Airlines are forgetting to look for corner solutions
Three tales of how airlines find or do not find inspiration in that which is not obvious
The step-up to graduate economics from a bachelor’s degree can be a big jump. The first few lectures hit hard.
At undergraduate level consumers in an economic model decide to buy two products. Flights and hotels for example. Firms like airlines choose to buy two products too, spending money on both planes and fuel.
Completing exams is “easy” with what university professors (but not those of us who graduated 20+ years ago) would consider a “basic” understanding of calculus.
Graduate economics ups the pace quite a bit. Simple equations and functions are replaced with more powerful but also mind boggling linear algebra and multiple order differential equations.
The LSE graduate macro course which I took in 2005 with the legendary Prof. Danny Quah ended with a nice spot of chaos theory for tea.
So it should come as no surprise that graduate micro theory exams are not about extending airline purchase decisions from planes and fuel to planes, fuel, seats and catering.
A spot of fiddly matrix algebra would take care of that nicely but students would have learned little new of relevance.
Instead, graduate courses often emphasise a type of outcome known as the “corner solution”. These are outcomes where airlines and passengers make “extreme” decisions. An example from the passenger side would be people who would rather not fly at all than fly in economy.
Corner solutions are solved not by elegant mathematical methods but brute force and a leap of faith. They are not obvious. Spotting them is essential if you want top marks in the micro exam.
Airline economics is full of corner solutions. Yet it is often apparent that airlines, their advisors and their suppliers are not looking out for them.
Here are some examples.
British Airways migration to revenue-based Avios and tier points
Imagine a really busy flight to Houston before an oil shindig. Or New York before a banking extravaganza. Or Los Angeles before the Oscars.
Swanky business and first class cabins are stuffed to the gills and fares are high.
British Airways wants £15,330 ($19,152) for it’s most pricey Club World seats on London to Los Angeles and £19,578 for First.
Yet how valuable are these passengers to the airline?
At first glance you would think that these as these passengers are paying astronomical fares they are incredibly valuable to the London-based carrier. But this is not actually the case.
The fact that prices would be so high suggests that BA can sell the seat many times over. One passenger’s loyalty is worth little.
Also, for most passengers paying such fares they are paying out of a company’s pre-tax revenue rather than personal post-tax income. Many receive a back-end rebate as long as their employer buys a pre-determined number of seats a year.
Now imagine the same seats not to a fancy industry gala but on a normal Wednesday in February.
Fares will be much lower and there is a good chance that without business from the passengers actually on-board many of the seats would have flown empty.
Under the oldest BA loyalty model that I remember, passengers earned the same tier points and Avios whether they were flying on the cheapest or the most expensive tickets. It took the same number of flights to earn lounge access all year with tier points or enough Avios to buy a free-ish ticket.
This loyalty model is something of a corner solution. Low fare payers are valuable to the airline and so could earn out-sized rewards.
Between 2007 and 2012 I always bought World Traveller Plus tickets and upgraded them to Club World with Avios, or BA Miles as they were back then. It was entirely self-sustaining as the points earned on the base fare were enough to recover the cost of the upgrade.
Some years ago BA offered bonus Avios to high fare payers. Now Avios are awarded based mainly on spend, with a small bonus for Bronze, Silver and Gold members.
Tier points for status are going to be based on spend too. There has been much wailing and gnashing of teeth about this.
Offering Avios and tier points based on spend is not the best design for an airline loyalty programme because it does not actually reward airline loyalty. It rewards short-term spend and does not maximise customer lifetime value.
The old system is the corner solution. The new one is a classic interior solution. It is not necessarily bad, but it is not the best the airline can do. It does, however, score no marks in the exam.
Livery design
Every airline has a livery. These unique sets of badges, markings and other identifiers are supposed to clearly distinguish their aircraft from others. Except they don’t.
Take a look at the table below, which shows the colours on the tails of some of the world’s largest airlines, including the largest members of certain airline groups.
Every single airline has red or blue on the tail. For every single airline either red or blue is their main colour. Only Iberia, Southwest and Air Canada have another colour, but even in these cases their main colours are red and/or blue. They are all, in effect, the same.
Why? Blue and red are the colours of indecision. The colours of the interior solution. The only colours that the board can agree on.
A few standout airlines like easyJet (orange), Qatar Airways (purple) and Spring Air (green) have gone for the corner solution, the one that requires the leap of faith, the colour that people would say they don’t like, and yet their customers know them all the better for it.
The SAS million point challenge
Scandinavian flag carrier SAS recently left Star Alliance and the orbit of Greater Lufthansa to join SkyTeam and the orbit of Air France-KLM.
To celebrate they offered a promotion that any member of their EuroBonus loyalty programme who flew 15 of the 19 SkyTeam airlines would receive one million EuroBonus points, enough for ten return tickets across the Atlantic in business class.
At first glance this seems daft.
1. You do not actually need to fly SAS and airline loyalty is supposed to fill airline seats
2. Completing all the flights in the time available is so gruelling that it is hard to imagine anybody sane doing it.
A “standard” loyalty strategy would be to do a status challenge, awarding status to passengers who fly your own airline. Another “standard” strategy would be a status match to copy a passenger’s status from another airline’s programme onto your own.
But SAS did not do this. What they came up with is a corner-type solution, with a little brute force and a little bit of faith.
1. It gets other SkyTeam members aware that SAS is now in the alliance, something which might easily have been overlooked otherwise - apparently the country providing the largest number of successful travellers is South Korea, a route which SAS launches on 12-Sep this year
2. It brings new SkyTeam passengers into the SAS programme and once they are in there is a good chance they will stay there
3. It is just the sort of thing that makes good marketing and of course all the travel influencers jumped on it.
A chap called Barry completed the challenge and had his adventures featured widely, including by the airline and on UK blog Head for Points, which is where the factoid about South Korea came from. Barry reported that at least 600 people completed the challenge and SAS only expected six or seven completions.
So SAS lucked out. A few reader comments on Barry’s Head for Points article are worth repeating in full.
david 26-Jan-6:14
Six to seven – their original guess of how many people would complete the challenge. Wholly underestimated. Hope the numbers really work out for them what with social media exposure to allow others carriers to attempt it.
Kaye 26-Jan-7:15
Really reveals that airlines seem to habitually underestimate exactly how many people have the money to travel frequently, and from different parts of the world.
It makes a lot of the modelling of likely consumer behaviour very difficult if not impossible. The customer personas of the old frequent flyer/plane geek/wealthy premium traveller have been upended and just don’t exist in the same format as they did 20 years ago.
Interesting to watch all the loyalty programmes adapt to this.
Kaye 26-Jan-7:50
I think they’re overestimating how much premium traveller is fueled by wealthy West Londoners and corporate high fliers, and underestimating how much disposable income there is outside London and that they’ve been benefiting from discretionary spend from those sources.
I think the doubling down and focusing on what would have been the traditional premium traveller 20-30 years ago might surprise them.
Food for thought.
Lessons
The reason that graduate economics exams are tough is not so much about mastering the course content. Rather it is the need to demonstrate a broad range of understanding in a small amount of time, only three hours per course at LSE.
Lazy students try to push through the exam by just “solving the equations”. Sadly this is not enough to do really well. In fact it is a waste of time because it involves effort in exchange for no marks when a corner solution is involved. Only those who spot the corner solutions achieve top marks.
And it is the same in aviation. The stories I told above suggest to me that airlines are more focused on process, task and “optimisation” rather than thinking about what is best for their business. They are being lazy and not looking for the best answers. They are missing the corner solutions and leaving revenue on the table as a result.
By looking out for the corner solutions they would upgrade their exam performance from “Pass” to “Distinction”. That would be better for passengers, employees and shareholders.
What are your favourite airline corner solutions? Please let me know.
oliver AT ransonpricing DOT com
oliver DOT ranson AT inkaviation DOT com
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