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Opinion: It’s Time for Airline Loyalty Programs to Add Value
Over the past several years, airlines in the U.S. have gorged on easy business, many making money hand over fist. This led to some brazen liberties taken by three of major U.S. airlines to devalue their loyalty programs. The logic was simple: they were making tons of money, so what need was there for a compelling loyalty program that actually drove loyalty? And of course, there was the addition of basic economy fares, which punished elite travelers who were forced to pay for trips on their own dime.
All of this was terribly short-sighted, and I have been saying for years that it’s going to be a problem when the next economic downturn came around. And in 2020, we sure got that economic downturn, to the point where many airlines experienced negative net-forward bookings due to COVID-19, meaning more travelers were canceling trips than were booking them.
Delta Air Lines, United Airlines and American Airlines all essentially offer a commodity product. To put it plainly, there isn’t that much differentiation in economy cabins across the carriers. And differences in punitive basic economy fares are too nuanced for the ordinary traveler to attempt to compare, so they’re more or less considered similar for the purpose of this article.
Destruction of Loyalty Programs
Because they’re selling something so similar, airlines needed to have another place where value could come from that would drive loyalty. In recent decades, one of those areas was the loyalty program, which airlines, in their magnificent foresight, have gutted the past few years.
The three major U.S. airlines are all deep in ditches when it comes to driving value from their programs. Delta is a little bit deeper than the rest since they’ve been the ones to gut their program the most, making a number of moves that have devalued their miles and changed their platform to make it more airline-friendly.
The airlines’ respective marketing departments can of course create promotions to help drive people back onto planes or push people to a particular airline, but the promotions need to be lucrative enough to make that happen. But at the same time, they also can’t be too lucrative that they end up actually driving down value for the airline itself. Print too many miles and release too few seats, and the airline can no longer make money off those seats.
Delta Air Lines recently spoke about its SkyMiles members hoarding miles through co-branded credit card spend for use in the future. Any reasonable miles or points enthusiast will tell you that’s a terrible idea. Airlines rake in billions of dollars by selling their passengers a value proposition that the airlines can then unilaterally change when executives realize they’ve badly managed their programs.
In good times, Delta charged obscene amounts of miles for redemptions. But now, we’re not in those “good times.” So what is likely to happen when all that pent-up demand returns and members go to use their miles? Delta is going to need to devalue its program even further. We’ll see redemption rates soar even higher as people try to burn through their glut of miles.
Right now, it’s simply not feasible to intelligently leverage airlines’ butchered loyalty programs. And this is why we see paltry offerings by the airlines: They’re victims of their own greed.
Delta tried to go the “revenue premium” route by blocking middle seats on aircraft, believing the move would drive passengers to the airline. But looking at some initial third-quarter data, the strategy appeared to backfire as the carrier ended up generating less revenue per mile than its competitors.
The approach here seems to be to try to get higher-paying passengers on its planes now with the hope it will continue to do so in the future. All they would need to do that is a valuable loyalty program to help drive that returning demand.
Then, of course, there is the punishment that is basic economy. While having basic economy makes perfect sense, the unreasonable punitive restrictions levied on elite passengers does not. For most airlines, the fare class essentially told every elite passenger that unless they are traveling on an expensive fare, they will be treated like other passengers.
The loyalty of a top tier flier flying over 100,000 miles annually means nothing to an airline if that flyer purchased basic economy tickets for their family vacation. They are simply their fare. And that is exactly what elite loyalty program members hope to avoid.
American Airlines this past September was onto something when it added back elite benefits to its basic economy fares. But at the same time, the airline said that basic economy no longer qualified towards elite status — so again, the airline was pushing the message, “If you don’t buy expensive fares, you mean nothing to us.”
The lack of a value proposition from these major airlines is going to let price-aggressive competitors take the upper hand. One airline in the U.S. actually is doing something intelligent with their loyalty program, and that airline is Spirit Airlines.
Spirit Airlines Tries Something Smart
The airline recently announced a spectacularly well thought out revamp of its loyalty program. It gives elite status hard benefits, and it makes collecting points meaningful. The beauty of the program is that it also is positioned to be profitable to the airline as well. There are higher points earning multiples on ancillary spend, which is the area of the business where Spirit makes a large fraction of its revenue and — crucially — sees the highest margins. None of the big three airlines offer any sort of increased value for purchasing ancillaries.
Spirit has put together the perfect strategy to draw leisure flyers away from the big airlines. With mileage earning pitiful and redemptions high, the leisure flyer doesn’t get much value from programs like AAdvantage, SkyMiles or MileagePlus.
Spirit not only offers cheap fares but now offers a decent way to earn miles and have relatively reasonable redemptions. If it can market these benefits effectively, it will do damage to the big three airlines as leisure travel returns. Spirit can’t compete for business travelers purely because of its onboard offerings, but nearly all forecasts say any business travel is not likely to recover until 18-24 months from today, and leisure travel is going to be driving bookings for the time being.
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