Success in building a Frequent Flier Programme (FFP) can, at times, appear to be more of an art than a science. Judgements over their relative worth can be highly subjective, often shaped as much by the need to keep up with competitors as by hard measurers of success. But as the concept of airline loyalty programmes matures, perhaps it is time for a more systematic approach to building and maintaining the FFP.
Few would deny that the loyalty programme has come of age as a centrepiece of airline marketing strategy. Global Flight Management, a German consultancy specialising in FFP programmes, now holds a database of 120 airlines which operate their own loyalty schemes. Four years ago that number stood at 80, suggesting 50% growth in less than half a decade. Even long-standing sceptics like Emirates or European regional Eurowings have been forced to swallow their opposition and join the trend.
Tiny start-ups such as Europe's Scot Airways or European Air Express have also added their names to the league. There are at least another 100 airlines which have no scheme of their own but have forged FFP links with one or more operators, typically signing with at least one major airline partner. Such cross-participations takes the number of FFP links past 700.
Not all are winners, which begs the question: what makes some loyalty programmes more successful than others? Although no two schemes are ever quite alike, Global Flight Management's experience suggests there are fundamental rules which govern the development of a FFP. They hinge on getting the airline's aims and structure laid down from the start.
The starting point is what you hope the programme will achieve. The obvious answer is to increase seat sales - either by generating repeat business among loyal customers, or, if the programme is powerful enough, to attract new passengers. But there are other significant aims worth pursuing. One benefit stems from having the ability to communicate with customers, using the FFP database as a source of marketing information. Another is to develop an additional source of revenue through the trade of FFP points to associated partners. That alone can prove highly profitable. Finally, there is the opportunity to differentiate products. In an increasingly undifferentiated world, loyalty schemes allow customers to see and accept the differences between competing offers.
Who to target?
Next come the issues about who to target and how. Will the scheme target only frequent high-yield travellers and, if so, how are they defined? Should occasional leisure travellers be included? In which markets should the product be positioned? How will you behave in relation to alliance partners? How does the FFP fit into your overall sales and marketing strategy?
These questions need to be asked regularly so that the programme can adapt to constantly changing market conditions. Nothing kills frequent flier success like a static programme and such redevelopment is at least as important as the initial design.
The temptation may be to design a programme around market sectors, but keep in mind that customers act globally. Take the example of British Airways, which offered a scheme to its UK-based Executive Club members, but excluded any points rewards on economy travel other than at full fare. At the same time, the European version of the scheme offered points on budget fares too, so smart UK customers could simply enroll for this version of the scheme. Worse still, there was the option of switching to one of BA's FFP partners such as Cathay Pacific, which offered a more flexible Asia Miles scheme. Customers may still fly with BA, but they are lost to the in-house FFP. In this case, Cathay now has the control and owns the loyalty.
As this example illustrates, it is important not to focus too narrowly on one particular objective and risk doing damage to the scheme as a whole. The most successful FFPs are those that work across all of their strategic aims.
Another challenge is to win internal support for the FFP. Every department needs to recognise the loyalty programme as a key marketing tool, not simply a fashionable accessory. Experience suggests that at least 80% of all programmes lack this level of internal priority.
Above all, a programme needs market acceptance. It is a fact of life, that a loyalty scheme's success and profitability will grow in line with the number of members it attracts. The questions to ask here are concern how the consumer is likely to judge the attractiveness of a programme and how it can be structured to maximise that acceptance.
At this stage, it is important to remember that an FFP is always aimed at the individual traveller and that his expectations are not necessarily those of the airline. The consumer is hardly attracted by direct mail opportunities or airline revenue targets. His interest is in the awards and service benefits that he can expect to win. A programme structured to meet those expectations will have played an important role in helping to differentiate the airline from the crowd.
Programme structure
The first question that any customer is likely to ask about an FFP structure is how long it will take to win an award flight. Additional issues could concern the minimum distance credited for short-haul flights, the class of service bonus for travel in first and business class, and the type of fares that qualify for points accrual. The differences between programmes are tremendous.
One example is bonuses applied to travel in business class cabins, compared with economy. They range from no bonus on Midwest Express (which only operates business class) through to significant multiples for many Eastern European carriers. Hungary's Malév offers triple points for business travel and Czech flag carrier CSA has a six-fold bonus. Between the extremes there is a wide variation. Carriers in North America, Asia and Australia tend to offer a 25% bonus, but airlines such as Continental or USAirways, which operate a two-class service,to that with 50%. European majors such as Swissair or Air France also work on 50%, but more offer 100%, including KLM, Lufthansa, Virgin Atlantic, SAS, Finnair and Olympic.
As an illustration, Table 1 overpage shows the number of required return flights in business class between London and Tokyo needed to earn an award flight on the same route and class. Table 2 does the same maths for a Paris-London service, but with the award flight in economy. The product differentiation is clear. The best and the worst solutions are always separated by an average factor of four to six on long-haul flights and of 10 to 15 on short-haul flights.
A second structural differentiator is the partner network. That was once largely linked to hotels and car rental, but that has since opened to include credit card, telecoms companies and beyond. Today, many other companies in the mature markets of North America, the UK and Brazil have begun to tap into the loyalty effect of the established FFPs. Issues then have to be worked out as to whether the arrangement should be reciprocal, or, if partners do not have their own programmes, how much membership will cost. For the FFP owner, the network partners are an opportunity to generate revenues through the trade of bonus points.
Athird structural element centres on the terms and conditions, covering the validity of miles, booking procedures, blackout dates, transferability of awards and, last but not least, the capacity provided for award travel. There is a clear tendency to respond to customer expectations, making the programmes more flexible, rather than less. Any attempt to tighten the rules can quickly attract complaints, as well as aggressive marketing attention by competitors. Two years ago United Airlines considered introducing a Saturday-night rule for its cheapest Saver Awards for travel in North America. The plans were withdrawn after an unprecedented storm of protests.
This bidding of flexibility may have begun in the USA, but it has spilled into other markets. In April, Air France was the first European major to introduce a non-expiring policy for its miles, tearing up a below-average two-year expiry condition. The move was certainly influenced by its alliance with Delta, which has long had such a policy. Another instance of how best practices need to be considered on a global scale.
Keeping quality management under control
The fourth structural element of the programme structure is customer service. Even if outsourced, quality management needs to remain under strict airline control. Basically, the customer service should ease the participation in a programme for every member. Competent telephone support, Internet guidance and a professional communication strategy through a dedicated newsletter system are all market standards. Nevertheless, the quality levels of customer service in day-to-day operations still vary significantly and often fail to meet expectations.
The final structural element is the elite programme, catering for that essential customer segment of frequent high-yield travellers. While all airlines aim to keep their best customers, there are significant differences in how they go about it. Qualification for an elite programme runs from as low as 8,000 miles (12,900km) a year for a small eastern European carrier such as Croatia Airlines, but larger programmes often require up to 50,000 miles.
Neither are the elite members offered uniform benefits. European and Asian programmes tend to focus on service benefits such as priority check-in and lounge access, while their US counterparts rely more heavily on free upgrades, waived blackout dates and additional mileage bonuses.
The much-cited harmonisation between elite programmes within the global alliances are mostly limited to the reciprocal status recognition. Benefits and qualification levels vary significantly. For instance, to achieve Gold status with the Star Alliance, a German-based member of Lufthansa's Miles & More scheme needs to accumulate 150,000 miles within one year. Air Canada's Aeroplan members get it after 35,000.
Customer relations are usually tailored to elite members. Individual mailings, unique special offers, personalised luggage tags and dedicated telephone numbers are just some measures to make the customer feel special. In some ethnic markets, such status can be critical.
Profit equation
Once the programme structure has been established, benchmarked against best global practice, there is nothing to prevent the operation being turned into an effective profit centre. On the surface, the cost/revenue equation for an FFP operations looks relatively straightforward. Revenues flow in directly from the sale of loyalty points to associated partners. Costs are also easily measurable, coming from depreciation of programme set-up costs and recurring operational costs.
What is less easy to gauge are the indirect revenues that flow from the FFP's positive impact on the sales number. Since the loyalty programme is seldom the only reason to choose a particular carrier, there is no way to determine the exact value. Faced with this problem, many programme operators prefer to neglect the indirect revenue box, instead striving to cover their costs just through the trade of mileage points. Many manage to do so. The partner network then becomes, not simply a marketing asset in attracting customers, but a purely financial requirement to assist the programme's long-term profitability.
Yet there is no reason why an attempt should not be made to factor indirect costs into the equation. A mix of reliable estimates and experience show that indirect revenues are usually a multiple of direct revenues, depending on the development status of the partner network and the membership structure.
In conclusion, a successful FFP must be one that is based on clear strategic goals, and that achieves a balance between them supported by an attractive programme structure benchmarked against best global practice. Today, FFPs are clearly more than a must-have or even an efficient marketing tool. They are an integral part of airline strategy, not to mention an interesting boardroom challenge.
| Table 1: Flight required for award – London-Toyko | |||
| Number of paid flights in Business Class required by loyalty schemes to earn an award flight in Business Class. | |||
| FFP Scheme | Flights required | Airline used | |
| Spanair | 3.91 | Lufthansa | |
| LatinPass | 4.61 | KLM | |
| Air New Zealand | 5.01 | ANA | |
| Northwest | 5.12 | KLM | |
| Thai Airways | 5.14 | Lufthansa | 1 |
| SAS | 5.16 | SAS | |
| Braathens | 5.36 | KLM | |
| Malev | 5.36 | Alitalia | |
| Lufthansa | 5.43 | ANA | 2 |
| American Airlines | 5.47 | JAL/BA | |
| Air Canada | 5.47 | ANA | |
| Japan Airlines | 5.47 | JAL/BA | |
| All Nippon Airways | 5.47 | ANA | |
| Varig | 5.47 | ANA | |
| Alitalia | 5.49 | Alitalia | |
| Finnair | 5.50 | BA | |
| Qantas | 5.82 | BA | |
| Continental Airlines | 5.96 | Air France | |
| Ansett | 6.00 | ANA | |
| Aeroflot | 6.00 | Aeroflot | |
| Virgin | 6.03 | Virgin | |
| Gulf Air | 6.03 | Virgin | |
| British Midland | 6.43 | Virgin | 2 |
| Air France | 6.43 | JAL | |
| Cathay Pacific | 6.72 | JAL/BA | |
| United Airlines | 6.75 | ANA | |
| KLM | 7.01 | KLM | |
| Delta Air Lines | 7.46 | Air France | |
| South African | 7.47 | Lufthansa | |
| Korean Air | 7.80 | Korean Air | |
| US Airways | 7.97 | Swissair | |
| Ukraine International | 7.97 | Swissair | |
| Malaysia Airlines | 7.99 | Virgin | 3 |
| Portugalia | 8.20 | Swissair | |
| Singapore Airlines | 8.36 | ANA | |
| Swissair | 8.57 | JAL | |
| Mexicana | 8.75 | Lufthansa | |
| Icelandair | 8.86 | SAS | |
| Iberia | 10.78 | BA | |
| British Airways | 13.00 | BA | 4 |
| NOTES: 1 Award flight on ANA. 2 on Lufthansa. 3. On KLM/Swissair. 4. UK scheme. Applying off-season award. Standard awards at 23:00 | |||
| Table 2: Flights required for award – Paris-London | |||
| Number of paid flights in Business Class required by loyalty schemes to earn an award flight in Economy Class. | |||
| FFP scheme | Flights required | Airlines used | |
| British Midland | 3.00 | BM | |
| Lufthansa | 6.25 | BM | |
| American Airlines | 6.67 | BM | |
| Air France | 6.67 | Air France | |
| United Airlines | 6.67 | BM | 1 |
| British Airways | 7.11 | BA | 2 |
| Continental Airlines | 7.50 | Air France | |
| SAS | 8.33 | BM | |
| Virgin Atlantic | 8.33 | BM | |
| Aeromexico | 10.00 | Air France | |
| Scot Airways | 10.00 | Scot Airways | |
| Air New Zealand | 10.98 | BM | |
| Air Canada | 12.00 | BM | |
| South African | 13.33 | BM | |
| Japan Airlines | 15.00 | BA/Air France | 3 |
| Thai Airways | 15.00 | BM | |
| Iberia | 16.25 | BA | |
| Delta Air Lines | 20.00 | Air France | |
| Finnair | 21.19 | BA | |
| All Nippon Airways | 27.27 | BM | |
| Singapore Airlines | 27.27 | BM | |
| Qantas | 29.77 | BA | |
| Cathay Pacific | 45.45 | BA | |
| Notes: 1 Promotion – 31 December 2000; standard value is 10.00. 2. Value for continental European scheme; value for UK scheme: 2.81. 3 Awards on British Midland. | |||
About the author: Ravindra Bhagwanani is general manager with Global Flight Management, a consultancy set up in 1996 as a specialist in frequent flier programmes. The company offers a web-based service for customers to compare FFP schemes. www.globalflights.de
Source: Airline Business
