Member of an Airline Loyalty Programme?
Good for you – But better for the Owner!
If you are a regular airline traveller, you have special cause for celebration on the 1st May each year.
For on this date thirty seven years ago, American Airlines launched it’s Aadvantage® programme, the first ever integrated Frequent Flier Loyalty scheme.
In 1978, just prior to the launch of the then unique programme, the US Government had enacted the Airline Deregulation Act, and the US air carriers were in a state of turmoil.
Against a backdrop of recession and economic uncertainty, airlines were struggling to contain costs and make even meagre yields, so great thought was given to enhancing the profits from existing customers.
It is said that it is six times more expensive to generate a new customer than it is to hold on to an existing one, so the ability to retain customers was seen as being a high priority.
Executives at American Airlines created the Aadvantage Programme, a system that rewarded loyalty by offering free upgrades to either business or first class, or free tickets, based upon the number of air miles that the passenger travelled.
Prior to the launch of the programme, American’s marketing department trawled through their SABRE reservations system for bookings with recurring telephone numbers. The 130,000 most frequent flyers were selected as the initial members of the Aadvantage programme, closely followed by the 60,000 members of the Admirals Club (American’s Airport Lounge Club).
Naturally such a scheme was hugely popular with passengers, and United Airlines launched their own loyalty programme called Mileage Plus the following week. Subsequently most large airlines have launched similar programmes.
So, the passenger may enjoy a free Business Class ticket from New York to London for every 50,000 miles travelled. That’s certainly a good deal, but what’s in it for the Airline.
Firstly, the Airline can build up a profile of an individual’s travel behaviour, seat preferences, times of travel, and class of travel booked.
Such statistical data is gold dust for a marketing department, and the information may be used to make decisions related to routes, departure and arrival times, and size and type of aircraft to be used on various flights. These decisions could make or lose the airline millions.
Loyalty programmes are good – for the owner, but British Airways made an inspired development of the AA system when they launched the BA Credit Card,
Once the programme was launched, passengers were given a double incentive. Book the ticket on BA, and get airmiles for the flight, and pay for it on the airline’s credit card, and get bonus mileage!
The passenger obviously benefits from this, but not as much as the airline.
Consider this – The passenger buys his ticket on BA, using his BA credit card. He then rents a car through the BA booking system (getting some airmiles bonus of course), and then pays with his airline credit card – for more bonus mileage.
When he gets to the airport, he buys some duty free liquor, a Mont Blanc pen, and some Chanel perfume for his wife. He then orders some Lalique Crystal, and some Caviar from the Caviar House.
Having finished his shopping, he takes his trip, and whilst abroad uses his Airline credit card for further purchases, enthusiastically hoovering up bonus air miles, all to be redeemed with the airline for future flights, which of course, he will pay for with his airline credit card.
Now, the passenger thinks that the loyalty programme is basically for his benefit. Not so!
For the company is now building up a comprehensive profile of the passenger, logging his purchases, and his shops of preference. The marketing department is creating a whole new armoury of tools to use on the passenger.
You, the passenger, may not realise the stealthy gathering of data, and may be quite happy amassing your bonus airmiles.
It should be said, that there is nothing sinister in the gathering of such information. Many corporate E-commerce websites make no secret of the fact that personal details will be used for marketing purposes.
The airline gains far more than the passenger, mainly because air transport ticket prices have fallen in real terms over the years. They make profit on the ticket cost; they then make profit on the interest generated on the credit card. But most valuable of all is the comprehensive demographic information they glean.
Long-term analysis of the passenger’s buying behaviour enables the marketing department to design incentive packages targeted personally at the individual, and thus generate more business.
Further examination of the flights booked may help the airline’s network analysts to plan new routes, or revise timings of existing routes.
This type of programme promotes exceptional loyalty, and ties the passenger more effectively to the airline. A passenger who is mishandled for whatever reason is more likely to stay with the airline if he has amassed a significant number of airmiles.
Global economic problems and the huge costs involved in operating an airline has led many airlines to form commercial alliances. These alliances allow airlines to pool resources, share booking systems and flights. In most cases, they will also honour the redemption of airmiles gained on another alliance members loyalty programme.
Many airlines have invested in hotel chains and car rental companies, and these will also offer airmiles for the airline, generating further profits – and all for the cost of a free ticket for every ten return trips London to New York.
Compared with the total spend made by the customer, the net gain is heavily loaded in favour of the airline.
These programmes have proved so successful that many high street chains have embraced the idea with great enthusiasm. Tesco’s have their Clubcard; Sainsbury’s have the Nectar card.
Interestingly, ASDA, which is part of the US Wal-Mart group do not operate such a scheme. Their philosophy is that low prices at the time of checkout ties the customer more effectively to them rather than the promise of money back later. It must be a successful business models, as Wal-Mart is the world’s biggest employer.
It may be argued that Low Cost carriers such as Ryanair and Easyjet drive loyalty through low prices, but this seems to be a less powerful argument, as service standards are much lower than that provided by legacy full fare airlines.
The only other loyalty programme that doesn’t seem to translate very well into the world of air transport is that operated by the Co-Operative Retail Group.
The Co-Op as it’s popularly known has been running a loyalty scheme for many years, and is known throughout the UK as “dividend”, or just plain “divi”. Put quite simply, customers were encouraged to become members of the Cop-operative.
They purchased a share, which then enabled them to receive a percentage of the profits generated. This scheme has been running for decades, and has been very successful in keeping customers loyal to the brand despite enormous competition from much bigger rivals such as Tesco and Sainsbury’s.
So – Loyalty programmes are good for the customer, but not as good as they are for the provider!!!