'It is the glue to hold the alliance together.' There is no doubt in Lufthansa chairman Jürgen Weber's mind that frequent flyer programmes are key to the future of Star alliance, the name given to the cooperation between Lufthansa, United Airlines, Air Canada, SAS, Thai Airways International and Varig.
In fact one airline executive confides that the decision to link the five partners' FFPs more closely, by enabling passengers to earn and keep their elite status on any Star Alliance carrier, was the driving force behind Star.
There is little doubt of the importance of FFPs among the members of any other major alliance grouping either: codesharing may be necessary for the airlines in terms of promoting their product through computer reservations systems, but when it comes to passenger loyalty the power of the frequent flyer plan is unrivalled.
'I think FFPs are already more important than codesharing. For your average traveller, the codeshare drives it but the regular business traveller is acutely aware of frequent flyer plans,' says Rupert Duchesne, vice president marketing at Air Canada.
His view is shared by many other carriers: 'FFPs are much more customer oriented,' concurs KLM's manager loyalty programmes, Bruce Dönszelmann. 'Codesharing is more product-oriented.'
Not surprisingly, however, no-one has rushed to ditch their major codeshare agreements. But as FFPs grow in power and scope, such an event is not beyond the realm of possibility. 'If you look at who drives the airline's profitability, it is the high margin business traveller,' says Duchesne.
Take British Airways and would-be partner American Airlines. After waiting more than a year for regulatory approval and US antitrust immunity for their planned transatlantic codeshare alliance, they have already linked their FFPs, with the current exception of the transatlantic market. They are also exploring ways to add to their FFP relationship.
The main goal of the two carriers is still the antitrust approval which would put them on a par with Star Alliance, KLM /Northwest and the Delta/Swissair group. But the current lack of an open skies agreement between the US and the UK makes immunity problematical and a solution may still be some time away.
Hence the decision to push ahead with FFP cooperation. 'There is an extensive range of market opportunities which we can explore, none of which would require regulatory approval,' says Patrick O'Keefe, American's managing director marketing planning and consumer research. 'The FFP would be a major tool; a loyalty programme is fundamental to a sense of cooperation,' he adds.
Straight codesharing needs DOT approval but does not attract antitrust scrutiny, and the carriers could also look at sharing terminals, through check-in, linking reservations systems and joint advertising and corporate events, says O'Keeffe. These tools would all 'convey to the customer that we want to work more closely together.'
As global alliances mature, partner carriers are realising how powerful closer links between their loyalty plans can be. FFPs have long been recognised as an effective means for a national carrier to dominate the premium traffic in its home market. By combining forces and offering more uniform benefits, that market dominance can be greatly extended. 'If you do that with a partner you obviously have more clout,' says KLM's Dönszelmann.
The prize is the loyalty of the premium business class passenger. Membership of a national carrier's FFP by frequent business class travellers is typically around the 70 per cent level. Through close FFP ties within an alliance, that loyal traffic base can be passed on to the other partners' networks and, through US antitrust immunity, the revenue shared via the grouping's codeshare flights.
But FFPs are no longer simple passenger loyalty schemes. Most programmes have at least one major credit card partner as well as tie-ups with other travel-related businesses like hotel chains, car hire companies, telecommunications and restaurants. These offer frequent business travellers the ability to earn additional points, while airlines can generate valuable revenue by selling miles to partner companies.
Some plans already go even further by accessing the mass market of leisure travellers through extensive consumer schemes. These enable points to be earned when shopping or watching the TV, for example. For extensive consumer schemes, such as Air Miles, first launched in the UK by British Airways but now operating in Canada, Spain and Holland, membership of consumer plans - as distinct from traditional FFPs - can be as high as 52 per cent of households.
Consumer schemes offer carriers the ability to dominate their home market's leisure traffic as well, and to sell miles to major retailers upfront. At minimum this can offset the cost of their traditional FFPs - estimated at between 2-3 per cent of an air fare - and at best they can make an outright profit. Not all carriers, however, are yet convinced that they should be in this business.
Sometimes there is a conflict between the aim of the FFP manager and the more traditional goals of the airline, explains Urs Eberhard, general manager Swissair Qualiflyer, the single FFP managed by Swissair on behalf of itself and partners Sabena and Austrian Airlines. 'Qualiflyer would love the Tom, Dick and Harry approach of selling miles [to any business] but the main aim is to create loyalty to the Swissair brand. Any partnership must be in the interest of the airline.'
As yet none of the major alliances has formally extended its FFP cooperation into the mass consumer market but, where US partners are concerned, there is already an overlap with the traditional FFP business. This is because, in terms of redemption, most US carriers' plans do not make a distinction between miles earned by flying and those purchased and awarded by a retailer. This makes it impossible for their alliance partners to do so either.
American has gone further than any US carrier in giving opportunities for redemption: 'We don't view award tickets as free tickets because such a substantial number of our tickets are paid for. If we did, those companies that pay would be very unhappy,' says Bruce Chemel, president of the AAdvantage marketing programme at American.
American sells its seats to retailers at 2 US cents a mile, earning $500 for 25,000 miles. 'On average American does not make close to $500 anywhere on the plane. It's becoming a very big business,' says Randy Petersen, editor and publisher of Inside Flyer.
Given the higher fares in Europe, one source speculates that BA is selling at around 3 cents per mile. Few carriers would turn their noses up at this: 'You need probably 3 cents per mile before it is as attractive as your normal economy proposition,' says Duchesne.
In contrast, in Canada and Europe, with the notable exception of the UK, Air Miles consumer schemes are kept entirely separate from the traditional FFPs of the supplier airlines, so it is clear where passengers are coming from. BA runs a half way house, enabling members of its Executive Club to mix Air Miles currency, earned from credit card and consumer purchases, with Executive Club points earned on BA flights. Executive Club members can use all these points to redeem flights on BA and any of its partner airlines. There are different selling classes for the redemption of Air Miles and traditional miles but the latter do not necessarily get priority. For most airlines points towards elite status can only be earned by flying.
Both American and BA offer extensive opportunities for non-flyers to collect and redeem free miles. Whereas BA sells far more of its capacity to Air Miles UK than it gives away in Executive Club points, for American the consumer aspect is less developed. 'When you compare it to credit cards or telecoms it's still relatively small, but it's gonna grow 30 to 40 per cent this year and it has a better margin,' says Chemel.
If any alliance-related FFP cooperation can be expected to target its partners' leisure home markets as well as business travel, it is that between American and BA. Interestingly BA partner Qantas is also a long way down the consumer road while American's partner Canadian Airlines International is the Canadian supplier to Air Miles (Canada). Elsewhere KLM is a supplier to Air Miles in the Netherlands but it currently keeps this strictly separate from its Flying Dutchman programme. In Spain, Iberia is the main Air Miles partner. Air Miles International is also establishing a company in France and has ventures in South America. Air Miles (UK) is 100 per cent owned by BA but the airline has no connection with Air Miles International, the umbrella company for the Air Miles overseas ventures.
However the majority of carriers prefer to focus on the travel-related activities that will enable their main target, the premium business traveller, to earn additional points. These carriers will sell miles to hotels, car hire companies, telecommunications companies and perhaps restaurants or florists.
They do though all have tie-ups with credit card companies and, for those airlines that offer fairly generous mileage to non-flyers on credit card, this is a limited means of accessing the mass market. The number of points that can be earned on credit card varies greatly. Air Canada, for example offers one mile per C$ spent on its two affiliated credit cards. 'It is primarily on the credit card that the more infrequent flyers earn. The credit card gives us access to the mass market,' says Duchesne. Total membership of Aeroplan has risen to 3 million, of which just 200,000 members are regular flyers. In contrast Swissair limits the opportunities for non-flyers: 'You would need to spend $40,000 to get the 25,000 mile minimum award or take 10 business class trips,' says Eberhard.
Beyond ties with credit cards, Duchesne shuns the broad brush mass market approach. 'I really question the benefit of these mass market programmes to the airline in terms of building loyalty and the brand,' he says, adding that Air Canada lacks the spare capacity to follow this strategy.
The answer lies in whether a FFP should be viewed as a revenue stream or a loyalty programme for the airline. The former view is gradually taking precedence in the US while in Europe and Asia most cling to the latter. 'I certainly think FFPs will become more retail orientated. It's just another way to distribute the product,' says American's O'Keeffe. 'Our primary business is to stimulate customer loyalty,' says Dönszelmann at KLM.
Keith Mills, chairman and chief executive of Air Miles International Group, puts three arguments in favour of a broad consumer programme.
First, the revenue generated substantially defrays the costs of administering the traditional FFP. In Canada, where Air Miles was established five years ago, some C$130 million (US$93.5 million) in miles will be sold this year, of which 'about 50 per cent flows back to the airline as net revenue for their seats', says Mills.
Second, a consumer programme enables individuals to remain in the programme even when they are flying infrequently or not at all: 'You can keep them from cradle to grave,' says Mills. And third, it provides access to data on the millions of consumers who fly on the airline infrequently. 'The forecasts are that leisure traffic will grow and business travel will stay flat. Yet airlines have little data on leisure travellers,' says Mills.
American has developed AAdvantage as an umbrella brand for small and large companies alike. 'It is clearly an AA loyalty programme, but separate from that it has become an umbrella loyalty programme for other companies,' says American's Chemel.
Most airlines are at least attributing a cash value to the miles that they issue. Within an alliance a carrier values a mile according to whether or not it expects it to be redeemed, when and where it could be redeemed, and what the variable cost of supplying the free seats is likely to be, says Iain Webster, BA manager for alliances and air partners in relationship marketing. The use of yield and capacity management means 'you can tell as your programme becomes more mature what percentage is going to go where', he adds. Carriers allocate a cost to miles earned on their flights and receive compensation from partners when seats are redeemed on their airline. In practice money only changes hands if an imbalance arises.
Most major alliance partners have clearly identified the potential of FFPs - with or without a consumer aspect - but still have some way to go before they can fully realise the rewards of closer cooperation. Benefits need to be more uniform across plans and the issue of status has to be dealt with.
Most alliances are now working towards enabling miles to be earned and redeemed in the same manner on partner carriers. 'We want each Star alliance traveller to have one programme and accumulate all the points on that airline [plan]. Then they will reach a status situation more quickly,' says Joanne Ward, Air Canada's manager Aeroplan. Uniform benefits remove competition between different plans and the need to participate in more than one plan.
A second dominant feature of Star alliance is that special recognition and status benefits, such as upgrades, priority check-in and lounge access, earned on any partner's programme will be respected throughout the Star network. 'The global traveller is really interested in being able to fly on their primary airline and keep the recognition and the benefits when they travel on the partners' networks,' says Ward. Other carriers such as KLM and Northwest are also working to align status.
But Passages, the joint FFP owned by Singapore Airlines, Cathay Pacific and Malaysian Airlines, and entirely focused on the business traveller, has an entirely different approach. The joint Passages programme only allows passengers to earn free flights. 'If you want recognition you have to be a member of one of the three separate FFPs,' says Edward Nicol, general manager and director of Passages. Nicol questions whether the Star approach to passengers will work: 'You lose the recognition part if you earn it flying on anybody. Passengers expect to be recognised.'
Another issue is the sharing of the data gleaned from FFPs. With the exception of Qualiflyer, into which Sabena has merged its entire database, there is a limited sharing of data at present and carriers remain reluctant to let their partners know who their best customers are. Air Canada, for example will organise a mailing for a partner carrier, and Swissair will release its data to Delta once the passenger flies with its US partner. This may change as relationships grow closer and the carefully targeted use of data grows within the bounds of partnership marketing.
As the alliances strengthen their FFP cooperation, the number of 'tactical' FFP partnerships - which fall outside the scope of a strategic alliance - is likely to decline: 'We give top priority to linking FFPs with strategic partners. The opportunities for tactical alliances will be reduced as the strategic alliance grows,' says Dönszelmann. Most tactical partnerships are likely to be limited to certain routes, particularly in regulated markets where foreign airlines cannot develop their own networks.
As FFPs become more powerful competitive weapons within major alliances, regulators are beginning to monitor them more closely. In approving the Lufthansa-SAS link, the European Commission required that an airline without an international FFP wishing to operate on the 'most important routes' covered by the alliance be offered participation in the Lufthansa-SAS programme. 'In certain circumstances, measures need to be taken to prevent this barrier to entry from being strong,' says one Commission official.
Larger carriers can also target competitors by offering bonus points on routes where they compete with a smaller airline. But Copenhagen-based Maersk Air has found a neat way to compete in the FFP market by giving the bonus points to companies, not individuals. 'Many companies favour Maersk as a result,' says Jorn Eriksen, senior vice president commercial.
There is very little at present to hold back the power of FFP links between strategic partners. Some governments have made attempts at individual taxation, but in most cases the onus is on the individual to declare free flights and no action is taken against those who do not. The German government gives a tax free allowance of DM2,400 ($1,386) per year after which tax is payable. Lufthansa has offered to pay the tax above this sum at a rate of 2 per cent. Most companies accept that their employees get the benefit of free flights as compensation for the time spent travelling.
The extensive power of airlines' frequent flyer programmes should be unleashed in the near future as the major strategic alliances work to develop their full potential.
Source: Airline Business
