Ai Editorial: The FFP Model - The SAA Approach
Embracing a full-fledged revenue-based FFP - assessing how SAA did it
Suretha Cruse, South African Airways (SAA) Executive: Customer Loyalty talks to Ai’s Ritesh Gupta about how the airline moved from a mileage-based FFP to a full-fledged revenue-based FFP.
What would it take to come up with a relevant and engaging loyalty proposition? This is one question airlines across the globe are trying to answer as they continue to remodel their respective frequent flyer programmes (FFPs).
FFPs continue to face capacity, regulatory, accounting and liability pressures, notwithstanding the fact that we compete for “share of mind” in an over-crowded loyalty environment whilst weathering the storm of a highly competitive and technology-smart era, says Suretha Cruse, South African Airways Executive: Customer Loyalty.
Cruse there is a growing awareness of the limitations of the legacy FFP models [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 to fully leverage the interests of members, partners and shareholders. Monetizing the value of a mile /point with appropriate mobility for personalised customer convenience is a core challenge for any FFP from a customer loyalty perspective,” explains Cruse.
Embracing change
From a customer perspective, the SAA Voyager programme changed from a mileage-based FFP to a full-fledged revenue-based FFP effective February this year. Cruse says, “The move was singularly aimed at becoming more generous and by instilling transparency and fairness in the accumulation of Miles (1 Mile for every ZAR 1.60 spend) for the primary brand [SAA] with our most valuable customers; hence ensuring more efficiency in terms of customer retention.”
It furthermore enabled SAA Voyager to attach a transparent economic value to the mile for SAA exclusive support (accruals and redemptions) with its 5% return commitment; 5% of ZAR 1.60 = 8 ZAR cents. In other words, ZAR 10,000 spend on an SAA-operated flight will give a member ZAR 500 (6,250 miles) to spend on a future SAA-operated flight and the same amount of miles will count towards tier status within SAA Voyager.
SAA Voyager has furthermore implemented a dual approach for flight redemptions:
- Revenue-based Dynamic Awards (exclusively to SAA-operated flights) are dynamically priced based with the economic value of a mile and based on the going price of any available seat, inclusive of fuel levy and therefore there are no capacity constraints – thus offering complete availability to all seats in SAA’s inventory; and
- Classic flat-rate mileage-based Awards; known as Star Alliance Awards (remained status quo), Upgrade Awards (mileage thresholds were lowered) and JourneyBlitz Awards (newly introduced and exclusively to SAA-operated flights), have set mileage thresholds, but are capacity controlled and are exclusive of fuel levy.
Cruse also shared that from a commercial perspective; the SAA Voyager programme changes were aimed to unlock asset (customer and financial) value by changing to a full-fledged 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 programme as a division of the airline [SAA],” shared Cruse. “The commercialisation of SAA Voyager enabled us 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.”
Overcoming challenges
So what are the major challenges that airlines need to face while embracing revenue-based FFP?
Reflecting upon the experience, Cruse says there are a few hurdles, but with a diligent approach, solutions will come at the speed of light to mitigate reputational risk.
- Do communicate - “Foremost, do not underestimate the power of communication during the transition from a mileage-based to a revenue-based FFP model,” she says. Cruse stressed that although rewarding customers based on monetary value spend is well accepted and understood in all other industries, this concept is not synonymous to the airline industry and habits die hard even though FFPs have evolved since the launch of the first one in 1981.
“Moving from an “instant gratification” model (accruing of miles/ points based on distance travelled with %-based accrual calculation rules engine) to a “delayed gratification” model (accruing of miles/ points based on uplifted pro-rated sectors flown) is a significant mind-set change for mileage junkies,” she says.
- Don’t copy: Secondly, FFPs should not react by copying a revenue-based accrual/ earning structure of another FFP. Cruse says FFPs must fully comprehend their own business model in respect of their revenue and cost structures, as evolving to a full-fledged revenue-based model (accrual and redemption) requires monetizing the value of a mile/ point – a critical success factor to maintain commercial sustainability of the FFP, which by default will impact all rates negotiated with long-standing accrual and redemption programme partners as a result of a previous calculated cost of a mile/ point.
- Lastly, be prepared to be the whistle blower for peculiar revenue proration activities which stems from unfavourable interline pricing agreements in place, where some fares collected will be shared between the carriers participating on the ticket/ itinerary and the full fare collected does not necessarily belong to the long haul operating carrier. In addition, corporate and IT fares needs special consideration for the accrual of Miles / Points in a revenue-based FFP. From a customer perspective; they quite frankly don’t care about the “oneness” amongst airlines’ interline pricing and special agreements between airlines and service providers. The monetary part in a customer’s mind is predominantly spend on their most preferred long haul carrier of choice and this must make sense in terms of their perceived support towards the airline.
There are other areas, too, where one needs to focus.
For instance, the role of the revenue accounting system while switching over to revenue-based FFP shouldn’t be underestimated at any cost.
Cruse says it’s a critical success factor for this journey.
The role of revenue accounting’s processes and their feeding systems are measured as a critical stakeholder in this transition to achieve the desired outcome. “The migration of our revenue accounting system to a new system (a major migration for any airline) was scheduled for implementation five months prior to the FFP re-launch. However, due to unforeseen challenges on their side, their migration took place after we re-launched our FFP model. We in the end offered a “delayed gratification” of between 15 to sometime 60 days in lieu of a maximum of 4 days,” shared Cruse.
What to expect
The industry is referring to revenue-based FFP as a major development.
This trend will continue and eventually evolve to a full-fledged FFP model, asserts Cruse. “The most frequently asked question is if customers are benefiting from a revenue-based FFP model. The mere fact that the short answer is “yes and no”, should put into perspective the disparity of the legacy model [mileage-based] over time,” says Cruse. “High yield customers will praise you for rewarding them equitably, whereas low yield customers will feel deprived – sometimes through no fault of their own, but rather due to competitive pricing amongst airlines on selected long haul routes. “Taking away” from loyal customers, even if relatively minor, can ignite a firestorm of opinions on social media platforms.”
The premise of rewarding your best customers based on monetary value spend, has worked well for other industries’ loyalty programmes (financial, hospitality, retail, etc.) and members alike and therefore FFPs should be no different.Suretha
Suretha will be speaking on this topic at Mega Event in San Diego which is taking place on the 4/5th of November. More information at www.MegaEvent15.com
Follow Ai on Twitter: @Ai_Connects_Us and Checkout our events at: www.AiConnects.us
