generate new revenue streams. In addition to applying traditional fuel surcharges, they have adopted a range of policies that will either save them money or drive incremental revenues.

Many airlines have cut capacity - either by cancelling or postponing new services or temporarily halting existing services. In the US alone, the six major carriers are expected to reduce overall capacity by up to 9% this year; it's cheaper to ground an aircraft than to fly it. In Europe, airlines are increasingly considering replacing short-haul services with high speed trains. Alternatively, some major carriers are substituting their full service brand carrier for low cost subsidiaries.

With economies of scale in mind, airlines on both sides of the Atlantic are considering consolidation: for example the proposed merger between Delta and Northwest (already given the go-ahead by both parties' shareholders) would create the world's largest carrier in terms of traffic - and also the world's largest FFP. On-board services are being critically examined - ranging from charging for non-alcoholic beverages on domestic flights to baby bassinets.

No longer free
Charges for services that were previously free are being introduced; "better" seats (say, near an emergency exit) are now for sale, and a charge is made for checked-in luggage. American Airlines' charge of US$15 for the first checked bag may yield in excess of US$500 million according to analysts.

Airlines are also charging fees for award issuance, miles re-deposits and various other programme related activities. Ancillary revenues - from offering related services such as hotels and car hire on the website to selling seemingly unrelated products or services - such as gambling, are attractive.

Satisfaction levels dropping
Customer satisfaction levels continue to drop in the US as a result of the new policies. Even before some of the new fees were announced, the airline industry, according to the University of Michigan's American Customer Satisfaction Index fell to its lowest satisfaction level since 2001.

Possible consequences
Changes in perception and use of FFPs are bound to be both negative and positive.

  • On the positive side, members may realise that, after years of miles value erosion, the equivalent value of a 25,000 miles award ticket could now significantly increase as a result of higher fares.
  • If the oil price remains at a high level, airlines will re-assess the price at which miles are sold to partners.
  • Higher average fares (and therefore greater possible dilution) and new accounting practices will drive FFPs to increasingly use non-air rewards.
  • Redemption capacity may suffer as a result of network and frequency reductions.
  • A reduced demand as a result of the weaker economy may lead some airline to offering additional mileage incentives.
  • Airlines are increasingly monetizing benefits associated with elite status in an FFP by selling them to none frequent flyers.
  • As revenues suffer, more and more Boards will be looking at the possibility to partially or fully spin-off the frequent flyer programme.
  • Airlines will find ways to run the programme cheaper.
  • Airlines have increasingly moved to a model whereby award inventory is effectively bought from revenue (yield) management.
  • With recruitment freezes in place, airlines' management will increasingly look to outsource functions to providers who will be able to provide flexible and cost effective solutions.
  • Proposed system changes will undergo further scrutiny from the airlines.

The full white paper can be downloaded free from The Wise Marketer - click here.

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