Not so long ago, an alliance based only on links between frequent-flier programmes (FFP) would have seemed hopelessly optimistic. Yet the real force of the global FFP is becoming apparent as major groupings such as the Star Alliance, oneworld and the European Qualiflyer group begin to harness its power. For those not included within these increasingly sophisticated FFP groupings, however, there is a growing threat of falling in behind in the race for high-yield passenger.
From the start, the FFP was a central part of the marketing strategies launched by global alliances. It is arguable that FFPco-operation forms the main basis of the oneworld alliance, although founding partners British Airways and American Airlines admittedly remain hampered by the lack of antitrust immunity which would allow their co-operation to flourish on the north Atlantic.
Star and Qualiflyer have already led the charge to take their co-operation further towards the goal of forging seamless links between their member FFP schemes. From the start, Star allowed complete FFP reciprocity - the ability to earn and burn miles on all its partner airlines. It was also the first major alliance to allow points earned on any member carrier to count towards the achievement of the various status levels. Star has since taken the next step by putting in place measures for the joint sales and marketing of the partner FFP schemes across the alliance - the Qualiflyer group has not taken long to follow suit.
In early July, Star chose a joint marketing agent, Brierley & Partners, to develop joint loyalty initiatives that will encourage exclusive travel within the Star Alliance network. Meanwhile, the leading members of the Qualiflyer alliance (Swissair, Austrian Airlines, Sabena, TAP Air Portugal and AOM), have set up a separate company, Qualiflyer Loyalty, to co-ordinate offers for their 2 million FFP members.
Outside the alliances
With FFPs already a powerful marketing tool, such co-ordination represents a threat to the vast majority of carriers that have only limited bilateral agreements. Responses to an Airline Business survey of 50 mainline airlines, shows that more than a quarter of have no FFP links while a surprising 54% have fewer than five. Only seven airlines reported more than 20 links.
To make matters worse, it has been demonstrated beyond doubt that bilateral FFP tie-ups are considerably less effective in attracting high-yield passengers than their alliance-branded rivals.
"In oneworld, we are doing a lot of stuff that we don't do in our bilaterals," says Bruce Chemel, president of AAdvantage marketing programmes at American Airlines. Among these, he includes greater ease of redemption of miles, joint alliance awards, alliance status levels and more powerful branding.
Claiming awards, particularly multicarrier ones, is far easier within a global alliance. "In oneworld you are supposed to be able to do with anyone what you can do with any other oneworld carrier," says Chemel. In concrete terms, it is much easier to claim AAdvantage miles on another oneworld carrier, he says.
There is also a oneworld award which covers segments flown by each of the different member carriers. "Every oneworld carrier can handle that. They are all oneworld awards and only the oneworld carriers can handle that," says Chemel. While the carriers' separate customer databases are closely guarded, each oneworld carrier has access to the others' award inventories. This means that an AAdvantage member can call American and book a free flight on any of the other oneworld member carriers.
In contrast, bilateral relationships, such as the one between AAdvantage and the Japan Airlines FFP, do not offer any of the status benefits of oneworld. With JAL, "there is no meet-and-greet, no lounge privileges and we are not trying to relocate our facilities next to the other carrier," says Chemel. "A bilateral relationship is just the ability to earn and burn miles. It's more of a reward issue than a loyalty issue," he adds.
Most bilateral relationships do not enable passengers to earn miles towards tier status. This fact alone gives global FFP alliances a significant competitive edge in the world of business travel. Combined with common branding and the latest joint marketing initiatives, there really is no contest. "When you have an alliance, you have commitment," says the United Airlines marketing manager, Jim Davidowitz. In other words, one partner carrier can be certain that its passengers will be able to redeem their miles on another partner airline without unnecessary restrictions - in United's case, with the other Star Alliance members.
"The trouble with bilaterals is that it's more difficult for our members to know who our bilateral partners are and that makes it much more difficult for the customer," adds United's manager of airline alliances, Nancy Mountain.
Antitrust immunity
Oneworld may lack the antitrust immunity to make FFP co-operation on the Atlantic worthwhile to American and BA, but it knows how to brand an FFP. The alliance has three status levels which are unique to its carriers: Emerald, Sapphire and Ruby. All top-tier cards in the individual carrier FFPs bear a coloured flash to give a common identifier to passengers. A set of service benefits - such as lounge access or priority check-in - can then be delivered in a consistent way to top-tier members in each of the programmes across the oneworld network. BA says that before this, each individual bilateral had variations in what was offered, making it confusing for members and staff.
But when it comes to inter-carrier agreements on the exchange of miles, there is little difference with the traditional bilateral accords. Whether or not they are partners in the same multicarrier alliance, airlines pay one another for the miles that are earned or redeemed on their partner by their frequent fliers. "If an AAdvantage member earns miles on BA, they pay us for those miles. There's no free lunch here," says Chemel.
Within oneworld and Star, the relationships that govern these payments are all bilateral. "We want our partners to be happy with the price so that they make seats available to our customers," says Chemel. United declines to discuss FFP pricing agreements within Star.
Going for global loyalty
With membership levels of 26 million for United and Delta Air Lines and 35 million for American's AAdvantage programme, mainly made up of US residents, the US market for airline loyalty programmes is at saturation point. The average membership per US resident is an estimated 4.7 programmes. Points can be earned on everything from a meal in a restaurant to mortgages, making it unnecessary to ever set foot in an aircraft. With little room for growth at home, the US carriers began to concentrate their efforts on marketing their programmes outside the USA.
The global marketing alliance has proved to be the perfect vehicle. The benefits to be gained from frequent flier plan co-operation lie at the heart of the Star Alliance and the potential rewards are far higher than those that could be gained from mere codesharing. "We had a [frequent flier] relationship with Lufthansa before there was a Star. It was the template for where we were going," says United's Davidowitz. From a tool primarily aimed at US residents, the global FFP alliance opened up the entire route systems of United's Star Alliance partners for redeeming and earning free miles, making United a more attractive proposition to a lot more people.
There is complete reciprocity between all the Star member carrier FFPs, including United's Mileage Plus and Lufthansa's Miles More programme on flights across the Atlantic. "It's better not to do carve-outs," says United's Mountain. Points earned on any Star carrier also count towards the achievement of elite-level status, which is then recognised across the alliance partners.
Without the antitrust immunity that enables United and Lufthansa to divide profits and revenues on transatlantic flights, some less fortunate carriers are loath to allow reciprocity in their more competitive markets. If they did, they might lose passengers and revenue. Status issues are also more problematic without immunity.
At oneworld, where FFP co-operation is marketed as a key consumer benefit, the lack of transatlantic codeshare rights and immunity between American and BA has preserved the carriers' strong competitive instincts. The partners have so far failed to agree on a form of FFP co-operation on the Atlantic. "We do not have transatlantic awards on BA but we are still competitive," says Chemel.
The US programmes dwarf their European counterparts so it is hardly surprising that Air France, for example, with its mere 2.5 million participants in Fréquence Plus, is keen to invite Delta's 26 million members to its party. But Delta's director of relationship marketing, Christine Pierce, is cagey about revealing details of what the two recently-allied carriers are planning.
Reciprocal accrual and redemption of miles has existed for some time, but miles earned on one carrier do not currently count towards achieving status levels in the other's programme. Elite level accrual is being analysed by the two carriers, but Pierce admits that the lack of immunity is an obstacle. "We cannot mingle programmes or make changes that are not as generous," she says.
Half-way house
The likelihood is that Delta and Air France will be forced to maintain a half-way house between a bilateral relationship and a broader global FFP alliance. But whatever the outcome, bilateral relationships will continue to play their role. "There will always be bilateral relationships that extend outside oneworld," says Chemel. United's Mountain concurs with this view: "There will always be a need for a bilateral arrangement, for instance where United has a particular need in a particular market," she says.
American cites its bilateral relationships with carriers such as Hawaiian Airlines and Brazil's TAM as examples of bilateral relationships which extend its global network coverage. While Chemel concedes that TAM may later be introduced to the other oneworld carriers, he stresses that bilaterals are an important means of increasing American's frequency and ability to offer miles. AAdvantage has partnerships with at least 12 non-oneworld carriers, he says.
While there is no question that FFP bilaterals will continue, it is equally certain that some bilaterals will cease because of closeness to a global alliance composed of rival airlines. In this context, Singapore Airlines' decision to abandon its co-operation with AAdvantage almost certainly stems from the carrier's growing codesharing and FFP links to key members of the Star Alliance.
But those carriers that depend on bilateral FFP links to increase the attractiveness of their plans remain unconcerned by the threat of the global FFP. Virgin Atlantic's head of loyalty, Paul Smitton, believes that loyalty to the brand is more important than the frequent flier programme. "We do not see this as an issue. We see loyalty as not so much about the programme as about what the airline offers."
Virgin's strong brand may give it the benefit of above-average passenger loyalty, but it remains to be seen whether it can shrug off the rise of the global FFP. Virgin has links with six airlines: SAS, British Midland, Austrian Airlines, Sun Air, Malaysia Airlines and Air New Zealand. There is, however, an increasing gulf between the majority of carriers that boast only a handful of frequent flier tie-ups, and those that have enough FFP partner airlines to claim global network coverage for earning and burning frequent flier miles.
North America leads
In this respect, the North American carriers, whose loyalty plans have reached full maturity, are streets ahead of their European and Asian counterparts. "We truly offer our members the world; whether it's for earning or [in terms of] destinations," says Chemel. United remains slightly dismissive of such claims, however. "Star and oneworld only have a claim to global coverage and even oneworld does not have a worthy Pacific carrier," says Davidowitz. But global FFPs remain the goal of the major alliances, and unaffiliated carriers must wake up to this.
In the same way as FFPs have expanded outside the USA, their retail aspect has snowballed. The large global alliance members make no distinction between the ways in which free miles have been earned when exchanging seats, although elite level customers will generally "book out of a higher bucket," according to Delta's Pierce.
Most European and North American FFPs offers numerous retail opportunities to earn miles as well as tie-ups with credit card companies, hotels, car hire or restaurants. AAdvantage's agreements encompass 20,000 florists, 3,000 small and regional businesses, 400 golf courses, 350 mortgage outlets and 1,900 estate agents. In the UK, the Air Miles programme, initially created to fill empty seats on BA aircraft, has expanded to other parts of Europe including Holland and Germany. Air Miles enables consumers to earn points towards free flights on a host of goods, utilities, credit cards and services.
In short, loyalty has become a valuable currency for the airlines. The US majors sell miles to major companies at around 2ó per mile and this has become a valuable source of revenue. "More than 50% of our miles are paid for by non-passengers," says Chemel. "We do not view those seats as distressed inventory. We see them as paid-for seats and it's in our best interests to make them available."
In exchange, the companies that buy miles can use AAdvantage as an umbrella brand and get the mailing exposure of a major corporation. "We mail to 4 million a month," says Chemel. Linked into a global FFP alliance, this retail aspect is a force to be reckoned with.
Market restrictions
Against this backdrop of FFP co-operation, competition between the FFPs, like that between the airlines, varies from market to market. BA, for example, matches its competitors in major markets such as the USA, while restricting benefits in other markets. "The home carrier hasn't felt the need until now to match the US carriers," says Chemel. In the USA, members of BA's programme can use free miles to obtain upgrades and earn miles on discount economy as well as premium class travel. In the UK, where rival home market plans are less generous, bonus miles for economy can only be earned on full-fare tickets and there is no upgrade option available.
This differentiation could change as saturation at home leads to a more aggressive marketing of US programmes in Europe and elsewhere and travellers become more knowledgeable about which plans are most generous. "We are a lot more aggressive outside the USA," says Delta's Pierce.
Rampant competition between frequent-flier plans is not quite on the cards yet. For the time being, airlines seem ready to limit their generosity to matching offers by rivals, but this is still early days for the global FFP.
| Frequent flier links between airlines June 1999 | ||||||
| Number of FFP links per carrier | 0 | <5 | <10 | <20 | >20 | Total 50 airlines |
| % of sample carriers | 26% | 28% | 10% | 22% | 14% | |
Note: A link to the Qualiflyer FFP programme is counted as a single link. Where an airline does not have its own FFP the number of links is considered to be the number of programmes in which the airline participates regardless of the number of airline participants in the plan. Source: Airline Business/ATI alliance database.
| Miles & More | |
| Airline | Lufthansa |
| Members | 3.2 million |
| Airline partners | 26 |
| Destinations | 720 + |
| Hotels | 17 |
| Car hire companies | 5 |
| SkyMiles | |
| Airline | Delta Air Lines |
| Members | 26 million |
| Airline partners | 13 |
| Destinations | N/A |
| Hotels | 18 |
| Car hire companies | 5 |
| Credit Cards | 2 |
| Awards issued 1998 | 1.9 million |
| Mileage Plus | |
| Airline | United Airlines |
| Members | 26 million |
| Airline partners | 18 |
| Destinations | 900 |
| Hotels | 19 |
| Car hire companies | 7 |
| Executive Club | |
| Airline | British Airways |
| Airline partners | 14 |
| Hotels | 12 |
| Car hire companies | 3 |
| Credit Cards | 2 |
| AAdvantage | |
| Airline | American |
| Members | 35 million |
| Airline partners | 26 |
| Destinations | 800 |
| Hotels | 27 |
| Car hire companies | 7 |
| Credit Cards | 52 |
| Awards issued 1998 | 2.7 million |
Source: Airline Business
