First Published on 29th November, 2016
Ai Editorial: Be it for competing financial goals, looking beyond “costs”, being customer-centric or managing change, airlines need to sort out issues internally to refine their FFPs, writes Ai’s Ritesh Gupta
FFPs are evolving, and coping up with capacity, regulatory, accounting and liability pressures isn’t easy.
Also, these programs need to keep pace with the expectations of their members. A lot - data, analytics, program metrics, redemption etc. - is being scrutinized.
But airlines, as organizations, also need to assess their approach toward FFPs.
We assess some of the issues that loyalty specialists, including executives from airlines, believe need to be addressed today:
1. Overcoming competing financial goals: FFPs have themselves become more complex. On one hand, a key business goal of FFPs is to drive new incremental revenue by way of incentivizing passengers to increase their frequency, spend and affinity (advocacy) for the airline. Even if a passenger can’t spend more than they already are, the airline wants to “lock-in” high-value customers and increase their share-of-wallet. On the other hand, FFPs have become highly-profitable businesses in their own right by selling billions of dollars’ worth of miles to banks and other third-parties, whilst maintaining an incredibly low cost of redemption. This high-margin revenue stream is driven by the high affinity that consumers place on the airline’s mileage currency. FFPs are an easy-to-quantify cash-cow when it comes to third-party revenue, but it’s a lot more difficult to quantify the cash return to the airline in the form of incremental passenger spends on actual transportation. It’s this ambiguity that drives conflict between loyalty program managers and senior airline executives, as both groups of management are seeking (what appears to be) competing financial goals. It’s also worth noting that FFPs rarely sit under “Sales” in the company structure, but usually under “Marketing”. This is a mistake as FFPs are a profit-generator and should therefore report to a profit centre, not a cost-centre.
2. Look beyond “costs”, focus on value proposition: An executive based in Southeast Asia told me: “Most airlines look at these (FFPs) programs as cost and hence are reluctant to build engagement with program members. Airlines have rich data of their program members, as they capture members’ journey and even possibly credit card details and information from other program partners. Proper analytics will allow these airlines to better engage with members, with relevant communication of offers, at the right time, via the right channel and so on. This is unfortunately lacking, even with the legacy carriers.”
Simply from a financial standpoint, loyalty programs are profitable if the incremental revenue from the program is greater than the cost of redemptions, while also taking into account the operational cost and points liability. The important question to ask is how much money the airline would save or lose in the long-term if you stopped the program completely - and that could include all the frequent flyers, who might move to a competitor and therefore eradicate not only their incremental revenue, but also their lifetime value in general. If you can build a loyalty proposition that is simultaneously attractive to customers and continually profitable for your business, then you can regard it as a success. An attractive customer value proposition should ultimately drive revenue, and if the costs of that are managed and controlled properly, then the program should flourish.
3. Managing change/ assessing risk with P&L responsibilities: There is a danger in rushing to “spin-off” FFPs as the results can not only be varied, but can undermine the ability of the airline itself to leverage changes in consumer behavior. However, simple steps that an airline can take are to treat the FFP as if it was a separate, but a wholly-owned subsidiary. It’s not necessary to actually spin the FFP into a separate subsidiary like Qantas has, but the business unit reporting should treat it as such. This includes accurately accounting for transfer-pricing between the airline and the FFP (such as when passengers earn miles); and even more importantly – accurately and transparently accounting for the revenue generated by the FFP. The implications of new accounting requirements (such as IFRIC 13) will be better accommodated by this transparency. For FFPs to run as business unit with P&L responsibilities, an airline executive said key management team members should get involved in all aspects of planning. “Establish a clearly demarcated unit with defined goals, and employ experienced and dedicated resources. An arm’s length financial arrangement and documented agreements between airline commercial and the loyalty program on the financial exchange, airline and loyalty commitments (is must),” said the executive.
Talking of change, in case of South African Airways, the SAA Voyager program changes were aimed to unlock asset (customer and financial) value by changing to a fully fledge revenue-based FFP. This intervention was furthermore a step-change towards commercialisation of the division and formed part of the first stage of reform to improve the efficiency, alongside the implementation of required administrative changes to the operation and management of the program as a division of the airline. The commercialisation of SAA Voyager enabled the team to capture opportunities for greater efficiency and optimum service delivery, in addition to ensuring a clear business definition for future commercial sustainability, to the benefit of all stakeholders.
4. Dealing with “legacy of being rewarded”: The phrase FFP neatly encapsulates the biggest issue faced by many program owners today. The legacy of being rewarded for distance travelled has set an expectation amongst customers which is difficult to reset. The commercial benefit of changing to revenue-based rewards is just too great for program’s to ignore. And understandably customers do not like change as it locks value invested to the value you can glean from the program. This move removed the ability to easily “game” the systems. And it is not just legacy FFP’s, take a look at the recent revamp at Starbucks to align reward value to the drinks you buy. There is a growing awareness of the limitations of the legacy FFP models or mileage-based due to an increase in the line-up of partners for greater customer participation which continue to put more pressure on the limited award seat inventory of airlines that was initially intended and often priced to fill empty seats. It is therefore no surprise that the widening of the target audience to include low and medium frequency travellers, primarily to generate more third party revenues for the FFP, undoubtedly provoked the evolution of FFPs from mileage-based to revenue-based models.
Moving from miles to a revenue based accrual structure is a huge challenge with no easy answers. There will be a fall out. It is just a question of which group will be impacted the most and how to preserve the members that matter. The pill needs to be sugar coated as much as possible by packaging the negative with positives and clear communication on how members can benefit from the new structure. A hybrid approach can work well as demonstrated by Singapore Airlines PPS Club which is accessed via revenue targets whilst points redeemed for flights are still based on mileage. There are various weightings applied to earn rates as a proxy for value, for example, factoring earn rates downwards for promotional fares.
It is also needs to be noted that failing to adequately reward and engage lower spending passengers will result in them either failing to enrol or failing to engage with the program. The option to be rewarded from everyday purchases has opened up the realms of the FFP to the average or infrequent traveller.
5. Being customer-centric: Whilst the FFP has the ability to personalise and publish its customer value proposition both in terms of product and service against the backdrop of a perfect 10, the FFP as a customer touch point remains a mere support function of the entire customer experience for the airline to get it right, the first time, every time. Let’s face it; there are a large number of inter-dependencies across the airline and all the customer touch points are substantially cross-functional. If the customer satisfaction is not being met by the complete customer experience provided by the airline, the FFP members’ true loyalty towards the airline is questionable and their loyalty to the rewards of the FFP is an unintended consequence. 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.
As for making the most of data, the push must come from the top to consolidate and merge all data available within the organization, into a single data warehouse, for better engagement and eventually better customer experience. From experience, the biggest challenge would be to get the internal buy-in, from the various departments, on why a consolidated, single view of the customer would be better for the organization and in the long-term, reap the benefits of a highly engaged and loyal customer).
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