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Customers Are Driving the Need to Evolve Airline Loyalty Programs

Apr 11, 2018 7 MIN. READ

Why the shift to currency-spent models is alienating frequent fliers and occasional travelers alike. 

It is an age-old business adage that it costs more to attract new customers than it does to cultivate existing customers. This concept is at the center of the thousands of loyalty programs that companies offer customers. Modern loyalty programs can trace their lineage to the launch of airline loyalty (originally, frequent flyer) programs in the early 1980s.

Airline loyalty programs began as simple plans to create product differentiation following airline industry deregulation in the late 1970s. Since their humble beginnings, these programs have morphed into massive businesses, adopted by nearly every corner of the travel industry. A recent report found that consumers have amassed more than $48 billion worth of rewards — the vast majority of which are not earned from flying. Airlines discovered that selling miles to other companies, credit card companies in particular, is a highly lucrative business. Although the airlines do not report separately the value of miles sold, it is estimated that the total sold by U.S. carriers is between $15-18 billion annually, at disproportionately high margins.

A recent report found that consumers have amassed more than $48 billion worth of rewards — the vast majority of which are not earned from flying.
In essence, airline loyalty programs have transformed massive mileage sales businesses. While this shift has provided significant economic value to airlines, recent changes in the accrual and redemption of rewards has put at risk the implied economic value and attractiveness of the programs to the majority of travelers, which may ultimately challenge the volume of mileage sales to which airlines have become accustomed.

Are the Loyalty Programs of Today Delivering on their Original Promise?

Despite rapid growth, there is a growing sense that these programs have grown fundamentally flawed and out of touch with modern customer behavior (some attribute this to the competitive miles-for-sale business or the growing segment of customers who travel fewer than three times per year). The data bears this out: on U.S. airlines, less than 50% of onboard customers on any given U.S. airline flight are members of that airline’s frequent flyer program.

This raises the question: do today’s airline loyalty programs achieve their original purpose of engendering brand loyalty, driving a higher share of ticket sales and increased ancillary revenues from their customers?

This question becomes even more important when accounting for the ever-increasing visibility travelers have into pricing information, on-time performance statistics, and customer reviews/experiences.

The stakes are high. If the perceived consumer value of airline miles declines, sales could follow suit. Furthermore, if airline loyalty programs do not focus on appealing to a wider spectrum of their customers, they risk handing over even more control to tech and information behemoths like Google, Amazon, and Facebook.

It is time for the airline industry to reassess its approach to loyalty, incorporating the current customer dynamic and technologies to engender loyalty from a greater share of their customers with a greater opportunity to increase knowledge about their total customer set and the marketing opportunities that holds.

To understand where loyalty programs must go in the future, let’s first take a look at how they became what they are today.

airline infographic

The History of Airline Loyalty

For the first 20-plus years of their existence, frequent flyer programs typically awarded one mile for each mile flown, with bonuses offered to the most frequent fliers and passengers traveling in premium cabins.

The standard economy class award ticket within the continental U.S. for most airlines cost 25,000 miles round-trip, while first class awards went for 50,000 miles.

This was a rich customer benefit because it was truly free, which helped travelers feel that the airline was rewarding them in a personal, valuable way. All of these features, however, would change as new revenue streams from the sale of miles became the driving business focus.

Today’s Challenge and the Evolutionary Attributes of Loyalty 2.0

While the currency-spent earning model makes economic sense for airlines, the shift threatens to alienate both low- to semi-frequent fliers and the growing number of infrequent or occasional travelers.

For airlines, the transition from mileage-based earnings models to currency-spent earnings models is a recent one, the product of different competitive and pricing environments. And while the currency-spent earning model makes economic sense for airlines, the shift threatens to alienate both low to mid-frequent fliers and the growing number of infrequent or occasional travelers, due to the significantly longer period required to earn the same rewards as before.

Had the programs originally followed a spend-based metric from the start — hotels and retailers, for instance, have always used this model — frequent fliers would not have perceived a significant loss in value. Infrequent or occasional travelers (who make up the majority of travelers in terms of volume, not revenue) now feel that a reward is most likely out of their reach, limiting the desire to join the program or stay loyal to one airline. Now, all but the most frequent travelers are questioning the value of the programs and, therefore, their loyalty to one brand. This negative perception will eventually erode the desire for the majority of travelers to collect airline miles and therefore the value to outside purchasers, like credit card companies. Key for airlines, along with other industries, will increasingly be the need to foster emotional loyalty and not simply transactional habit.

When an airline’s loyalty program fails to attract new customers and keep current customers engaged, the airline does not collect relevant and actionable customer data, misses opportunities for more effective and relevant merchandising, and foregoes opportunities to build new revenue streams.

The changes in earning and redeeming structures are not being accompanied by other customer-centric changes/additions, adding to the sense of alienation among the majority of travelers and the desire to search for other reward programs. When an airline’s loyalty program fails to attract new customers and keep current customers engaged, the airline does not collect relevant and actionable customer data, misses opportunities for more effective and relevant merchandising, and foregoes opportunities to build new revenue streams.

Online companies fight to build online “eyeballs”, a significant portion of those “eyeballs” being specious, upon which they build multi-billion dollar businesses. Airlines have the opportunity to do the same, with “real” people, if they embrace the need to attract and retain the vast majority of their customers, not just the highest frequency customers.

In Forrester’s latest Loyalty Wave™, it is clear that loyalty marketers aspire to evolve their programs to address current and future customer needs. Airline loyalty programs are no exception, and need to evaluate the next steps necessary to succeed and grow, based on the changes in both consumer expectations/behavior and earnings/rewards restructuring by the airlines. Unlike their predecessors, today’s loyalty programs are ubiquitous across almost all business verticals, regardless of size, service, or product type.

Additionally, the disrupters we mentioned earlier have raised the bar when it comes to customer service—from groceries to home goods, sites like Amazon have transformed instant gratification from a luxury into an expectation. For infrequent fliers, the long-term earnings structure of airline loyalty programs can feel like an eternity compared to many other daily commercial experiences.

To prevent the loss of customer loyalty and data to disrupters like Amazon and Google, airlines need to adapt and evolve their loyalty programs. A few examples:

  1. Offer lower-cost travel rewards — and we’re not talking about free magazines — to appeal to less-frequent travelers
  2. Reward less-frequent travelers for flying within a specified period of time (e.g. six months)
  3. Expand the attractiveness and uniqueness of the points/currency by creating a fiat currency for purchase towards anything an airline offers (checked bag fees, in-flight beverage purchases, in-flight connectivity, etc.)
  4. Proactively collect self-reported customer data by rewarding loyalty currency, allowing more accurate targeting and both customer and airline-relevant offers
  5. Partner with consumer-positive companies that want access to real “eyeballs” to create new revenue opportunities
  6. Embrace the confluence of CRM and loyalty platforms — the two should no longer be considered separate but rather part of the same customer cultivation and engagement continuum

Airline loyalty 2.0 should make programs more inclusive and relevant for all airline customers, generating increased revenues and profitability for the programs. ICF can help an airline achieve the highest profitability of its loyalty program through its deep experience in airlines, loyalty programs, and technology. ICF can help an airline achieve the highest profitability of its loyalty program through its deep experience in airlines, loyalty programs, and technology.

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