Air India is undergoing a transformation at the moment,after being privatized. While an airline can’t be reinvented overnight, the number of initiatives the airline is undertaking is unlike anything I’ve seen before. This includes everything from ordering 470 new aircraft, to rebranding, to introducing new cabins, and much, much more.
Continue reading: Air India Flying Returns Program Overhauled
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Ultimately I'm not sure if there is even a motivation for Air India to introduce an industry leading loyalty program. I'm sure Air India will be able to fill seats either way, especially being in Star Alliance.
AI will be competing with many airlines on many routes to/from India, but the way to win those fights (for the Indian market) is to offer a better experience than the competitor, or be cheaper than the competitor. Not sure a more competitive loyalty program would help much with the airline's bottom line, so this is what I expected (but it would have been nice to have been surprised).
But ultimately this program will fulfill its goal, which is to make sure people aren't avoiding Air India because of its loyalty program.
How are they going to award points and elite points for Star Alliance flights not booked through AI? Do they get to see the fare paid on all tickets?
I doubt that. I think that would count as collusion between airlines and would be against the law.
This is why many revenue based frequent flyer programs still award miles for travel on partner airlines based on distance flown, rather than the cost of the ticket. The exception is airlines who have codeshare agreements, because they are allowed to share this information between each other and coordinate fares. This is why American can award miles based on how much you paid on British Airways flights.
Codeshare agreements alone do not permit coordination of fares. Antitrust immunity granted by the civil aviation authorities of both airlines in participation, is required for that. Using the example you gave, American and BA have that. Airlines who are only engaged in a simple codeshare together, do not.