American’s former CEO, Bob Crandall, and American’s current CEO, Doug Parker, attended an event at Southern Methodist University this Wednesday, where the topic of mileage running came up. Here’s what Dallas News quotes Parker as saying:
“All of our customers are valuable, but those who pay us the most are the most valuable,” he said. “That’s the behavior you want to reward. You had this really perverse thing going on where we had people wanting miles so badly that they would do these mileage runs — looking for the cheapest fare they could find to go to who-knows-where and back.
“And that didn’t seem right to us. The dollar-based plan makes much more sense. We’re in the right place now.”
Parker groused that American should have called them dollars instead of miles 36 years ago. It would make it clearer now that airlines rake in so much dough from credit card partnerships.
“We’d like to turn AAdvantage miles into Bitcoin so that everything that you buy is with AAdvantage miles,” he said.
I’m not going to sit here and suggest that mileage runners are valuable for airlines, or that it’s wrong to reward high revenue customers. However, quotes like this — and for that matter how management teams at the “big three” US airlines are running loyalty programs — so greatly misses the big picture of why these programs have become so successful. I don’t want to make this too long (I could probably write a dissertation sharing my thoughts on this), but there are a few points I’d like to make.
Airlines have taken the power of loyalty programs for granted
I’m sick and tired of hearing airline executives say that they wish loyalty programs had been run a different way a long time ago, and how the airlines have been looking at it all wrong.
To me this is just mind-blowing. Airline loyalty programs are one of the most successful marketing tools and business concepts to emerge in the past few decades. Airlines have made billions of dollars off these programs. We’re talking about programs where they’re issuing a currency that they own, that they have full control over, and that they can devalue at any time. Yet tens of millions of people have joined these programs and become engaged in almost irrational ways.
Even among non-frequent flyers, airline credit cards are incredibly popular, and even beyond that, cards that accrue points that transfer to airlines (and in turn that airlines get paid for) are becoming even more popular.
There are so many businesses that Americans interact with more every day, from supermarkets to Starbucks to gas stations. While some have credit cards, they aren’t nearly as successful or common as marketing vehicles.
Those who first designed airline loyalty programs were brilliant, and I can’t help but feel like airline executives constantly complaining about how loyalty programs used to be is like looking a gift horse in the mouth. We’re talking about a concept that has earned US airlines tens of billions of dollars.
Airlines can’t actually attribute improved performance to devalued loyalty programs
The past few years the “big three” airlines have made a lot of changes to their loyalty programs. They’ve reduced the number of miles you earn, increased the requirements to earn status, and awarded miles based on revenue rather than distance flown.
What’s interesting is that airline executives have hyped how these changes to their program will improve performance, but almost across the board that hasn’t been the case. Listen to just about any airline earnings call. Airline executives will say switching to revenue based programs was the right thing to do, etc., but for the most part anticipated revenue increases from these changes haven’t materialized as hoped. Instead they can just attribute reduced costs to these changes.
As View from the Wing wrote about in April, American AAdvantage credit card acquisitions and revenue didn’t increase as hoped, which is presumably due to AAdvantage being a less engaging and valuable program to many.
Are airlines really rewarding the right customers now?
Historically airlines have viewed loyalty programs as a marketing mechanism. While they’re also huge profit centers, the process of awarding miles for travel is generally considered a marketing expense. In other words, the goal should be for an airline’s loyalty program to influence consumer behavior, and get more butts in seats.
It’s true that mileage runners probably aren’t the most profitable customers and were being rewarded disproportionately. But should the highest revenue customers really necessarily be the ones earning the most miles? Let’s compare two scenarios:
- A company has a corporate contract with an airline because they’re the only airline flying nonstop in a market. The company gets a substantial discount on the full fare ticket cost, but is still paying a lot for tickets.
- A consultant has the choice of which airline to fly every week and has a certain budget they have to stay within.
In which case does an airline loyalty program have the potential to have a greater impact on the decision making process? Sure, it seems like the person with a full fare ticket on a corporate contract is the most profitable customer, but the point is that their behavior probably isn’t at all motivated by the miles being earned. The airline is basically flushing miles down the toilet by awarding them to this person, since they’d fly the airline regardless. The same is typically true for someone booking the last full fare business class seat on a flight day of departure.
Conversely, while the consultant might not be booking full fare tickets, the airline they choose to fly could very much be influenced by the quality of a loyalty program, and in this case the money spent on the loyalty program could generate significant incremental business for the airline.
I’m not suggesting those flying full fare nonstop tickets shouldn’t earn miles, or suggesting that mileage runners should be earning a ton of miles. Instead what I’m suggesting is that some airlines have oversimplified their loyalty programs and completely lost sight of the purpose they serve. A loyalty program should serve as a marketing vehicle that influences consumer behavior, because otherwise you’re just giving away something for free if a consumer would have made the same decision either way.
Furthermore, if you’re going to incur the expense of awarding miles, you might as well do something to differentiate your program. The “big three” US programs now basically mirror one another. When everyone is offering basically the same thing, why bother? Shouldn’t they just stop awarding miles altogether?
Dear 2017 airline executives: stop taking for granted what your predecessors did. Airline loyalty programs have become addictive for people, and we’re not just talking about mileage runners. Look at all the people who participate in these programs even though they don’t fly much. Don’t take that for granted, and stop pretending like the current system for rewarding passengers makes perfect sense.
If loyalty programs are to be marketing vehicles, they shouldn’t just reward high revenue customers for decisions they make anyway, but rather should be innovative and do something to shift consumer behavior. With airlines just copy-catting one another, I can’t help but think these programs are turning more into an expense rather than a profit center, at least when it comes to the miles awarded through flying.
Oh and Mr. Parker, if you’re going to try to model AAdvantage after Bitcoin, you’re missing one key element. While the value of Bitcoin fluctuates, the general trend is that the value is going up. The same can’t be said for AAdvantage miles.
(Tip of the hat to View from the Wing)