A Win and Fail in Airline Frequent Flyer Programs

Premium Economy on Delta’s A330neo (Photo: Delta)

[ Airlines ]October 20, 2019 12:00 am ET

By Hemal Gosai

Two interesting new developments have come about in the past two weeks with regard to airline frequent flyer programs in the United States. First United Airlines announced that that spending on flights would be the main driver of elite status qualification over the previous standard of miles flown, secondly, Delta announced a subscription service targeted towards the infrequent flyer to receive some incremental benefits. One of them hits consumer loyalty on the head and the other misses its mark.

On a high level, customer loyalty is about driving repeat dollars to a business. This is accomplished in many ways; first and foremost is by having a good product that consumers want to consume more than once. This is followed by having some sort of loyalty program that offers a reward for continued business.

Generally, these two work hand in hand or one works while one doesn’t. Delta has a great operation that brings them repeat business and allows them to charge a premium, their loyalty program, however, is less than good at rewarding loyal customers. American Airlines currently is trying to punch its way out of a paper bag but their frequent flyer program has a few redeeming factors, ironically the best way to earn American Airlines miles is through not flying.

Over the past few years, there has been a shift to reward spend with an airline. Minimum dollar spend requirements were pegged to elite status in addition to segments or miles flown. If that is all airlines cared about then why not just require a dollar amount to be spent and reward elite status solely on that.

United Solely Revenue Based Elite Status

Well, it looks like that is now the case with United Airlines which introduced a way to earn up to Premier 1K status through spend on the airline and a minimum of 4 segments on United in the given year. In theory, if someone spent $24,000 in qualifying dollars on a roundtrip itinerary irrespective of distance with a connection in each direction solely on United metal they are awarded Premier 1K, something that previously required $15,000 in spend and 100,000 miles or 120 segments.

This really isn’t rewarding loyalty. These high revenue passengers generally are corporate travelers with corporate travel governed by negotiated contracts drafted between the airline and high-level managers at corporations. It’s hardly the traveler that is actively choosing the airline. For many companies, the edict is passed from the people above as to what airline is the preferred one.

Incremental Dollars are Important Dollars

These corporate travelers are personally not driving revenue to the airline. This is where the belief that the high revenue corporate travelers are valuable falls apart. Their money is already guaranteed through corporate contracts. They pledge no real allegiance to an airline.

It is the incremental dollars that count. It is the money that an airline earns beyond what they can just expect. It’s the money they work for, dollars they otherwise wouldn’t have earned. That is where loyalty comes in and that is where airlines are continuing to fail.

The top tier corporate traveler has a decision when it comes to personal travel. Elite status plays a part at that point, yes, but by things like basic economy where hardly any elite benefits are recognized there really isn’t any value to continue to fly the airline one has elite status with. If they are premium cabin flyers they are already receiving the royal treatment elite status would’ve given them irrespective of airline.

There barely is any worthwhile mileage earning with leisure travel and award redemption pricing is skyrocketing so even on the redemption side there isn’t that much incentive.

United has prioritized high spenders without really thinking about the people that can drive incremental revenue. Sure the frequent flyers make an outsized proportion of revenues but that doesn’t mean the other part is irrelevant.

In a nutshell, there simply is no meaningful reason to stick with one airline, destroying frequent flyer programs has ruined any sort of value proposition and instead pushes many to simply consider schedule and price.

Delta Gets it Right

This is where Delta comes in with a brilliant strategy with their SkyMiles Select program. It’s a subscription service, not a new concept here though; United has one but targets a different demographic entirely. Delta’s subscription service is for the infrequent traveler. It’s $59 and gives the buyer a better boarding position, essentially guaranteeing overhead bin space, and eight drink vouchers to use onboard.

The brilliance behind this strategy is that it’s an attempt to bring in incremental dollars, money Delta otherwise would not have earned. If the airline can offer a casual traveler a subscription for a year it could make the casual traveler more likely to fly Delta than another airline because these people usually are airline agnostic.

If a person already has sunk money into Delta they are more likely to fly them to get their money’s worth even if Delta is a little bit more expensive than a competitor. This allows Delta to potentially get more people into planes and also have them willingly pay more than what their competitors are charging. However, what remains to be seen is just how high can Delta price and not deter these subscription customers. Once the magic switch is found it’s the gravy train from there on out.

Loyalty programs are frequently changing in the airline world but many are losing focus on what is important, earning a dollar they otherwise wouldn’t have. Big ticket corporate spenders do make the world go round but they aren’t the only folks that matter. It’s the leisure market that matters greatly as well and loyalty programs need to be used as a tool to bring in that money because those dollars are truly discretionary.

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Hemal Gosai

Hemal took his first flight at four years old and has been an avgeek since then. When he isn't working as an analyst he's frequently found outside watching planes fly overhead or flying in them. His favorite plane is the 747-8i which Lufthansa thankfully flies to EWR allowing for some great spotting. He firmly believes that the best way to fly between JFK and BOS is via DFW and is always willing to go for that extra elite qualifying mile. Hemal's opinions are his own and do not reflect those of his employer.

Author

Hemal Gosai

Hemal took his first flight at four years old and has been an avgeek since then. When he isn't working as an analyst he's frequently found outside watching planes fly overhead or flying in them. His favorite plane is the 747-8i which Lufthansa thankfully flies to EWR allowing for some great spotting. He firmly believes that the best way to fly between JFK and BOS is via DFW and is always willing to go for that extra elite qualifying mile.
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