IATA - Special Report - Frequent Flyer Programs
`
`Programs
`
`Policy
`
`Publications
`
`Services
`
`Training
`
`Events
`
`Pressroom
`
`You & IATA
`
`About Us Careers Contact & Support
`
`
`
`ADVERTISEMENT
`
`Advertise in Airlines
`International
`Advertising Pack (pdf)
`
`Home » Publications » Airlines International » August 2012 » Special Report - Frequent Flyer Programs
`
`Publications
`Standards & Manuals
`Directories
`Newsletters
`Airlines International
`June 2013
`April 2013
`February 2013
`December 2012
`Supplement - Technology
`October 2012
`August 2012
`Director General & CEO
`Comment
`CEO Interview - Qantas
`Special Report - Frequent
`Flyer Programs
`Airport Slots
`CEO Interview - Air Malta
`Cargo's Carbon Emissions
`Finance - Backbone of the
`Industry
`Social Media - Brave New World
`Soapbox - Aircraft Finance
`
`June 2012
`Supplement - Airport Development
`April 2012
`Supplement - Aircraft Technology
`& Environment
`Library
`
`Economics
`Sales Agents
`Subscribe to IATA Information
`
`Special Report - The Price of Loyalty
`Frequent flyer programs can earn
`big money for airlines but has the
`focus on short-term revenue
`gains jeopardized long-term
`loyalty?
`In 1981, under the leadership of Bob Crandall, American
`Airlines launched A Advantage, recognized as the
`industry’s first true frequent flyer program (FFP).
`
`AAdvantage was very much a child of its time, benefiting
`from deregulation and computerization. Without the former,
`an FFP was unnecessary, while the latter made it possible. Within months of the launch of A
`Advantage, United Airlines, Delta Air Lines and Trans World Airlines (TWA) had implemented their
`own versions and FFPs became a mainstay of airline marketing, particularly for the high-yield
`business traveler. Even Southwest Airlines, which originally resisted the temptation to have its own
`scheme, joined the party.
`
`More than 30 years later, most estimates suggest that there are at least 130 airline loyalty
`programs and more than 150 million members.
`
`Airline FFPs have been transformed in the meantime. Most airlines have recognized that the
`programs could be operated as profit centers in their own right rather than appearing on the books
`as marketing costs. And that has raised the question of whether short-term cash or long-term
`loyalty will be the driving force going forward, especially as FFPs continue evolving into alliance
`and even non-affiliated schemes.
`From past to future
`Ravindra Bhagwanani, Managing Director of FFP consultancy Global Flight, agrees there will be
`two main FFP developments. “The larger carriers will continue to focus on the cash generation
`aspect of FFPs while smaller carriers will differentiate by using them much more as a true
`Customer Relationship Management (CRM) tool,” he says. “Personally, I see the second option as
`much more promising and hope that larger airlines will not overstretch the system by looking solely
`at short-term financial gains as this can quickly fall back on them.”
`
`However, in the current economic climate, it is hard for airlines to ignore a money-spinner and the
`evidence suggests that FFPs can make a big difference to the bottom line. “FFPs are a major
`direct cash generator for larger carriers through the sale of miles to credit card and other partners,”
`admits Bhagwanani. “Without that revenue source, there would be very few major airlines in North
`America in business today.”
`
`When United filed for bankruptcy in 2002, the only part of its operations that was making money
`was its FFP. Aeroplan, promoted heavily by Robert Milton when he was CEO of Air Canada, raised
`$250 million in 2007 for just 12.5% of the company.
`Marketing benefits
`Partners pay good money to airlines to be involved in an FFP because the schemes are such
`powerful marketing tools. Qantas reported more than $1.1 billion in partner payments in the 12
`months to 30 June 2011, a valuable cash asset. The largest US programs—American, Delta and
`United—each generate more than $1 billion annually.
`
`Also a consideration is the saving airlines make on mass marketing. The targeted advertising of an
`FFP is far more cost-effective and to an extent negates the need to rely on mass media.
`
`There are costs involved, of course. Aside from the opportunity cost of the seat, there is the direct
`cost of flying an extra passenger in terms of meals and fuel use. There are also costs in running
`the FFP, including staff salaries, IT implementation and maintenance, and communication costs
`such as enrollment brochures and loyalty card production. An FFP will also normally pay partners
`an agreed per mile rate if a customer decides to spend his miles on that partner’s product rather
`than the host airline.
`
`Then there is the question of liability. While it has been reported that the time elapsed between
`earning and burning miles is about 30 months and that some 17% of points are never redeemed,
`the issue of airline liability is an important one. CNBC reported in May 2011 that there are 15
`trillion unclaimed miles in the marketplace.
`
`Airlines typically use one of two methods to account for their liability:
`The Deferred Revenue Method recognizes redeemed frequent flyer miles at the amount for
`which the award credits could be sold separately.
`The Incremental Cost Method only applies the marginal cost of redeemed miles to the balance
`sheet, such as the fuel and food to fly a reward passenger on a seat that would have
`otherwise flown empty.
`
`http://www.iata.org/publications/airlines-international/august-2012/Pages/loyalty.aspx[6/13/2013 6:59:01 AM]
`
`

`

`IATA - Special Report - Frequent Flyer Programs
`
`Higher revenues
`Each methodology has pros and cons, but there is a significant difference in the final amount
`entered into the books.
`
`When Delta Air Lines chose to revalue its FFP under the Deferred Revenue Method following its
`Chapter 11 reorganization, for example, its FFP liability increased from $412 million to $2.4 billion.
`
`The reason for the change is that it allows the airline to report higher revenues on award
`redemption. This doesn’t affect cash flow but it does allow for a more robust financial statement
`and help bolster a company’s standing in the financial community.
`
`Overall, frequentflier.com estimates airlines effectively give cutomers a 10% to 20% rebate on
`ticket purchases.
`
`Not surprisingly, most airlines stand firmly behind their loyalty programs, believing them to offer the
`best
`of both worlds—a cash generator and a driver of loyalty. Alaska Airlines has some three million
`members in its FFP and Rick Rasmussen, Director of Alaska Airlines’ Customer Loyalty and
`Marketing Programs, says the program is an important part of the brand, the customer experience
`and the airline’s financial performance.
`
`Manoj Papa, Head of South African Airways’ Voyager scheme, which has some 2.4 million
`members, agrees that FFPs are now an intrinsic part of the airline business model. “Passengers
`are inclined to select an airline where they are a member of the FFP program over other airlines
`that fly the same route,” he says. “This selection often happens even where other airlines have
`lower fares or may be perceived to have better service or product.”
`
`Indeed, IATA’s Airs@t product (www.iata.org/airsat) shows that FFPs are the second factor behind
`schedule convenience in a customer’s choice of airline. For business travelers, an FFP is far and
`away the most important element in deciding which airline to use.
`
`But there is another side to the story. In today’s market of alliances, codeshares and consolidation,
`customers fly with loyalty to groups larger than a single airline. And that makes determining the
`future loyalty of a customer something of a minefield.
`The pros and cons of partnership
`Papa believes the many types of partnerships add value to the FFP strategy, strengthening the
`member proposition in terms of accrual and redemption opportunities.
`
`“They provide SAA and Voyager with exposure and awareness opportunities since our code is
`carried on the network of the partner and hence reaches millions of members,” he says. Papa
`notes that accessing partner databases also allows sales campaigns to be launched successfully
`beyond the borders of the airline’s own database.
`
`But David Mackrell, General Manager, Loyalty, Air New Zealand, warns that there are drawbacks.
`“These arrangements are often complex and require good, clear communication to customers for
`them to be able to make the most of such an FFP benefit,” he admits.
`
`Indeed, while there may be consumer benefits to be had from such alliances, some observers
`believe there is a lowest common denominator effect from loyalty program co-participation—there’s
`simply less incentive to be innovative or extra-generous.
`
`This could have serious consequences for an airline’s brand and its long-term customer base. As
`Tim Winship, Publisher and Editor of FrequentFlier.com, stresses, “An airline’s loyalty program has
`more power to undermine a carrier’s brand image than it has to enhance it.
`
`“When an airline’s loyalty program is felt to be stingy, for example, that negative perception tends
`to degrade the carrier’s overall image, while the perception of a generally customer-friendly
`program seems to have a more neutral effect on a carrier’s image,” he adds.
`
`Air Canada found itself locked in a bitter legal dispute when it put an expiration date on its Aeroplan
`miles. And while all airlines retain the right to change the terms and conditions and constant
`activity is a must, many now see the wisdom in an open-ended redemption period.
`
`Then there are programs such as Air Miles, which offers free flights despite having no airline
`affiliation. Such schemes clearly have implications for the long-term customer relationship. Partners
`can change and customer loyalty is to the scheme and not an airline.
`
`Alaska’s Rasmussen isn’t convinced though. Appropriately recognizing and rewarding customers
`for their business is the key. “A well-run frequent flier program has the ability to reinforce brand
`loyalty by helping to attract and retain good customers, and increase customer satisfaction,” he
`says.
`Industrial scale
`Other issues hit upon the future of frequent flyer programs. The Norwegian government banned
`reward miles for domestic flights to promote competition among its airlines. The premise is that
`larger airlines can overpower smaller carriers through their FFPs. Norway has since partially lifted
`the ban but the complaint remains.
`
`“It is indeed true that smaller airlines need to be a bit more innovative to overcome the size-related
`disadvantage,” says Global Flight’s Bhagwanani. “But if you look beyond the headline figure of
`membership numbers at more meaningful key performance indicators, you realize quickly that
`smaller FFPs are often actually much more successful than the large ones. But, on the other hand,
`there are too many “me too” programs out there, which don’t result in the benefits for the operating
`airline that they should, and represent only a cost factor.”
`
`A more positive development is technology advances that have the potential to merge revenue
`gain with one-to-one CRM and a more efficient travel process.
`
`Air New Zealand’s Mackrell believes data management and analysis is “an area of opportunity as it
`becomes richer and easier”. In the first instance, this means a better FFP. As Winship puts it, “I will
`know that an airline is making optimal use of my frequent flyer data when it routinely anticipates my
`
`http://www.iata.org/publications/airlines-international/august-2012/Pages/loyalty.aspx[6/13/2013 6:59:01 AM]
`
`

`

`IATA - Special Report - Frequent Flyer Programs
`
`next flight and proactively offers me an incentive to book with the airline.” The functionality
`associated with a database has improved enormously, as have the skills to expertly mine the
`information. Winship’s dream could soon become a reality.
`
`At Alaska Airlines, Rasmussen says the carrier can use data to tailor a customer’s experience
`when they visit the website. “For example, if a customer is a member of our Board Room lounge
`program, we could display a message when they visit the website that shares information about
`upcoming special events in the lounges,” he says.
`
`Travel agent sales could similarly benefit from improved customer data. IATA’s New Distribution
`Capability (NDC) project will address airline requirements for innovation in global distribution. A
`foundation standard will be presented at the World Passenger Symposium in October 2012 in Abu
`Dhabi.
`
`There is a potential innovative use in security too. “FFPs can serve as an important platform for
`pushing next generation travel services such as biometrics, known traveller programs, and
`standardized boarding tokens to the frequent traveler,” says Ken Dunlap, IATA Global Director of
`Security and Travel Facilitation. A loyalty card could become a permanent boarding pass, for
`example.
`
`Offering greater product differentiation will in turn generate valuable information. Rasmussen
`believes that “customer data allows the carrier to make better decisions about how, when and
`where to grow our airline based on the travel behavior of our customers”. Using the data beyond
`the FFP could be the key to a better business model.
`
`Ultimately, airline seats remain a powerful currency. The FFP is a channel to a brighter future if
`airlines learn to exploit the magnet that is a free flight. Partner companies are clearly happy to pay
`for that hook and customers clearly appreciate the concept.
`
`Frequent flyer programs and the environment
`
`Frequent flyer programs are often cited as an environmental concern because they promote travel—and
`especially trips that might not otherwise be taken if a traveler had to pay for the flight. “But it is about
`responsible travel,” says Paul Steele, IATA Aviation Environment Director, “carbon offsets are freely
`available.”
`
`Cathay Pacific offers customers the option to buy carbon offsets with frequent flyer miles. And regardless
`of whether or not a flight contains a passenger using reward miles, that flight is still scheduled and will
`take off and land as planned.
`
`Information for travelers
`www.iatatravelcentre.com
`
` Aviation and the environment
`www.enviro.aero
`
` The Benefits of Aviation
`www.benefitsofaviation.aero
`
` Follow us on
`
`
`
` Privacy
`
` Legal
`
`© International Air Transport Association (IATA) 2013. All rights reserved.
`
`http://www.iata.org/publications/airlines-international/august-2012/Pages/loyalty.aspx[6/13/2013 6:59:01 AM]
`
`