Counting on loyalty

Ravindra Bhagwanani and Nadja Killisly at Global Flight Management in OFFENBACH

The frequent flier programme is a powerful marketing tool, yet few airlines have a rational set of benchmarks against which to measure their success. The basis for such a measurement model is laid out here in the first of two articles on FFPs

Frequent fliers know exactly how to put a score against different airline loyalty schemes - they simply count up the miles and benefits that they receive. But from the other side of the counter, what should an airline count if it too wishes to assess how well its frequent flier programme (FFP) is performing? For the vast majority of carriers, the honest answer is that they have few if any hard measures in place. For them, it could be time to set down some solid benchmarks against which to count the benefits that they get from a programme as well as those that go to the customer.

It is clear, that without a systematic approach to measurement then any decisions taken about the future shape and investment in the loyalty programme are simply stabs in the dark. At the end of the day, an FFP is not a toy of the marketing department, but a tool to contribute to the overall business success. So long as the performance remains unmeasured, then any potential success are effectively left to coincidence.

For their part the travelling customers are becoming wiser about how loyalty programmes work and what they want from them. Meanwhile the more sophisticated frequent flier already belongs to several different schemes. This growing awareness has already started to show through in the level of criticism now being raised around programmes in the more mature markets, ranging from Australia to the USA. A more rational approach to FFP management could perhaps help the industry to provide some appropriate answers. The key challenge for the FFP operator is to achieve a balance between its own internal objectives and the customer expectations.

It is useful too for the airline to be able to test the effectiveness of its FFP scheme and perhaps identify weaknesses in the way in which it is structured. Last year, Global Flight Management, a German consultancy specialising in FFP programmes, argued for a continuous process of development and review (see Airline Business June 2000). The model presented here - and in a second part of the article next month - takes that argument a stage further by outlining how performance measurement could be moved onto firmer ground.

Too often the industry still relies on trial and error when it comes to making modifications to a scheme or attempting a link with customer relationship management (CRM). The biggest influence can often be how a programme measures up to the benefits offered by rival schemes. That alone suggests a lack of clear overall strategy.

An alternative approach is to create a measurement model which allows all activities to be judged from the basis of a common platform. Then the basic mission of FFPs to improve an airline's bottom line can be achieved more efficiently.

The measurement model is based on three levels, starting with the familiar indicators of volume, such as number of members. The next level deals with more indicators linked to airline operations, while the top-level centres on financial indicators. This last, and most important, category will be dealt with next month.

A strength of the model is that it can be applied to all airlines, independently of the nature of their business. With only minor modifications, carriers which do not have their own programme could even use it to judge the relationship with partner FFPs.

Volume indicators

The idea of volume indicators is straightforward enough. They revolve around those absolute numbers which describe the scale of the FFP. All of these will be available directly from the FFP database.

Classic parameters include the overall number of members, miles and rewards. They would also cover agreements with partners and benefits to customers. A list could include the following:

Total number of members Number and type of awards issued over a set period Number of miles redeemed Outstanding mileage balance Number of partners Value of miles sold to partners Number of possible award destinations Miles accrued and redeemed through partners during a certain period

What all of these indicators have in common is that they are hard numbers. Naturally such information is essential as the basis for any FFP model, and feeds key information up to the higher levels. On their own, however, volume measures give few deep insights into the performance of an FFP scheme.

At best the impression that they give can be misleading and at worst plain wrong. For instance, a carrier which is relying too heavily on such volume measures might feel entitled to celebrate as its FFP passes the million member mark. Yet this information alone does not give even the smallest hint about underling performance. A programme can perform well and profitably with 10,000 members or can fail with 10 million. Claims about size and scope may be useful for grabbing headlines but become critical if they are allowed to influence internal decision-making.

Operational indicators

So, the next step is to take the basic numbers and relate them to the operation of the airline itself. Building relations between volume indicators and general traffic data can lead to some useful conclusions

In some cases, it makes much sense to use these criteria for specific market segments, perhaps a geographical area or customer group. In fact, how and when these indicators are applied will depend a lot on the environment in which each airline operates. Some carriers may need to add their own distinctive relations and parameters, but the indicators follow the same overall logic.

For example, it could be important to know how much of the airline's overall flying or passenger revenues are covered by FFPs and whether they are from in-house or partner programmes. The same is true of the proportion of overall seat capacity provided for award travel, whether free or co-paid (including upgrades, companion tickets and cash/miles mixes).

The overall membership number too can be further analysed. What proportion is made up of active or top tier members? How much traffic or revenue does the top tier cover? Other key ratios include the percentage of redeemed to accrued miles, or expired to backlog miles during a certain period.

Customer-led indicators measure the availability of award flights in relation to requests and also booking lead times. It may also be necessary to measure the impact of promotional offers and direct marketing.

An example of how these indicators could look is shown in the table (see over page). This is based on a fictional, although potentially typical, European carrier, but could be applied to any airline's FFP.

It is clear that a lot of helpful and valuable information can be concluded from these operational indicators, which is simply not available from looking at the volume numbers alone. It is also important to monitor the development of the parameters over a time scale.

Take, as a working example, the relationship between an airline's own FFP and that of partners. Given that most airlines partner with other programmes it is important to monitor how much flying or revenues are covered by its own frequent fliers in relation to all flying by FFP members, including those of partners. In theory, a carrier should strive to bring 100% of the traffic within its own scheme. After all, only when an airline has direct access to the data about its customers through its own FFP, can it hope to translate this loyalty bonus into effective CRM actions.

However, many airlines participate in 10 or even 20 programmes and so cannot hope to achieve the ideal 100% score. For them the task should be to define individually what proportion is still going to be acceptable. That may be monitored at the level of local market segments. Clearly, the proportion of own FFP penetration needs to be considerably higher in its home and other key markets than in secondary markets. Unfortunately, this logical requirement is not supported by the fact that most members of the leading alliances have partners offering more attractive programmes than themselves in their own home markets.

What is even more interesting is the trend. In other words it is crucial to track what happens to the measure over time - in this case monitoring the share of own FFP coverage. Take the example of the three airline trend lines shown in the graph (above left). Airline A is clearly showing the best performance, remaining relatively steady throughout the year.

Airline B appears to start out with a clear lead but as the months progress it is showing a pattern of steady decline in the proportion of in-house FFP coverage. This is usually a clear indication that the programme lacks competitiveness compared to its partners. That is a highly dangerous situation for any programme calling for immediate remedies.

Airline C records a significant one-time decrease, but otherwise a more or less stable value. Here, the reason could lie in a new partnership with a strong player which brings with it a large number of FFP members. That could be the case in an unequal marriage between a small flag-carrier and a US major. If this proves to be true, then the indicator "percentage of traffic volume covered by all FFPs" should logically also start to increase at the same rate. Although such an explanation may cause less worries than in the case of Airline B, the smaller carrier needs to ask how it plans to handle and balance this situation.

The underlying message in all of these examples is that the monitoring itself is far less important than the ability to correctly identify and interpret the trend. Analysts need to be careful not to rely too heavily on standard explanations as the particular environment of every airline strongly influences these values. Neither should the measurement model itself be allowed to stand alone in splendid isolation. Rather it is the input to a continuing process of programme development. After all, the ultimate aim is to make the FFP a valuable commercial asset, more of which next month.

Operational indicators for model airline loyalty programme - First quarter 2001
Indicator/measure		Proportion
Traffic/revenue on which miles are earned, against*:
	All passenger traffic	26.1%
	All passenger revenues	34.2%
Own loyalty membership of which:
	Active members	48.0%
	Tier 1 members	10.9%
	Tier 2 members	2.8%
	All tier members (by revenue)	16.9%
Split of traffic on which miles are earned between:
	Own members	76.2%
	Partner members	23.8%
Proportion of seat capacity provided for:
	Free award travel	2.9%
	Co-paid award travel	0.7%
Distribution of credited miles:
	Own flights	81.9%
	Partner airlines	6.0%
	Non-air partners	12.1%
Distribution of redeemed miles:
	Own flights	95.9%
	Partner airlines	4.1%
	Non-air partners	0.0%
Mileage expiry and redemption balances:
	Miles redeemed to accrued	74.5%
	Miles expired to total backlog	4.1%
Change in accrual through special offer:
	Hilton hotels double points promo	+187.2%
Availability of award flights:
	1st choice	36.2%
	2nd choice	34.3%
	3rd choice	22.0%
Percentage retroactive mileage credit:
	Own flights	0.7%
	Partner airlines	1.3%
	Non-air partners	4.8%
NOTE: This example is modelled on the likely experience of a fictional major European carrier in the first quarter. *Traffic on which miles are earned refers to revenue passenger miles (RPM) or equivalent kilometres (RPK) flown by members of all qualifying FFPs. Source: Global Flight Management

 

About the authors Ravindra Bhagwanani is general manager and Nadja Killisly is director of customer relationship management services with Global Flight Management, a consultancy set up in 1996 as specialist in frequent flier programmes. As well as consultancy services to airlines, the company, based in Offenbach, Germany, offers a web-based service to help travellers select the best FFP schemes. The web site may be viewed at: www.globalflight.de

Source: Airline Business