Overview

Frequent flyer programs celebrate their 25th anniversary in 2006.

Where are the airline and hotel loyalty programs today? How did they get to this point? Where are they headed? And what strategies should program members adopt going forward?

So far in this series, we've heard from the travel suppliers—the mainline carriers, discount carriers and major hotel chains that operate the largest loyalty programs. In this installment, we queried three acknowledged experts in the field of travel loyalty to get an outside-in perspective on the programs.

Our participants:

Steve Grosvald

Steven Grosvald of Grosvald & Associates is an independent consultant specializing in loyalty marketing. Prior to founding his own firm, Grosvald worked for 25 years in the airline industry, playing key roles in the development, launch and administration of United's Mileage Plus and Continental's OnePass mileage programs. As a consultant he worked on programs for Mexicana, Varig, South African Airways and Reno Air.

Rolfe Shellenberger

Rolfe Shellenberger spent more than 50 years in travel marketing and consulting, including a stint at American Airlines during which he played a key role in the development of the first mileage program, AAdvantage. ACTE (Association of Corporate Travel Executives) recently honored Shellenberger with its 2006 Lifetime Achievement Award.

Roger Williams

Roger Williams is Managing Partner of Consulting at Airline Information and co-founder of the "FFP" brand of conferences and publications. He was formerly chairman of the 120-airline member ISMC organization and, among his various roles in airline operations, customer service, network planning, and sales and marketing, served as system manager for loyalty and alliances at Air Jamaica.

 

Questionnaire

1. Looking back over the past 25 years, what do you consider the most significant two or three developments in the programs' evolution to date?

Response by Steve Grosvald

In chronological order: 

• Elite - American Airlines’ enhancement with implementation of Elite Gold, and later the multiple elite levels introduced by virtually all programs. 
  
  Why: Provided appropriate recognition and benefits to very best customers. Gave high value customers a target to shoot for which motivated them to and rewarded them for consolidating their transactions with a “primary carrier” (and also select secondary carriers)
  
• Co-branded FFP-linked credit cards - Launch of the Continental/Eastern Marine Midland Bank Gold MasterCard in the mid-1980s.
  
  Why: More than any other enhancement since the launch of the FFPs (frequent-flyer programs), the program-linked co-branded credit cards dramatically expanded the “geographic utility” and lure of the programs. 
  
  Their use permitted FFP members to earn miles buying virtually anything virtually anywhere in the world and made the programs attractive to tens of millions of infrequent and even non-flyers. Programs would not be as large, nor would airlines be selling as many miles profitably to partners and “top off” miles directly to members without the co-branded card relationships.
  
• Two-tier award charts - Continental and Eastern's introduction, with the launch of OnePass, of the two-tier award charts: Unrestricted ”AnyDay” awards and for half the mileage price, restricted “MileageSavers,” MileageKeepers, SaverMiles type awards.
  
  Why: Provided many more members and potential members with a reasonable opportunity of achieving their objectives of earning a free ticket. Also provided an alternative to blackouts for holiday travel by using higher cost “any day” type awards.
  
• Partner expansion well beyond travel - related companies to the point where the programs have become what I call “multi-sector travel and retail programs.” 
  
  Why: This too has contributed to the greatly expanded geographic utility of the programs and reason to consider their FFP their primary retail “program” as well.

Response by Rolfe Shellenberger

First development: Expansion of market through charge card relationships. This introduced many people who were not early targets of the programs to benefits of mileage accumulation. It broadened markets and generated what I think of as second-hand loyalty. My guess is that fewer than 50% of award users are frequent flyers today.

Second development: Airline alliances. Mileage redemption opportunities expanded geographically because, in many cases, alliance members cooperated on FFPs. Thus, an AAdvantage member who wanted to go to South Africa, for example, from the United States could get there with a combination of American and British Airways.

Response by Roger Williams

First would be the application of currency in loyalty programs. Recognition and benefit programs existed for some time prior to the pioneering AAdvantage and Mileage Plus schemes, and were exclusively targeted toward high-value customers. Modern airline loyalty programs perfected a simple yet effective mechanism to manage customer behavior by transparently measuring accomplishment (earning points) then providing a material reward.

Second would be partnerships, which can be extensive and have become a great way to provide value for customers. In particular, partnerships with multiple airlines create a single virtual brand controlled by the customer’s desire to earn and redeem miles in his home program. This is great for small airlines looking to gain new customers at a drastically reduced acquisition cost. For the Majors, partnerships can be positioned to provide a competitive edge in a market, where real dissimilarities among programs simply do not exist.

Finally is the Battle of Awards, the “anytime award” versus “discounted award.” Some of your readers may be upset they are unable to redeem their miles for an award seat—however, if they are willing or able to pay double the miles, then availability becomes as common as securing a seat for money.

The fact that there are 16 trillion outstanding “points” in the world among 160+ FFPs can be a bit misleading, but indicates the presence of a problem. A branding message is a promise to the customer and in the case of frequent-flyer programs its free travel. Consider that over half the miles earned in the FFPs of U.S. majors are generated by co-branded credit cards. The majority of the members who have these credit cards tend to be low frequency passengers who will barely qualify for a discounted award with the help of this card. Many of these customers do not have an option for an anytime award because they simply do not have enough miles; however, the amount of money they spent on their credit card to attain 25,000 miles on average generated $250 for the airline.

2. Today, 25 years after their introduction, what role do mileage programs play in the overall marketing efforts of the airlines and hotels?

Response by Steve Grosvald

Since I’m no longer in a corporate position, I can’t provide a definitive assessment. I presume for most of these firms the programs continue to be their major marketing/advertising effort focused on the entire CRM (customer relationship management) package: Attracting, recognizing, rewarding and retaining repeat and high-value customers.

Understandably how this translates to the overall marketing effort at any firm depends on both corporate philosophies and competitive landscape.

Response by Rolfe Shellenberger

Unfortunately, all airlines except Southwest, Alaska and AirTran have diminished their service and depend too heavily on loyalty engendered by FFP to keep their seats filled. Also, airline messages to FFP members are not exploiting profile data that could stimulate trips. Instead, messages are most often designed to solicit credit cards with high annual membership rates, or to fulfill promises made to partners, e.g., airline soliciting use of partner hotels, often at rate levels that are not matched with equal value. A preponderance of communications focuses on overly extravagant products and services despite an incontrovertible fact that airline users are far more price sensitive today than in 1999, for example.

Response by Roger Williams

Combined with technology-driven relationship marketing and analytics, the role of the mileage program has expanded at all customer touch points and provides valuable business intelligence to the folks in airline advertising and route/network planning. CEOs are constantly reminded of the existence of their program when proud members approach them and voice their opinions; the tier levels of members are almost like ranks, and when top tiers speak executives listen. So the loyalty program clearly represents the sampling of customers that big decisions are based upon. Beyond feedback, programs that can successfully maintain high switching costs, or rather entice members not to participate in rival programs, can affect fare competition, increase yields for the airline, and provide dependable data for future planning. The mileage program represents a level of trust between the airline and customer that affects customer service on the whole.

As for hotels, there is an interesting footrace happening now between FFPs and FGPs (frequent guest programs). During the early ‘80s hotel loyalty marketing heavily depended on airline schemes, not only for generating traffic through incentives, but also for database development. Today, as hotels have incorporated a wide variety of options into their core reward offering, customers belonging to both program types have realized that availability and reward value is very attractive indeed with hotel programs. The latter maturation of hotels programs has now positioned the FGP as an attractive alternative to some airline programs. The ability to earn a variety of airline miles and a heavy capital investment in CRM systems has opened the door for FGPs to dominate the travel experience. This effort I believe is very central to the marketing strategy of the hospitality industry. 

3. A widely held view among frequent travelers is that mileage programs are a burden the airlines bear only grudgingly, and that airlines would terminate them (and offload their associated overhead) if only they could do so without putting themselves at a competitive disadvantage. True or false? Please elaborate.

Response by Steve Grosvald

False. If administered properly the programs are enormously profitable and achieve generative revenue objectives. They are the most successful form of marketing ever introduced in the industry…and it’s all measurable, as compared with standard media advertising which is not…or rarely so.

If the programs were to be terminated the airlines and hotels would simply have to spend more money attracting and retaining good customers using another form of advertising. Let’s keep that in mind; the programs are a form of advertising and a very effective one. Therefore, if FFPs were cancelled, the prices customers pay for the associated products and services would NOT decrease.

Response by Rolfe Shellenberger

Definitely false. Airlines make atrociously scandalous profits from FFPs. And they also gouge customers with unreasonable extra charges like $75 for a short-notice trip, even though handling costs amount only to deducting mileage and making a reservation.

Airlines sell miles for about $.02 each; yet, redemption values are more like $.015. And breakage from inactive accounts is a gold mine.

Response by Roger Williams

This is more false today than ever before because marketing has been permanently altered by mileage programs and the future CRM opportunities they have created. Now I’ll warn you that there is a rough patch ahead in the United States where airlines will be implementing aggressive liability strategies, but beneath the reward scheme of every program exists the art of relationship marketing and customer intelligence—the absence of which would be a great disadvantage. The future development of programs will place less importance on point accruals outside of flying and bravely attempt to become more anticipatory to the customer’s needs both within the program and with the flight product. Just like an investment portfolio, the miles held by customers may fluctuate in value; but I would be more concerned about the airline itself being dissolved rather than the program discontinued leaving just flight operations.

4. There is a rising tide of consumer sentiment to the effect that mileage programs have lost so much value—more fees, higher award prices, fewer available award seats, etc. —that they are in danger of losing their relevance. True or false? Please elaborate.

Response by Steve Grosvald

True. In some cases it appears to be a case of killing the goose that lays golden eggs. Airlines cannot make up for their huge deficits in other areas by increasing service fees, etc., in their FFPs. I am sensitive to the fact carriers are seeking to generate revenue from every possible source but in some cases they reach a tipping point where the program is no longer a motivator but rather an irritant. That can result in increased “splitting of transactions” by members…the very thing the programs were designed to overcome.

Response by Rolfe Shellenberger

True. One marketing principle I learned early on in this business is that loyalty is very often replaced with resentment when a marketing relationship is denigrated. Airline avoidance is much more passionate than airline loyalty. If you continuously treat your best customers arrogantly, they will become avoiders of your brand, and will sometimes go to great lengths to demonstrate their outrage.

Response by Roger Williams

The short answer is false. FFPs will not lose their relevance because the target group of high-value customers that these programs began with continue to be addressed. On the other hand the latter target group of low-frequency customers are nearing the point of crisis with programs that earn incremental revenue from them and limit their rewards. The market will naturally work itself out as the value of selling miles on the open market to credit card banks continues to decline for some programs. The ultimate maturation point of an FFP that has chosen to grow non-flight accruals, and then expanded its database to target customers who are largely or wholly sustained by these non-flight accruals, will revert to its original configuration of recognition and retention of high-frequency customers. So for many people who do not fly often these programs will eventually lose relevance, but then you can always join a younger program looking to expand its base through outside incentives.

5. Given the situation as we find it today, what would your advice be to current loyalty program managers?

Response by Steve Grosvald

Be less mechanical and more innovative. Hire me—or someone like me with a similar track record—to work with them to innovate and develop much more creative solutions to some of their problems to achieve more of their objectives to the benefit of both the members and the airline.

Response by Rolfe Shellenberger

Revamp fees on award travel; in fact, eliminate any charges that seem to be unwarranted, like a $60 handling charge to get an itinerary sent by FedEx. 

Drop what are patently gouges. For example, I wanted two first class tickets from Palm Springs to Washington to Miami to Palm Springs. First class was available for purchase on all segments, but because one segment was “restricted,” I would have had to cash in 160,000 miles instead of 80,000. Of course, I didn’t accept it; my wife and I used our retiree pass privileges to make that trip instead.

Use profile data to focus messages. My purchase of airline tickets has diminished to almost nothing because my business activity has declined. Show some sensitivity to that situation. Also, link profiles to destinations popular with members. Don’t send me messages on resorts in Palm Springs or Palm Desert; that’s where I live.

Response by Roger Williams

Evaluate the market strategy of your airline and ensure that your program supports this on all points. Pay careful attention to the convergence of customer satisfaction and loyalty; these are not the same. This may sound odd to an outsider but an FFP manager’s job is not customer satisfaction (in its greater sense) but rather to create a suite of attractive reasons why the customer should continue flying his airline. These reasons are only as good relative to those of your competition. The art of airline loyalty is to execute this Machiavellian tactic in a genuine environment of trust. Trust can only be gained by keeping promises, so your program should aspire to do what you say it can do. Redefine the relevance for a large group of low-frequency passengers through diversification of awards and honestly offer only what you can provide.

Subsequently I have a bit more advice for the small programs which is more along the lines of a survival guide to partnerships and alliances with larger programs. Small programs, especially those originating from markets outside of the United States, have much more room for growth compared to the programs of North American and European carriers, but they need to plan for maturation and try not to carbon copy existing FFP models.

6. Of today's U.S. mileage programs, which ones stand out in your mind? Why?

Response by Steve Grosvald

None in particular. “The best program” is one that works best for a member in his home city to destinations to which he travels, thereby permitting him to achieve Elite status most quickly. That should always be one of the primary considerations: “On which airline can I earn Elite fastest?” Then, “Are their service, policies and program benefits sufficient to earn my preferential support?”

Response by Rolfe Shellenberger

Of course, after spending 31 years with American Airlines, and being a key person in developing and designing AAdvantage, American is number one with me, even though I deplore some arrogance in their current methods for treating their good customers. I was a Platinum, but they drummed me out of the regiment when my travel declined in 2000. They did give me a Lifetime Gold but so far I haven’t been able to put it to use.

I like Southwest’s simplicity: eight roundtrips earn you a free one.

Continental has recently been tough on its members even though its program was very popular.  They handled upgrades more generously than anyone else, but now they appear to have a supply problem: not enough First Class seats. 

Response by Roger Williams

Alaska Mileage Plan has all the trappings of a big program but they make a solid effort in managing their award inventory and communicating with members. They also respect the value of their miles and carefully offer bonuses accordingly.

I like the direction that American is going with their new TrAAvel Perks program, even though I would like to see more offerings—there is still time for growth.

Cathay Pacific’s Asia Miles is an outstanding program model because the management understands loyalty very well. They have an excellent dialogue with the customer where they are able to gain intelligence that can be used to improve the reward experience. Their lifestyle rewards are not unique to the industry but are accurately suited to the customer through marketing intelligence.

Etihad Guest, the program of Etihad Airways from the United Arab Emirates, caught my eye with its approach to currency management. They have a firm grip on the monetary value of their miles. They have taken this a step further and provided customers with an online store where miles or money can be used to purchase things like iPods, etc. 

Finally, Iberia Plus stands out because they are a large program within the major Oneworld alliance and they shy away from selling their miles to partners like credit cards. The program uses a “point” system that I do not believe translates well into an alliance that uses “miles," their ratio between earning and redemption is a bit conservative, but you have to admire them for their discipline in focusing on loyalty.

7. Given a clean slate, how would you design a new travel loyalty program?

Response by Steve Grosvald

In today’s environment, as I have said recently in other public forums, I believe it’s time for the programs to be overhauled and both mileage accrual and award charts be revenue-based.

It makes no sense at all to award 2,500 miles to someone who pays $250 or $500 for a SFO-JFK flight and credit only 1,000 miles on a SFO-DEN flight for which the member pays $800 or more.

This is not a blinding flash of the obvious. In the past some airlines have tried revenue-based accrual but stayed with the industry award charts. That was one of the problems. For this to work, both need to be in concert. Most members would find this a much fairer way to recognize their business. After all, that’s the way mileage is earned for a good deal of the non-airline partner activity, particularly credit card transactions. 

Beyond that, in virtually all retail frequent-customer reward programs revenue is the determinant of points earned, so it’s not as if this is rocket science.

I’ve already developed many of the details using this approach and it works well for base and elite members and the airlines. Elite bonuses remain, as do the opportunities for the airlines to bonus routes, or flights for promotional purposes. It’s simply an idea whose time has come if the programs are to continue to be offered on a “win-win” basis.

Of course the biggest challenge is converting the industry to that approach. There’s no question in my mind that if the programs were being designed today—in the current economic and operating environments—that’s how miles would be awarded and redeemed.

Response by Rolfe Shellenberger

First, establish a hurdle for membership, e.g., two roundtrips booked on my airline within a month before application is solicited or accepted.

Second, set up a reward schedule that is not discriminatory relative to amount paid/revenue generated. Today, most private businesses and large corporations resist extravagantly high fares. To put it simply, airlines are rewarding their most extravagant—and maybe stupidest—customers even though those airlines are taking services away because they consider them an unnecessary extravagance. Not every traveler is a rock star or millionaire sports personality; only lawyers and consultants can get away with billing high-priced air travel and hotel rooms.

Choose partners carefully and be sure that you do not exclude popular brands like Best Western where typical room rates are more consistent with typical coach airline fares. Definitely include cruise partners.

Include dining partners but not fast food merchants.

Create an e-mail newsletter that is tied topically to member profiles in terms of age, destination preferences and family makeup. 

Response by Roger Williams

I would actually begin by designing the marketing department around the loyalty program. The same messaging that builds the brand equity of the airline, touting on-time performance among other things, is also the foundation for the program. Second, I believe the sale of program currency is a good thing within reason, therefore the initial goal of currency sales should be to pay for the program—beyond this profits need to be carefully planned as not to overextend your promise to the customer.

Consistently fulfilling rewards is the best way to win the hearts and minds of customers—just as on-time flight arrivals earn customer confidence. To make reward fulfillment actually work in an environment containing non-flight accruals, I would begin by clearly defining the value of flight and non-flight (lifestyle) rewards. There is no magic potion to make more free seats appear. However, starting off with decisive and measured non-flight promotions along with establishing the integrity of the program (deliver what you claim) reaps huge dividends down the road. 

8. Industrywide, what frequent-flyer marketing trends do you anticipate in the foreseeable future?

Response by Steve Grosvald

Other than revenue-based mileage accrual and award charts, it's hard to say. Absent that change, miles required for an award are likely to increase as will restrictions and service charges. I could be wrong but I’m not seeing a lot of innovation at the moment. A good part of that is that it’s hard to turn around the proverbial “supertanker.”

I do not support the idea of selling elite level as is currently being done by some carriers. It destroys the motivating reason(s) for elite relationships. At best it reduces mileage liability for the carrier but without creating a sense of need or urgency to fly that carrier as much as would otherwise be possible.

I would quickly add it’s fine to lure competitors’ elite members with short-term equivalent elite status (“Instant Elite” offers), but they should then be required to perform XX flights or $$ to maintain that level or achieve a higher one for the following year.

Response by Rolfe Shellenberger

Consolidation, whether merged or not. I also sense that partnership marketing will become a dominant factor in travel. Smart sector members can forge links with selected partners to sell entire trips rather than pieces of trips. My catalogue would include hotel-air combinations, golf holidays, intermodal trips like air with rail or bus to cover some destinations.

In my view, more effort needs to be expended to reduce seasonal peaking in travel. One very simple idea being tried in many areas worldwide is year-round schooling with parents picking three quarters for formal education and one quarter for recreation and informal education. Every destination suffers from peaking and many travelers are disappointed when airline seats are jammed, hotel rooms are overpriced, and tour services are designed to fulfill needs of hucksters who pay for their bus to stop at their shop.

Response by Roger Williams

Many programs in the United States may be similar, but this is not the case worldwide where foreign carriers have learned valuable lessons from FFP pioneers and operate in young loyalty currency markets. So there are many carriers abroad that focus more on loyalty and make less revenue incrementally. Among these carriers, some have made a conscious decision like Iberia to focus on customer loyalty, while others aspire to reap the benefits of currency sale that U.S. carriers have done for years.

If you follow the money earned from currency sales that is where you will find frustration among low-frequency members. We are going to see customer targeting among veteran programs in the United States focus more on higher-frequency profiles and in limited cases the introduction of thinly guised minimum qualifications. Bonuses, especially the generous allotments given by credit cards, will also subside. Finally, we will see a shift in the source of airline ancillary revenue. This is basically anything else the airline sells besides what you put your rear-end on. For European carriers this could range from onboard service charges to billboard-type advertising on the side of the aircraft. U.S. carriers on the other hand earn most of their ancillary revenue from the sale of miles to partners like credit card banks. A U.S. major can earn in excess of $1 billion per year in mileage sales or according to my colleagues at Ideaworks about $11.90 per passenger (not FFP member).

It is my opinion that loyalty-sourced ancillary revenues have already peaked among U.S. carriers, credit card banks have already recognized this and lowered their purchase price on miles. These banks have introduced their own cards that offer no blackouts, where money earned from transaction fees that would normally be unconditionally paid to the airline as promotion revenue are used to buy seats straight out. This is going to be difficult for airline credit cards to compete with.

9. What strategies should program members use to maximize the value of their frequent-flyer miles, both on the earning and redemption sides of the programs?

Response by Steve Grosvald

As noted above, select the best airline for your destinations and award objectives and program benefits. Then concentrate all your travel on that carrier to reach elite as quickly as you can to start earning substantial bonus miles. Select a secondary carrier/program as a backup or for routes not covered by your primary program.

Response by Rolfe Shellenberger

Avoid dependence on mileage hoarding if you have a trip in mind. Spend miles judiciously, i.e., get best value if you can by planning far ahead and nailing down your schedule so it coincides with benefits availability. If you see an opportunity to give your award(s) to a dear friend who otherwise might not be able to make a trip, consider claiming on your friend’s behalf.

Response by Roger Williams

On the earning side you need to keep up to date with bonus specials on selected routes and partners. The partner bonuses tend to be more generous. This approach can be more efficient than flying out of your way to log more miles—unless you have the time, of course.

On the redemption side you can sign up for specials with some carriers. It also does not hurt to write to your program to request such information if you do not get it by e-mail alert or find it on the Web site. Program managers will be glad to guide you toward an award seat if you are flexible.