Redefining Loyalty: The Next Frontier in Traveler Relationships

In our previous explorations of today’s traveler experience within the airline sector, we've delved deep into the digital transformation of the flight booking experience and explored the next era in in-flight entertainment. As we conclude our series on the future of the travel experience, we pivot our focus towards a foundational aspect of airline customer engagement: loyalty programs.

Traditionally, loyalty has been synonymous with reward points and tier statuses, but as we move further into the digital age, the very fabric of loyalty programs is undergoing a significant transformation.

The airline industry stands at an exciting intersection, with traditional loyalty models being challenged by changing traveler behaviors and expectations. Today's travelers are looking for more than just points they can spend on a kitchen pot from the loyalty magazine - they seek flexibility that aligns with their lifestyle and values. This shift necessitates reimagining loyalty programs to maintain relevance and re-establish deeper connections with customers.

Join us as we explore how airlines are experimenting with innovative technologies and approaches to transform loyalty from a transactional relationship into a more engaging, personalized, and meaningful journey.

The Historical Significance of Airline Loyalty Programs

Before delving into the accelerating transformations in airline loyalty strategies, it is essential to understand the historical context of these programs and their critical importance to airlines.

American Airlines pioneered customer loyalty in the airline industry with the launch of the AAdvantage program in 1981. This initiative marked the beginning of what would become a global industry standard, with many airlines, especially international legacy carriers, subsequently developing their own loyalty programs.

These programs have become mission-critical for airlines for several reasons: primarily to incentivize customers to choose a particular airline for their travel needs, even when other options might offer more direct routes or lower prices. Moreover, as we'll explain further below, loyalty programs have evolved into lucrative revenue streams for airlines, often generating substantial profits that rival or even surpass those derived from their operating networks. British Airways, for example, makes £1 million a day in profits for its owner, IAG, according to The Times.

In simple terms, the impact of loyalty programs today extends well beyond simple customer retention.

1. Credit Card Partnerships

In 1987, American Airlines once again revolutionized loyalty programs by partnering with Citibank to offer a branded credit card. This card allowed customers to earn points redeemable for flights, setting a new industry standard. Today, such partnerships are ubiquitous, linking credit card spending with airline loyalty points. This evolution has transformed traditional frequent-flyer programs into complex, multifaceted systems that go beyond simple travel benefits. Airlines have discovered that frequent-flyer miles are not just a tool for customer retention but a valuable currency that can be sold to third parties, such as banks issuing co-branded credit cards. This model functions as follows:

  • Airlines generate points out of “thin air,” as The Atlantic describes it, and sell them to banks at a profit.
  • Banks award these points to cardholders as rewards for spending, benefiting from transaction fees.
  • Cardholders can redeem points for flights or other goods and services, typically through airlines’ e-commerce portals.

This setup is highly advantageous for airlines. They receive immediate revenue from selling points, while the actual cost of redemption is deferred—and sometimes avoided altogether if points expire or are forgotten. Pre-pandemic, McKinsey estimated the number of unredeemed airline miles sitting in accounts at 30 trillion–enough to let almost every airline passenger in the world redeem miles for a free one-way flight back then—if miles could be redeemed for trips without restrictions.

2. Fragmentation of Fare Classes

In the following years, airlines began diversifying fare classes and introduced a more advanced ticket pricing structure as a result of the dynamic pricing movement, which we previously explored in more detail. This change allowed airlines to segment the market more finely and adjust pricing more dynamically according to demand and customer profile.

As a result, airlines soon took another spin on loyalty programs by shifting the focus of loyalty rewards from miles flown to money spent. This change aligned loyalty programs more closely with airline revenue, recognizing that the amount a customer spends is a better indicator of their value to the airline than the distance they travel.

The Value of Airline Loyalty Programs

The financial significance of this system is profound. Some Wall Street analysts value major airlines' mileage programs more highly than the airlines themselves. This valuation reflects the programs' ability to generate consistent revenue streams, particularly from selling miles to credit card companies and other partners.

The resilience of these programs was especially evident during the COVID-19 pandemic. For instance, US airlines could secure crucial financing by collateralizing the cash flows from their loyalty programs when other revenue streams were almost entirely disrupted. For example, CBS reported how:

  • United raised $6.8 billion USD backed by its program;
  • Delta was able to borrow $9 billion USD;
  • and American Airlines set a record for the largest financial transaction in airline history—$10 billion USD, backed by AAdvantage's intellectual property and cash flows.

Also, globally, the robust revenues from mile sales to non-air partners played a critical role in keeping airlines afloat.

British Airways-owner IAG, for example, had American Express pay the airline group 750 million pounds ($955 million USD) to renew their partnership, which saw American Express pre-purchasing Avios points for its British Airways co-branded cards and membership rewards program. This was a welcome boost to the airline's finances at a time when it was burning through cash and gave the carrier much more breathing space when many speculated it had to raise new equity to survive the pandemic disruption.

In summary, loyalty programs have evolved from simple airline retention tools to complex ecosystems that significantly enhance airline profitability and financial stability. They stand out as one of the most lucrative assets on airlines' balance sheets, notable for their steadiness in challenging operating environments.

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The Diminishing Appeal of Traditional Loyalty Programs

Despite the historically important role of loyalty programs for airlines, the landscape is shifting. There was a time when business travelers frequently made decisions based predominantly on loyalty benefits, going out of their way to fly with specific carriers to accumulate miles for the next tier status or to redeem for their bucket-list dream vacation. However, such behaviors are increasingly becoming relics of a pre-COVID world, less reflective of today's travel realities.

Recent loyalty surveys have shown a clear trend:

  • The likelihood that customers would recommend an airline's loyalty program to a friend or colleague has steeply declined.
  • This decline is notable because it contrasts with the relatively stable likelihood that customers would recommend the airlines themselves.
  • This discrepancy suggests that while the service quality of people’s favorite airlines might remain appreciated, the loyalty programs no longer hold the same value or appeal to passengers as they once did.

This trend is not isolated to the airline industry alone. Similar patterns of declining loyalty program appeal are observed across other travel categories, such as cruise lines and lodging. This broad-based decline across travel sectors suggests a fundamental shift in consumer attitudes towards loyalty.

This shift becomes even clearer when comparing the mismatch between loyalty offerings in the eyes of airlines and actual customer expectations from travelers. iSeatz undertook a dual survey among loyalty providers and loyalty customers to get a clear picture of how loyalty providers view their loyalty programs compared to consumers.

  • A significant 92% of loyalty providers believe their program is delivering on travelers’ needs.
  • In stark contrast, only about half of travelers feel the same.

Rethinking Loyalty: A Call for Innovation

These insights reveal a growing gap between how airlines view their loyalty programs and the evolving expectations of today's travelers. This divergence highlights an urgent need for airlines to reassess and potentially redesign their loyalty strategies to better align with contemporary traveler preferences.

This might involve integrating more flexible reward structures, increasing the personalization of offers, or even rethinking the very definition of loyalty in the airline context. To decide which path to embark on, it's important to understand the shortcomings of today’s airline loyalty programs from the traveler's perspective in more detail and how they came about.

We see two underlying reasons for the shift in loyalty dynamics.

1. Decreased Options Due to Consolidation and Fuller Flights

Due to the consolidation of major airline brands, airline travelers have fewer options than they did in the past. This consolidation makes it harder for frequent fliers to switch airlines without losing access to convenient flight routes or departure times. Moreover, customers who have banked a large number of miles or points with one airline or hotel program can feel locked in.

Secondly, flights are generally also fuller than they used to be, with the average load factor across all airlines increasing significantly over the past decades. The average load factor has increased from around 55% in 1970 to more than 82% today (ignoring the pandemic dip). This increased occupancy is attributed to various factors, including improved pricing and inventory control systems (see our revenue management primer), alongside many broader socioeconomic shifts, such as increased affordability of air travel, rising disposable incomes, and evolving consumer preferences, to name a few.

As a result, airlines have less flexibility to offer free flights to their loyalty members. Many carriers have made frequent-flyer redemptions harder to obtain by introducing additional fees, tightening stopover rules, and restricting redemptions through partner programs. Almost every airline has gradually increased the number of miles needed to redeem a seat. The result is that travelers experience fewer status upgrades and rewards, especially for long-time loyalty members. This becomes frustrating when they reflect on their statuses from the past.

2. Generational Differences in Loyalty Perceptions

McKinsey research indicates that loyalty program members today aren’t especially loyal in the first place, particularly among younger generations like Gen Z and Millennials. According to their 2023 survey on travel loyalty, younger generations consider and transact with significantly more competing travel brands than older generations. This behavior challenges the fundamental concept of classic loyalty schemes.

Additionally, experiential factors such as "offering an experience worth paying more for" and "feeling taken care of" have become more important over time and now account for three of the top five drivers of loyalty (among 40 drivers in total) to cruise lines, hotels, and airlines.

Lastly, different traveler groups prefer different types of rewards, emphasizing the need for hyper-segmentation in loyalty programs. 78% of consumers are more likely to make a repeat purchase when offered a personalized experience. The goal should be to achieve such nuanced hyper-segmentation of program members, resulting in a “segment of one.” This trend towards personalization is also mission-critical to address the preferences of younger generations. For instance, a study of over 1,000 Americans found that 81% of Gen Z appreciated personalized ads, compared to much lower percentages among Baby Boomers.

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Concrete Ways to Redefine Loyalty

These shortcomings highlight that merely tweaking reward programs is insufficient. Airline loyalty must evolve into fully immersive programs that engage customers more deeply with timely offers and enhanced travel experiences. While speculating about future directions can be insightful, a more practical approach is to examine the best practices currently shaping the industry.

So far, we have witnessed three fundamental approaches that are likely redefining the approach to loyalty in our industry.

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1. Subscription Models

Netflix-like subscription models are becoming increasingly popular in the airline industry, representing a modern interpretation of loyalty that encourages recurring use. For example, Malaysia-based AirAsia recently revamped its travel subscription plan, now offering unlimited flights within the 10 ASEAN countries. Similarly, Alaska Airlines launched an annual flight subscription program and recently introduced a club-style program with additional benefits for a monthly fee. Notably, Saudia, in partnership with travel-tech specialist Caravelo, announced a new subscription product for the Middle East. WizzAir and Caravelo have also introduced the “Flight Pass,” allowing subscribers two round trips per month for a monthly fee starting at $49, which has been especially popular among Millennials, Generation X, and Gen Z travelers. These programs aim to build lifetime customer value rather than viewing each purchase as a one-off transaction.

2. Gamification

Incorporating gamification into loyalty programs is proving to be a successful strategy for many airlines. These programs often include challenges, badging, and progress trackers that enhance digital marketing opt-ins. Mastercard, in collaboration with partner airlines, has applied gamification to loyalty marketing, resulting in a 10x increase in engagement, an 8x increase in incremental revenue compared to non-gamified campaigns, and a 22% increase in average basket size. Delta Airlines has been notably successful with gamification in its SkyMiles Program, offering mileage challenges, in-flight quizzes, and seat upgrade games that make the process of collecting points more entertaining.

Looking ahead, gamification could play a crucial role in promoting sustainability, incentivizing travelers to choose greener options, which remains a significant challenge in an industry where sustainability often causes confusion and disillusionment.

3. Personalization

Mastering personalization in airline loyalty programs can significantly enhance their exclusivity and appeal. By leveraging advanced customer analytics and New Distribution Capability (see our NDC primer), airlines have the opportunity to create highly tailored and exclusive offers that resonate with individual preferences and behaviors.

One potential approach to heighten exclusivity in the loyalty context is through dynamic tiering and bespoke rewards. Unlike traditional programs, where tier statuses are fixed, dynamic tiering can adjust the status level based on various factors, including spending behavior, flight frequency, and even the type of travel. For instance, an airline might offer temporary elite status enhancements for customers who increase their travel frequency within a short timeframe or during off-peak periods. Moreover, airlines can utilize data to deeply understand each customer’s preferences and offer personalized rewards that feel truly exclusive. For example, instead of generic access to an airport lounge, a loyalty program could offer an exclusive one-time entry to a luxury spa or a private dining experience at the airport, tailored to the member's layover timing and personal interests.

Similarly, for a family traveling on vacation, the airline could automatically offer seat upgrades, extra baggage allowances, or even partner with local attractions to provide custom activity packages at the destination.

Additionally, by leveraging AI and machine learning, airlines can predict and preempt customer needs, offering them services before they even ask. For instance, if a traveler regularly books flights to wine regions, the airline’s system could offer them exclusive tours or tasting sessions at boutique vineyards or even special cargo arrangements for transporting wine safely back home.

Through these personalized and exclusive offerings, airlines enhance the perceived value of their loyalty programs and deepen emotional connections with their customers, making each interaction feel truly unique and specially curated.