Loyalty Points are Dead: What Comes Next?
Can modern airline retailing can help airlines reward frequent flyers now that points have become commoditised?
Airline loyalty is no longer about miles and points currency. For the time being it is now only about status. Of course miles and points remain a vital part of many airlines’ business models. But they are not strictly a loyalty product any more. This article explains why.
The demise of miles and points as a loyalty reward also presents some interesting opportunities for how airlines might reward loyalty in the future. So this article also considers what airlines might do next.
Miles and points have been an incredible success story for airlines. Avios Group Limited, the loyalty arm of IAG and their subsidiaries, recently published profits of £420 million ($520 million).
Avios and other points currencies will remain an important revenue and profit source for carriers. The fundamental economics of a points programme remains sound. People want to fly, ideally in comfort. But they do not want to pay too much cash to do so.
Miles and points have been so successful because they allow aspirational travel from everyday activities and the potential for over-size rewards. Many collectors will never achieve enough for a longhaul flight in snazzy first or business class, hence other opportunities like airline wine programmes (see article). And many points will never be redeemed at all. But the idea of a free flight keeps people interested enough that general retailers want to work with airlines to offer their points as a sales incentive.
As a result, airline loyalty subsidiaries earn large sums of cash selling miles and points to third-parties like banks and retailers. These third-parties give out the points as a sales incentive to their own customers. The diagram below (explained in more detail in this article) explains how it all works.
Opportunities to earn miles and points are proving a boon for general consumers. But for people who actually fly on an airline, especially people who fly regularly, things are getting tough.
US mega carrier Southwest Airlines has cut the points earned from travel by more than 60%. London-based British Airways has moved from a distance- and cabin-based earning model to one which is focused on revenue.
A few passengers paying top whack might earn more mileage than they used to. Such passengers are few in number. My reckoning is that on a typical British Airways flight from London to Dubai roughly 10% of business class and 15% to 20% of premium economy passengers pay the highest fares (see article).
Unfortunately these passengers are few in number. That they are also paying high fares suggests that the seats they occupy are in high demand, so their individual loyalty is less relevant.
The most important passengers for airline loyalty are people paying good money for seats that would otherwise be unsold. That means people buying fares at the lower end in premium cabins.
Over on the other side of the ledger, it is getting harder to redeem. Qantas prices in points are going to increase 20% in August this year. The Aussie airline also has a reputation for being particularly stingy with seat availability in premium cabins.
On Virgin Atlantic all seats are now available for points, although at prices that will make most collectors squirm. Southwest has devalued their points by 43% over 12 years according to View from the Wing, an American blog.
Over at Delta, they have gone completely crazy. Their redemption prices are more expensive than what they expect seats to sell for in cash (see article). Lufthansa is even more bonkers as under their new dynamic pricing model seats will be available at cash-level valuations but only a limited number of seats will actually be available.
The plane (geddit!!!) fact of the matter is that there are now too many points chasing too few seats.
Virgin Atlantic abandoned their fixed seat per flight guarantee as part of their move to dynamic pricing. British Airways still retain theirs, although I would wager not for long.
So three things are happening:
1. It is getting harder and harder for most people to redeem points for their target flights
2. It is getting easier and easier for people to earn points from not flying
3. Frequent flyers buying a lot of seats are no longer rewarded as they once were, unless they are paying high fares.
For airlines like Virgin Atlantic and Delta we are seeing the quantity theory of money (see article) in action. More money/points chasing fewer seats leads to price inflation.
For others we are seeing scarcity and rationing. On BA’s most desirable routes like Cape Town, Tokyo and Sydney armies of forward planners call the airline to hoover up the Club (biz) and Traveller Plus (premium economy) seats the moment they are released at midnight (GMT) 355 days before departure.
Try and book one of those a few hours later when the working day has started and you will see that they have already gone.
In addition, for some airlines a tax whammy is surely on the horizon. In the UK miles and points have typically been treated as having no value for tax purposes, and so are traditionally not subject to taxation.
However British Airways is now selling points to the public at a fixed, easy to find price and awarding points based on flights as a fraction of spend. No wonder they have just handed over £557 milllion ($719m) to the British tax man.
So why do I think that miles and points are no longer relevant for loyalty? It is simple. Miles and points are now an incentive programme targeting the general public, not people who are actually loyal to the airline and taking a lot of flights. Today’s miles and points should better be considered as a plain and simple airline discounting scheme.
So what can airlines do to reward passengers who actually fly a lot, even if they do not pay the most expensive fares? I think that there are four options.
Option 1 – split out programmes country by country
In this article I made the case that there are too many points sloshing around in America for European loyalty to do it’s core job of filling seats.
The American credit card market is less heavily regulated than it’s European equivalents, so merchants pay high fees to banks that some but not all consumers get back the rewards.
A chap called Scott Mayerowitz who writes for The Points Guy, an American blog, claimed to have 22 credit cards in an article a few years back. Together these had annual fees in excess of $4k (£3.1k). Is this rational? He seemed to think so, and reading what he got in return it looks like the cards represent good value for money. If he actually used the benefits of course.
Marriott, Delta, JetBlue, Hyatt and Hilton were in Mr Mayerowitz’s wallet. So too were a variety of American Express products, which offer Membership Rewards points that can be converted on demand into a variety of airline mileage currencies.
I am sure that I would also have 22 credit cards if there was a good reason to do so.
But in the UK where I live no such good reason exists. And it is neither fair for customers or sensible business for the airline that British or European frequent flyers should compete with Mr Mayerowitz for reward seats, unless he is buying many seats for cash too.
I said in the article that in this context, separate programmes would mean moving American to dynamic pricing and easy-to-find rewards. It would also mean keeping Europe on the current model of aspirational yet achievable rewards.
There would need to be a few rules. For example:
1. America Miles cannot be converted into Miles
2. If you have an American credit card, your account is American.
Option 2 – issue a special class of loyalty points
Some companies have “class B” shares with special privileges over and above normal shares. Airlines could do the same, awarding “golden miles” when people actually fly and “consumer miles” on earnings from other sources.
It would be simple to design an award chart where the “golden miles” price is lower than the “consumer miles” price. Or have a fixed exchange rate, like one “golden mile” equals two “consumer miles”.
This model has numerous disadvantages though. It would be complex to communicate, complex to understand and complex for programme members to keep track of what they actually have.
I do not think that I would introduce such a programme if I was managing an airline loyalty scheme.
Option 3 – link rewards to status
Air France will only allow you to book a first class seat on points if you are Platinum or Ultimate member of the Flying Blue programme. Singapore Airlines first class redemptions are only available to KrisFlyer members.
Over at British Airways, Guest List members of the Executive Club receive two vouchers and potentially more that permit a redemption into regular revenue inventory.
At first glance, offering great reward opportunities to the highest status holders seems to make a lot of sense. It actually rewards frequent flyers. However there are some disadvantages:
1. People may not hold status for long enough to make a redemption, given that an element of forward planning may be required
2. People may not earn enough miles and points from travel to achieve their target redemption, especially since airlines have made it harder to earn points from flying (a BA Guest List member will earn at least 400k Avios under the new scheme, but even that will not take the family to Disney World in Club, unless they are a UK resident holding the Amex co-brand)
3. People who have noticed that airlines have made it harder to earn and burn may grow jaded and lose interest.
So I think that status-based rewards were once a good thing, but now airlines can do better. Which leads us to…
Option 4 – unleash the power of modern airline retailing
Imagine if airlines ditched miles and points entirely as a reward for flying. There are many alternatives, including:
1. Exclusive discounts and promotional fares that can only be unlocked by flying
2. Upgrade vouchers (confirmed at the time of booking, I never recommend airlines offer space-available products to the public)
3. Access to special “money can’t buy” events and activities.
Here is a use case:
As far as the airline is concerned, Peter and Susan fly every year to Alicante and nowhere else. They pay for their travel with airline points earned by converting hotel points. Clearly they travel a lot to earn so many hotel points.
Maybe, says the airline, they are earning so many hotel points because they are flying with somebody else. So I will offer them £500 off a longhaul flight booking in economy or £2,000 off a longhaul flight booking in business class.
Peter and Susan receive the offer and all of a sudden the airline sees one of them make a reservation for a flight to a really boring business type destination. They clearly like the flight so much that they book four more similar flights that year. Win.
Here is another use case:
Edmund and Lucy are clearly business travellers. Edmund flies every week to New York. Lucy flies once a month to Lagos and once a month to Houston. Aha, says the airline, Edmund is probably in finance and Lucy is probably in energy.
The airline decides to offer them a choice of continuing to earn points or, in lieu of points, a free flight in business class to the Maldives. It books into inventory class discount number three which is not necessarily the fully flexible fare but high enough to be available 99% of the time that holidays are booked.
Edmund and Lucy take the flight to the Maldives and are delighted. Lucy says that it is so much easier than keeping track of all those miles and points and calling up 355 days in advance. The couple each continue to book their business travel through the airline. Win.
Here is a third use case:
Eustace has to fly a lot for business. He hates it. So when the airline offers him a free flight to the Maldives as they did for Edmund and Lucy he declines and redeems his points on the wine club like he normally does.
Well now, says the airline. Eustace likes wine and he does not want to fly on holiday. So let’s say that if he buys a business class flight in the next month we will invite him to a special tasting near where he lives with a Master of Wine and all sorts of fabulous vintages. Or he can take the points.
Eustace chooses the wine tasting and takes his wife Jill along too. He hates his next flight a little less than usual because he liked the wine experience. In fact, Eustace thinks, if he is being honest with himself that flight was almost enjoyable. Maybe the airline isn’t so bad after all. Win.
I believe that modern airline retailing-type methods have the potential to move loyalty (real loyalty, the sort that actually involves paying cash for comfy seats) far beyond miles and points. Airlines and customers will both be the winners. The only question is: how long will it take? Answers on a postcard…
oliver AT ransonpricing DOT com
oliver DOT ranson AT inkaviation DOT com
Read more about airline loyalty on Airline Revenue Economics
Loyalty, Payments & Behavioural Economics
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