Increasing revenue on the billing as a loyalty program operator

28th July, 2020

Interview with Jason Adessky

The reality is – it is hard to foresee revenue generation escalating in the foreseeable future, but certainly there can be ways to mitigate the downside on billings. How to work out the same?

Ai’s Ritesh Gupta spoke to Jason Adessky. Excerpts:  

Ai: Looking at the airlines vs. financial service providers’ equation, is the power balance shifting?

Jason Adessky: The key stakeholders i. e. travel suppliers (airlines and their FFPs) and banks/ financial institutions are both hurting in terms of spend and more in case of airlines since their ability to influence or encourage travel is being hampered. Travel suppliers are handicapped by restrictions (be it for advisories, bans or self-imposed travel restrictions), so can’t materially influence what little traveler behavior there is.  The whole idea of a traveler flying and spending more with an airline has been shaken. For an operator, aside from groceries and certain e-commerce related shopping, consumer spending is down – may not be catastrophically down as this segment tends to be affluent and tend to have more wherewithal in terms of where to spend, how to do it etc. But on the whole spend hasn’t been great. 

From a financial services partner’s perspective (banks, credit cards, insurers etc.) again spend for these segments are down, not dramatically, but enough to hurt. Incentives usually in place that revolve around miles/ travel are less attractive. Many are evaluating their strategy to motivate and engage customers. But since airlines have more direct exposure, they are hurting more, their primary advantage of international redemption seats doesn’t exist for short to medium-term. On the other financial services companies have relatively more flexibility to drive and change behavior.   

Ai: What happens to redemption when fleets shrink?

Jason Adessky: As a general principle, when fleets shrink, there would be structural changes within an airline and these will flow down to eventually have an impact on FFPs, associated partners and their ability to influence customer behavior as well. Fewer redemption, less attractive seat options, etc will result in reduction in 3d party billing. And FFPs become relatively less attractive. Airline’s and other travel providers natural reaction, would be to start shifting toward discount pricing and use the same as more attractive, immediate levers to incentivize price-sensitive travelers. This will compound the damage to FFPs effectiveness.  

Not all doom and gloom, though.

FFPs are phenomenal, sophisticated data and marketing machines, with a highly attractive, high yield, low capital business model. Some of the gloss may come off, but opportunities to grow are available if they are able to aggressively pivot and address the silos, inefficiencies and unnecessary friction that have crept into their internal and external relationships with partners. This crisis provides a unique opportunity to re-examine how value is created and shared amongst various stakeholders. As an example, when card interchange regulation came into Europe and Australia a few years ago threatening core revenue streams, programs and card companies adapted and more collaborative and creative solutions were found by sharing and taking a whole portfolio view. Sure, the products are not as profitable as they once were, but they are innovating to create new opportunities. Today, it is a different set of challenges, but if anything the upside from innovation and streamlining is far greater. 

Ai: How should a loyalty program operator go about increasing the revenue on the billing at this juncture?

Jason Adessky: The reality is – it is hard to foresee revenue generation escalating in the foreseeable future, but certainly there can be ways to mitigate the downside on billings. From my experience of running airline loyalty programs, first I would look at breakage. It is a huge lever. The miles that are sold and not redeemed end up swelling the profit.  One can carefully examine whether it (breakage) is a good profit or a bad profit, but a sophisticated loyalty program operator would have focused on certain segmented strategies in the past. But I would re-visit that lever…the historic or previous models won’t apply anymore. So the plan should be to re-assess the appropriate breakage strategies and reconsider how to influence those by individual, by segment and by partner to optimize the outcomes.

Second, I would consider redemption- since international travel and front-end redemptions are going to be constrained, the plan would be diversify redemption options. Considering that local travel is going to be the best option, my suggestion would be to look at high margin experiences. Local operators are hurting badly, and there is an opportunity to work with them, possibly by sending customers their way.  There could be lot of upside for both the parties.

Third and most importantly, it is time to re-visit the business model and the current ways of working (financial, technical and organizational). This crisis offers an opportunity from program and partner strategy perspective. There has been an enormous amount of friction and silos created over the years. It has negative impact on the growth of the program. The model hasn’t changed much in the last 20-30 years. With careful reengineering of financial services and programme economics and processes, I believe that there is a very real opportunity for cards to be offering better propositions at a lower cost and for airlines and FFPs to be far more efficient in distribution of seats.

Overall, a loyalty program manager needs cut down on the friction in the multitude of processes and break down silos that inhibit future growth of the program, whatever the situation looks like. It is time to be flexible, open-minded and aggressively think of change. The time to come is still going to be fantastic for those  airline loyalty businesses that are structured and managed for success. Now is the perfect time for pivoting and enabling the acceleration of the growth once a situation stabilizes a bit. 

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