Revenue Management 101 for Loyalty Executives - Part Two
How can loyalty get better seat availability for redemptions & avoid devaluations?
Chats on FlyerTalk, an Internet Bulletin Board, are often about getting from A to B for as little cash as possible, ideally in first class.
Ways to earn points discussed on the board range from the benign (opening and closing credit cards for sign-up bonuses) to the questionable (manufactured spend). But many people still earn their points from buying tickets and travelling with airlines, and even if the miles come from other sources passengers buying tickets with miles are important revenue streams for airlines.
Loyalty has been an important driver of airline cash flow during the COVID crisis. Airlines with co-branded credit cards like British Airways and Virgin Atlantic have generated cash without operating flights, and while a great loyalty program may not be enough to save an airline at risk of bankruptcy it can make the difference between a poor year and an acceptable one.
But when borders open up again and seats are in demand as people want to travel, airlines will need to honour their part of the bargain. Loyalty teams will need to convince boffins in revenue management (RM) to make some seats available for miles when they could otherwise have been sold for cash. Given how tough things have been this is likely to be a hard idea to sell. This article, the second of three, outlines some tips and tricks that RM and loyalty might find helpful when they start working together post-pandemic.
How does loyalty get more seats?
RM are quite hard-nosed about who they will sell a seat to – if you pony up you will get it, if you don’t you won’t. But when it comes to making seats available for miles there are three things that RM may struggle to understand:
1. The cash the airline has earned as a result of those miles being issued
2. The lifetime value of passengers who might not be willing to pay some of the fares posted but who are nevertheless important to the airline
3. The cost of sale – there are no surprise discounts or rebates on mileage tickets reducing the revenue in the end, you get what you see.
Focus on how loyalty generates cash to convince RM to give you seats. At some airlines, like Cebu Pacific and British Airways, some aspects of loyalty are removed from the RM process. BA for example make two economy seats and two business seats available for redemption on every flight. Approaches like this, agreed with the airline’s leadership team, take responsibility for loyalty’s performance away from RM, which can help get buy-in from demand and pricing analysts.
Is it better to sell seats through the loyalty channel or the revenue channel?
For airline people like me, one of the mysteries of finance is that some types of business are valued more highly than others, even when they produce the same profits. According to Mark Ross-Smith, profits from operating an airline are considered ‘traditional’ by the markets, earning a price to earning ratio of about ten times.
Profits from running a loyalty company can be valued by the animal spirits at perhaps twenty times. So theoretically an airline that operated almost entirely based on loyalty would be double the value of an airline that sells it’s seats for cash. While that scenario is unrealistic, there are some important real-world implications:
1. Running a good loyalty programme can help your airline raise capital to support cash flow
2. Loyalty may be particularly helpful when times are hard and even if people are not buying flights they still engage with the programme through retail partners and the co-branded card.
Can loyalty managers avoid devaluations?
The price of bread in the supermarket rises every year and so do the prices of airline seats – a seat that ten years ago cost £2,000 may now cost £2,500. The distance between two cities on the other hand does not change and as the years go by both the £2,000 seat and the £2,500 seat earn the same miles. So in a programme where most miles are earned by flying there is generally no need to devalue and increase redemption prices, provided nothing else changes.
Unfortunately though lots of things do change. The number of miles earned by not flying increases every year for two reasons, first as more and more people earn through co-branded cards and retail partners. Second of all, the money they spend increases with the general price level and both together lead to more miles in circulation, more demand for seats and a need for redemption prices to increase so that redemption seats are not all sold the moment they are released.
The best way for loyalty to avoid these devaluations is by inspiring people to spend cash with the airline, even when they have miles to burn. Chasing status is a time-honoured way to achieve this, but there are also opportunities to reward people by issuing special cash fares for seats that would otherwise go unsold, only available through loyalty.
Coming up next week!...
What RM data supports the loyalty process?
What loyalty data supports the RM process?
How can RM and loyalty use data to work closer together?
Oliver AT ransonpricing DOT com