Customer status in loyalty programmes has traditionally followed the miles flown. But as some are starting to appreciate, not all miles are equally valuable to the bottom line
Along with every other area of airline cost, the frequent flyer programme (FFP) is under increasing pressure to show how efficiently it delivers to the bottom line. And the drive to answer that question may mean that the days of the traditional loyalty programme are now numbered.
Of course, it is possible for an FFP operation to show profits in its own right, using miles as a currency that is sold to programme partners. Although this is certainly a growth business, there are few FFP operations outside North America that have so far managed to stand as an independent profit centre. In any case, this does not address the more fundamental issue of how efficiently an FFP performs in its prime task of keeping the loyalty of the carrier's most profitable flyers.
A key part in that mix is the lure of achieving, and retaining, élite membership status, with all the benefits that can bring. While the rewards may be expensive to deliver, the investment will have been more than justified if it retains a lucrative customer. The problem is that most loyalty schemes, as they stand today, are poorly designed to ensure membership status is indeed linked to the customer's profitability to the airline.
Programmes tend to segment customers on the basis of the mileage flown and flight sector. The more mileage points that a customer gains, the higher their status in the programme. And the higher a customer's status, the more the airline invests in keeping them loyal. In short, travellers are recognised and invested in on the basis of the time they spend in an airline seat, but not necessarily on the money they spend.
For example, a passenger who takes a long-haul trip first class only once a year is likely to contribute more to the bottom line than one who shuttles every weekend on a short-haul route using the cheapest deals available. While the first customer stays a base member in most FFPs, the second could go on to receive all the attention reserved for a gold or platinum member. Latest data for 2001 from IATA's Economic Task Force demonstrates the gap in value. While the average business class passenger on the North Atlantic yielded nearly 20¢ per passenger kilometre (32¢ per mile) and provided a healthy profit margin, the average traveller on short-haul services within Europe yielded little more than half of that and contributed to a net loss. Even on markets with similar stage lengths, the differences in yield and profitability can be sizeable.
Some carriers have already started to address the issue of how status is earned. British Airways, Gulf Air, Qantas and Virgin Atlantic Airways are among those that have broken the traditional direct link between miles and status points. And at the start of this year, Delta Air Lines took the concept further with the introduction of its Qualification Miles system alongside its SkyMiles scheme - a still more refined method of recognising status on the basis of profitability rather than distance.
Mileage system
Delta's new status scheme, as with most of the other initiatives, has left the established and financially successful mileage system untouched - although BA has simply scratched miles awards for discount tickets. All SkyMiles members continue to accrue and redeem miles as before across the network of Delta and its partners. The attractions of the traditional loyalty element of the FFP therefore remain unchanged, with members receiving the same rewards.
However, the loyalty and status elements of the programme are completely separated. The qualification currency for the status part is now no longer a set of the mileage-based loyalty, but has its own currency in the form of Qualification Miles. Although still based on distance, status points are calculated according to new rules, which favour the more profitable fares. Premium classes attract a higher bonus of status points than they did under the old mileage system, while credits in economy vary according to the fare class. And this is where Delta has gone further than other such initiatives. Full economy fares receive 150% of the base status points award, while the most heavily discounted fares take only 50%.
While nominal qualification levels are unchanged, the result is that higher revenue passengers achieve élite membership levels faster than they did, while those using heavily discounted tickets will take much longer, although they will still find it possible. These effects are demonstrated in the example of flights between New York and Mexico City. Under the previous system, passengers would have to fly 10 business- class trips to achieve silver status. Now that is reduced to six. In the past, 12 economy trips would have achieved the same result, but under the new system that is cut to eight for full-fare journeys but doubled for discount tickets.
By splitting up a unified and inflexible system, Delta has paved the way towards a more revenue-orientated approach. So why not go further down that track? For example, the Delta system is still, essentially, linked to the fare class and while that goes some of the way towards bringing tier qualification in line with revenues, it does not guarantee that link. Even within the same booking class, not all routes provide the same bottom-line profits. Business class on the North Atlantic produces 10 times the margin for the same class on services within Europe.
Although it is possible to make finer distinctions between the sub-classes of fares, such distinctions are difficult to communicate to customers, even experienced travellers. Another difficulty arises over how to integrate alliance partners into the system, even where fare classes are harmonised.
Perhaps a more fundamental issue with the Delta approach is the fact that distance still plays a key role. The scheme does not sufficiently reflect the fact that a member travelling at full fare on a medium-haul domestic service is far more valuable to Delta than one flying on a heavily discounted transatlantic ticket.
Qualifying currency
It would seem more logical, as well as more straightforward, simply to use the ticket price as the qualification currency for the status points. That has the advantage of infinite flexibility for the airline and complete transparency for the customer. After all, most loyalty programmes outside the airline business would never dream of awarding points on the basis of an artificial currency like miles, rather than on revenues. Reason enough for airlines to consider doing the same, at least for the status part of their FFPs.
In the past, there have been attempts to put loyalty schemes on to a revenue basis. TWA gave bonus points for full-fare tickets, while National Airlines made a straight trade of points for dollars. However, neither airline - both now defunct - separated out the loyalty and the status element of their schemes.
Even a scheme based on revenue would require some fine-tuning, catering for more than a simple accumulation of the revenue generated per member. The key words here are profitability and competitive positioning. Depending on the contribution of different fares to the bottom line of the airline, the system uses factors, such as the service class (not the booking class) or for flights to particular areas or destinations. Additional factors such as online bookings, consolidator fares or corporate deals can also be introduced. Of course, there it would also be possible to amend the offer for special promotions. Such factors would clearly need to be highly tailored for each individual airline.
On the competition side, it is important to consider the reasons why passengers choose a particular airline. If it is simply due to the lack of any alternative, or perhaps because of a stringent corporate travel policy, there seems little justification for rewarding the traveller with lavish FFP membership benefits. Today, passengers can achieve élite membership by flying purely domestically in markets with limited competition, such as Australia, South Africa, Canada, Germany or France. It is worth asking what extra revenues, if any, do the dominant local airlines get in return for the associated costs of the membership rewards? When fine-tuning the system, the challenge is to find the right compromise between tracking profitability and keeping the system transparent to customers.
Although it is not a new issue, the question of alliance partners also gains importance if élite qualification is to be linked to revenues. It is clearly important to ensure that partners are still integrated into the scheme, but greater stress needs to be placed on the extent to which individual customers are profitable to the host airline, as opposed to other partners or the alliance in general.
Co-ordinated approach
It should no longer be taboo to reconsider the tier benefits being offered (which nowadays concentrate more on the airline operating the FFP than on partners), nor to look at sharing costs to serve such customers as part of a modern management partnership agreement. A co-ordinated approach with partners seems unavoidable.
A final key point to consider is the likely reaction of customers to such a programme redesign. It is important that a new élite qualification system will not simply be used as an excuse to penalise all existing members. Rather, as in the Delta case, it should balance penalties for some segments with benefits for others. This needs to be communicated accordingly.
Nevertheless, there will be a certain number of disappointed customers. Inevitably some will see their membership level gradually downgraded under the new system or perhaps even lose their élite status altogether. An opposition from this group, including the risk that they turn away from the airline, needs to be taken into account. Prior to implementing any changes, a simulation should be run to evaluate just what the likely downside is likely to be and how that balances with the new opportunities from the passenger groups that benefit from the change.
When confronted with a hostile reaction, it is important to recall the objective of the exercise - to concentrate on profitable customers. If the new scheme is constructed properly, then the members that do fall through the gaps are, by design, those that are less profitable to the airline. Therefore, it should be accepted that these customers might be lost. However, the majority of base members, who have no prospect of élite status, will not be affected by any changes given that the core mileage element of the FFP remains unchanged.
Outlook
So what are the potential rewards that await the operator of such a modified programme? For the first time, an airline can now tell solely on the basis of its FFP data to what degree specific customers are profitable to the airline. While there may be other "rising stars" that are not yet FFP élite members, and who can still be targeted through traditional marketing campaigns, a carrier can at least be certain that all of its élite members are also its most profitable. Any investment in this target group should, therefore, have a better return.
It is then safe to start looking at new and possibly more creative and tailored ways of rewarding the different élite levels. The accent should be on individual propositions rather than standardised offers. Options to choose between benefits, such as bonus miles or complimentary theatre tickets, would be easy enough to construct and give a more personalised feel. Allowing members to request their own tailored rewards is another example of how costs could be redistributed, without necessarily being increased. The Enrich programme from Malaysia Airlines already features such a scheme, whereby élite members can request how and when they would like to spend their points with the carrier and the airline works out a package.
At the same time, it becomes easier to take a hard look at potential cost savings for base members. This should, however, happen without downgrading the core structure of the FFP, which would affect everyone in the scheme. The FFP needs to remain competitive and to continue to attract volumes, not only for its own success but also to help the airline retain a viable network. But letting unprofitable customers become tier members is an unnecessary waste. The whole game is to identify profitable customers through the FFP and focus efforts on them. This might look like a small step at first sight, but, in reality, for most airline loyalty schemes it constitutes a small revolution.
| Trips required to achieve élite status with Delta SkyMiles | ||||||
| Fare basis | Trips on New York-Mexico City route to qualify for: | |||||
| Silver | Gold | Platinum | ||||
| old | new | old | new | old | New | |
| First class | 8 | 600.00% | 1600.00% | 1200.00% | 32 | 24 |
| Business class | 10 | 600.00% | 2000.00% | 1200.00% | 39 | 24 |
| Economy class | 12 | 2400.00% | 48 | |||
| Y/B/M | 800.00% | 1600.00% | 32 | |||
| H/Q/K/S | 1200.00% | 2400.00% | 48 | |||
| L/U/T | 2400.00% | 4800.00% | 96 | |||
| Note:Values indicate the number of one-way segments required between New York and Mexico City to achieve tier status levels under the old and new qualification systems. | ||||||
| Source: Global Flight Management | ||||||
| About the author |
| Ravindra Bhagwanani is general manager with Global Flight Management, a consultancy established in 1996 to specialise in frequent flyer programmes. The company offers a range of management-related services to airlines in the FFP field, including a website at: www.globalflight.net |
RAVINDRA BHAGWANANI AT GLOBAL FLIGHT MANAGEMENT IN OFFENBACH, GERMANY
Source: Airline Business
