Ai Editorial: Evaluating gaps in FFPs of American, Delta and United

First published on 12^th September, 2016

Where do 3 leading US carriers - American, Delta and United – stand today after transitioning from their mileage-based FFPs to a spend-based one, explores Ai’s Ritesh Gupta

Moving from a mileage-based FFP to a fully-fledged revenue-based FFP isn’t a new phenomenon. But for me it wouldn’t be wrong to say it isn’t settled either.

With American joining the fray, now all 3 major legacy U.S. carriers, including Delta Air Lines and United Airlines, have embraced revenue-based programs. Factors such as basis of accrual, implementation, the extent to which earnings of miles can be dynamic etc. have been under scrutiny.

“Every FFP is different – there is nothing wrong with basing your earning structure on spend – but I certainly wouldn’t be looking at American, Delta and United as a best case illustration – far from it,” says Catchit Loyalty’s Director – Travel and Loyalty Programs, David Feldman.

In fact, Feldman terms American, Delta and United as “bad examples” of revenue-based programs.

The first thing is to clarify what we mean by “revenue-based” when it comes to rewarding customers. The main premise – is that customers who spend more – should be rewarded more than customers who spend less.

Feldman explains there are many earning/ reward mechanisms available for a loyalty program to implement the same and they don’t necessarily have to be based on raw dollars-spent. In fact, often raw-dollar-spend can lead to misleading assumptions and sub-par performance from the program initiatives, he says.

The single biggest risk to FFP profitability is that (with recent changes and devaluations) if customers no longer perceive an airline’s currency as valuable and aspirational – then the entire business model of selling miles to third-parties is at risk.

For Delta, American and United – this was worth $7.65 billion in 2015.

Gaps in FFPs of American, Delta and United

Referring to these carrier’s new and old programs, especially from their structuring perspective, Feldman says, “With all the press surrounding the recent changes to US airline FFPs – many people mistakenly believe that the old American, Delta and United programs only rewarded folks for the distance they had flown and didn’t reward higher-spenders - which, according to gospel, has now been corrected. This is far from accurate.” He further adds, “The old systems awarded both more award miles (used for free flights) and more status-earning miles to those who flew in premium cabins compared to those on cheap tickets.

The problem with the old systems was that the “spread” or “differential” between cheap-fare earning and high-fare earning was minimal. In many cases as low as 1.5. That meant you really didn’t “much more” for spending more, explained Feldman. “Other airlines around the world including leading alliance partners of American such as British Airways, Cathay Pacific and Qantas have much greater “differentials”. For example – the differential on Qantas between Discount Economy and First Class is a factor of 6. So – to move to a more “revenue-based” earning system – the imperative was to increase the “spread” or “differential” to better reward high-fare customers relative to low-fare customers.”

So the problem – is that the exact system that Delta implemented and United and American blindly copied, as Feldman points out, has almost as many weaknesses and risks as the model which it is replacing, although these can be patched with some minor tweaks.

Here are some recommendations to make the most of spend-based program:

-       Managing the shift: You need to ensure that in increasing benefits for your best customers that you don’t make the program irrelevant to others. “This is especially true in major airline FFPs where significant revenue is driven from non-flying activities (which are often underpinned by the actions of medium and regular Best-Fare-of-Day passengers). Award miles are but one minor component of the decision-making process for high-value customers, who often care more about the “recognition aspects” of the program such as priority security/ boarding/ baggage, reduced or eliminated fees, lounge access and priority support when things go wrong. The additional marginal utility of a few extra award miles isn’t going to get a customer to switch airlines as much as poor (or superior) customer experiences will,” mentioned Feldman.

The other aspect that undermines the “we’re rewarding our best customers more” argument is actions such as devaluing the highly-valued systemwide-upgrades that American gave its top customers; and the airlines limiting mileage earning to 75,000 miles per trip. This means a First Class passenger spending $15,000 on a fare is rewarded the same as a Business Class customer spending only $7000 on a fare, added Feldman. This ill-thought strategy undermines the entire premise of the program changes”, he says.

-       Identifying the biggest challenges: Feldman referred to 3 of them.  

1.     Unnecessarily spending money on issuing more miles to some high-fare customer segments who will not actually contribute any additional revenue in return. For example – customers who are “hub-captive”, on managed corporate contracts, those who have no influence over travel decision-making or those who make decisions based on fare/schedule/route and airline hard product;

2.     Losing many mid-tier loyal customers by devaluing the program value-proposition (both on the earning and the redemption sides) to the point that many will no longer see the program as relevant and will just choose their airline on the trip-by-trip basis on cost. B.F. Skinner refers to this psychological concept as “extinction”.

3.     By “cutting too much” on lower fares and failing to maintain a minimum-mile-guarantee as a safety-net – many self-funded professionals (and casual passengers) who purchase low-fares will fail to be incentivized to sign-up to the program in the first place - which means they have no interest in listening to American’s 5-minute-long PA announcement for a credit card who’s currency doesn’t interest them, said Feldman.

-       Just don’t copy a revenue-based accrual / earning structure: Feldman says the important thing to remember is that real currency of a loyalty program lies in its ability to drive changes in consumer behavior. “If you’re an airline executive – you need to stop making decisions about your airline’s FFP.
What you need to do is to ensure that you have the very best loyalty folks running your FFP for you, and that they understand how to leverage consumer behavior. Give them your macro financial goals – and let them come back to you with models that will deliver your desired outcomes.”

Feldman complimented Delta for “going out on a limb and trying a new structure. Unfortunately – it’s pretty disappointing to see United and American simply copy Delta’s program word-for-word - faults and all. The new systems can be fixed to ensure that they are successful. The most prudent move would be to place a safety-net on low-end mileage earning so that all customers feel the program is worthy of enrollment and engagement.” Lastly – when devaluing the redemption charts – it’s important to remember that it’s the very aspirational nature of high-end rewards that attract customers to these programs. Take that away – and you take away the very behavior that generates profits for your FFP.

Valuing “low-spenders”

I also thought of how FFPs are trying to be a part of a flyer’s lifestyle. For instance, letting a member garner points for everyday purchases. Since those members who spend low tend to be perceived as low in value in revenue-based programs. So is there any innovative or meaningful way of engaging them? For instance, rewarding for everyday purchases or working with co-brand partners like fuel, retailers, finance etc. to tap behaviour and act more like retailers.  

Feldman says failing to adequately reward and engage lower spending passengers will result in them either failing to enrol, or failing to engage with the program. Customers will only engage in high-margin partner earning opportunities such as co-brand products if they perceive value in the underlying points currency. This is the very real financial risk facing American, United and Delta.

Some commentators erroneously assume that the only people losing in these changes are folks flying on $50 airfares – but analysis has shown that not only are fewer miles being award in total to all passengers – but many business customers, including first class customers are losing out in the new programs. The resulting erosion in loyalty may, or may not be compensated for by an increase in wallet-share amongst the biggest spenders; but will most certainly result in a decrease in partner mileage engagement by the rest of the customer-base (and hence revenue), concluded Feldman.

Hear from senior industry executives at the upcoming 7th Mega Event Worldwide 2016, The Event for Loyalty, Ancillary & Merchandising & Co-Brands, to be held in Toronto, Canada. (25 -26 October, 2016).

Twitter hashtag: #MegaEvent16

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