|Building Brand Loyalty: Frequent Flyer Programs|
Business travelers are seen as the most profitable customers an airline can accommodate. In fact, in the early 1980’s, American Airlines discovered that only 5% of its customers accounted for 40% of its business. This means that every business traveler, or frequent flyer, was more than 10 times more valuable than an occasional flyer. Obviously, questions were raised on how to keep luring these highly lucrative travelers to the product the airline has on offer and consequently build brand loyalty. One of the answers was Frequent Flyer Programs. The success of these programs is illustrated by the fact that American Airlines’ AAdvantage program had 28 million members, 15 years after its introduction.
Just like earning points at grocery stores in order to receive free products or discounts, a frequent flyer is rewarded with miles which are redeemable for free or discounted travel, car rentals, and other services. Recent research revealed that customers want to be rewarded for their loyalty expressed with repeat business.
It should be noted however, that participating in a frequent flyer program is only a small part of the decision making equation for a (business) traveler since factors like flight frequency, connection possibilities and departure times are the starting point for each journey. Airlines offer to fill these needs, while luring the most lucrative passengers to keeping choosing their business. Basically they encourage businessmen and women to purchase higher priced goods with the money their company put at their disposal with the purpose of collecting miles for personal use. When looked at it like this, wouldn’t the business traveler be defrauding his company if he could book the same flight at another airline for a lower price?
An interesting fact is that frequent flyer programs were initially a promotional device specifically designed to stimulate sales by building customer loyalty. By now, these programs have become an independent revenue service of their own. Already in 1995, United Airlines earned approximately $240 million while American Airlines earned more than $300 million. For example, these airlines offered companies to purchase miles and give to their customers or employees.
Today, travelers can earn miles by engaging in activities that can be as diverse as visiting a restaurant, purchasing clothes, or specific appliances from select vendors. American Airlines introduced for example its very own dining card, offering triple miles for meals eaten at selected restaurants.
By the late 1980’s it became clear that while stimulating air traffic on the short term, long-term costs and liability exposure of such programs is significantly. By offering customers additional mileage, business analysts estimated that the accumulated miles would wipe out an entire year’s revenue when redeemed at once. Added the increasing number of non-revenue passengers and the significant costs of administering the programs made airlines to respond in various ways.
First, by using inventory management the availability of seats for frequent flyer mileage redemption was significantly restricted. Second, the award rules have been changed unilaterally, generally increasing the amount of miles needed for a specific free trip. Third, some airlines have place expiration dates on accumulated but unredeemed miles. This way a traveler was forced to make at least one trip during a specific period in order to keep its mileage ‘alive’.
Now let’s return to the discussion of rewarding passengers for their loyalty. One might argue that airlines are actually rewarding the wrong thing, namely one point issued per mile flown. They actually should reward amount of dollars spent, not miles flown. A passenger for example paying the Y fare is paying several times more than the advance-purchase, Saturday night stay over. But both fly the same number of miles and in return receive the same amount of points deposited on their account. A reward system based on amount of money spent would be generating more customer spending and consequently influencing the airlines’ balance sheet positively.
Some collected data about frequent flyer programs: