Customer Revenue Management

Loyalty may power the next evolutionary stage of airline revenue generation – how should it be organised?

Which do you think is the more valuable business? American Airlines with their speedy jet planes, plush first class seats and impressive route network? Or their asset-light loyalty programme AAdvantage, which sells miles and points that people can exchange for free flights?

Believe it or not, the loyalty programme has it – in July 2020 AAdvantage was valued at $19.5 billion (£15.0 billion) but airline was only worth $6.7 billion (£5.1 billion).

Mark Ross-Smith, founder of loyalty marketplace statusmatch.com, puts the hefty valuations down to loyalty generating more demand than any other airline team has ever managed. He says that the reason loyalty programmes are so powerful is that they turn low-fare passengers into high-value ones through the special mechanics of loyalty (see article).

AAdvantage is not the only American programme achieving a high valuation – around about the same time four large US airlines and their loyalty programmes were worth a combined $114 billion (£87.4 billion), of which loyalty made up 64.1% (table).

Part of the reason loyalty is valued so high compared to a core airline business is that financial markets see loyalty as funky fintech worth 20x annual earnings and airlines as clunky old operations worth only 10x earnings. Theoretically an airline that sold all its scheduled seats miles for points rather than cash and monetise customer relationships differently could enjoy better financial results because of potentially less CAPEX an OPEX..…

But even the most successful loyalty programmes like AAdvantage are not yet perfectly integrated into airline business models. They have been selling billions of miles and points for hard cash to banks, retailers and other third-parties looking for a high-impact incentives partner. Yet transactional revenue managers staffing the engine rooms of monetisation have been handling things on a flight-by-flight basis, frequently unaware of or ignoring the value that loyalty adds to their airline’s business.

We have written before about how loyalty and revenue management (RM) can work together more effectively (see this article, this article and this article). Today we will examine why airlines have the potential to completely redesign their commercial departments around loyalty. Read on to find out how…

The end of the ancillary revenue growth era

Incremental revenue growth in ancillary revenues will plateau by 2025 (see article) – there is only so far airlines can go nickel-and-diming passengers £3 for a Coke and £15 for a window seat.

The way that airlines sell seats is antiquated too – today they push flights, products and fees in a way that is stackable and defined by their ‘manufacturing’ business, not the consumers’ needs. New commercial marketplaces like the AirAsia super-app and jetBlue travel products are coming to disrupt the market (see this article and this article).

Most fundamentally, price and product packages (the “content” that an airline’s commercial team creates) is not truly segmented at an individual travel shopper’s level. Letters of the alphabet are still used to label price brackets and individual booking records are isolated from other things a person has bought so it is hard for airlines to see exactly what people value as an integrated whole.

Unsurprisingly, since an airline manager’s world is dominated by legacy technology and processes, the way that airlines are organised is too. We have written about how to make this better using advanced organisational analytics powered by artificial intelligence (AI, see article). But to move beyond ancillary revenue into the customer-centric and personalised era more is still required.

Customer-focused RM in commercial optimisation

Once airlines define their goals in customer terms they can create a new business model and align their commercial organisation to deliver it. Goalposts are already shifting in the RM space as “total seat value” RM platforms like FLYR Labs or Kambr that incorporate all the ancillaries into the demand forecast appear on the scene. But it is still based on conventional business models around distribution.

Customer-focused RM will move the goalposts even more. It will use a whizzy combination of algorithms in a process called “convolution” to amalgamate different data sources, business rules and objectives defined at the level of the buyer. The convolution algorithms combine lower-level objectives and the results of multiple processes and outcomes into a single input for a further (higher) layer of “total customer value” revenue optimisation with richer insights, a layer which simply does not exist in today’s airline workflow or systems.

I have made this handy chart to summarise.

This approach is not only analytically more advanced than current processes, it is also cheaper as multiple data sets stored in a single place are used to evaluate different stages of the passenger journey today are integrated into one single flow.

Why should loyalty drive customer-focused RM?

Best-practice in modern organisation design is driven by data and structured to achieve specific goals. Moving beyond organigrams with boxes and straight lines, today’s most agile teams are enabled to work across traditional functions to solve tricky problems that would otherwise be left alone.

It will be a collaborative effort – humans will establish the objectives and figure out how to monetise travel shopping and buyer behaviour, but they will be assisted by enterprise-level AI that spots the trends and act on opportunities to source and sell related products and services from third parties in real time. Loyalty teams have the best profile to co-ordinate this process for four reasons:

1. Strategic skillsets: Loyalty people were the first to adopt customer-level analytics and use this data to drive new propositions. Since they alone in the airline follow individual customers across all their activities beyond just travel, they already understand their customers better than other departments.

2. Creativity: Airline commercial infrastructure was developed from punch-card computers in the 1960s and everything else has been built on top with little real innovation in the way things are done. Loyalty on the other hand is comparatively young, only really getting going in the last 20 years so today’s loyalty people have much more experience handling change.

3. Fit for purpose: Since loyalty managers work with individual travellers they are used to developing products and services consistent with the way people actually shop for, buy and value travel rather than the “stack” of traditional airline seat sales.

4. Retailing: Airlines have been talking about retailing for years but doing little beyond nickel-and-diming ancillary. Loyalty people already work with real retailers and although they might need a bit of help along the way, they already have access to the contacts, knowledge and mindset necessary to make airline retailing a reality.

Strategic planning is about capital allocation and choices. The rest is execution.

What choices do you face and how do you drive the transformational journey? Let us know and we can help you paint a picture and draft a blueprint to make your ideas a reality.

ricardo DOT pilon AT millavia DOT com

Read some favourite leading articles from the Airline Revenue Economics archive:

Tata’s Challenge – Air India can only find success by becoming a tech co with aircraft

Branded fare background – Understanding how the current generation of branded fares evolved

Premium Economics – Busting five myths about premium economy