Business travelers create the most value for airline loyalty programs. But as travel patterns ... [+]
Airline loyalty programs have proven very lucrative for airlines. Delta Airlines collateralized a $6.5B loan, following efforts by American and United to monetize their programs. Banks pay airlines a lot of money to issue points for credit card usage, and many frequent fliers tell stories of crazy things they’ve done to earn extra miles or “bulk up” before the end of the year to reach a higher-status tier. Yet, even despite all this, some research suggests that these programs don’t even create real loyalty. With the dramatic drop in airline traffic due to the pandemic, most airlines just pushed out customer deadlines. For example, if you were “gold status” going into the pandemic, you probably still are even if you haven’t flown in a year.
But what happens when travel demand recovers? Loyalty programs will change because people will likely be traveling less, and the old rules about what was rewarded and what rewards are desired may also change.
What Is Airline Loyalty?
Airline loyalty programs reward customers for buying tickets by giving them points, sometimes called miles, that can be used for free trips, upgrades, and other things. The programs are most valuable to airlines in non-hub cities, since those cities often have choices of which airline to fly for most trips. If you live in Atlanta, for example, and fly for business, there is really no other choice than to be loyal to Delta since they operate the most flights to the most places by a long shot. But if you live in Nashville, your nonstop choices are more limited so you may choose to earn points in Delta’s program and connect in Atlanta, or in American’s program to connect in Charlotte or Dallas.
If you relocate from Atlanta to Denver, are you really going to keep flying Delta even though you’d have to connect for almost everywhere you'd go? More likely, you would become loyal to United since they operate the biggest hub there. The point is that loyalty can be fleeting, and it costs airlines to issue points to customers and they need to be sure that the value they give for the points equates to what they earned from the customer that earned those points.
From Usage To Dollars
US Airways learned a hard customer lesson after 9/11, when the airline shrunk from over 400 planes to under 300 planes. They realized then that many of the customers in the highest-status levels of their loyalty program used the airline a lot but didn't pay particularly high fares. When US Airways changed the rules to give fewer rewards to customers buying lower-priced tickets, these loyalists organized into a group and called themselves the “cockroaches.” That’s because they felt that US Airways was treating them that way even though they used the airline almost every week.
Today, airline programs have evolved away from usage alone and most airlines recognize more loyalty in customers who buy higher-priced tickets. In Delta’s program, for example, you can reach certain levels of status by pure usage (the number of miles flown), the number of trips taken, or the amount of money paid. But money is the fastest way to get to the more lucrative levels of the program.
Less Business Traffic Means Fewer Earning Opportunities
While airline traffic is starting to return given the faster rollout of vaccines and loosening of local restrictions, the return of business traffic is still highly uncertain. An earlier study suggested that up to 36% of business traffic will never return, and Bill Gates suggested that 50% may not return. Business travelers have the most to gain from loyalty programs because they generate the most earning opportunities. So if these estimates are even just directionally correct, the number of points earned from flying may drop significantly. Yet the price, in points, to redeem awards like upgrades and free trips is somewhat a function of the rate of points generation. Without a change in what it takes to earn free things, a drop in the ability to earn could cause a significant mis-match in customer expectations.
More Value In Non-Flight Activities
If flying is reduced, airlines may be forced to give greater loyalty credit to non-ticket spending. Most of this is from points earned using affinity credit cards, where the airline is paid by the bank for the points issued. Airlines would rather you spend the money with them rather than only buying groceries and gas. Yet how can a consumer show loyalty to an airline if they are flying less often? This creates a challenge for the airline as fewer trips may mean even more reason to value the customer. If they only take a few trips, it becomes even more important that they use your airline, right? But if flying less means the airline is selling fewer tickets, will this create the economics needed to offer a rich set of rewards?
Re-pricing The Currency And More
The net effect of these potential structural changes is that the definition of airline loyalty itself is changing, and the programs will have to change by re-pricing the programs’ currency and more. Winning a smaller base of business traffic will become especially import to the three largest airlines in the U.S., so they will want to reward those customers through the loyalty program but recognize that the customer may not to be able generate as much business. That may mean some things like upgrades are easier to earn, while free trips may still require something similar to today's cost in points. It also may mean that credit card spend is given greater weight, since this is a way to show continuing loyalty even when flying is reduced.
This could also have an effect on flight schedules and capacity. Certain destinations, like Hawaii, have traditionally been important to customers as a reward and thus those flights relieve a disproportionate amount of the total loyalty liability. With fewer points earned, maybe there will be fewer flights needed to Hawaii, and other important “burn off” destinations. It’s also possible that the number of seats made available for upgraded or free trips is changed. If it takes longer to earn a free trip, it would be even more frustrating for customers if they couldn't get a seat on the flight they really want. Even where people want to use their rewards may change, as views of travel risk for longer-haul travel may change. The point is that everything about the structure of the current airline loyalty programs is based on pre-pandemic behaviors. Expecting these structures to make sense after the pandemic is risky, and so the programs themselves should change to reflect what post-pandemic loyalty really means.
