Airline loyalty programs have become huge businesses, especially with the increasing ability to monetize them. Over the years, these programs have gone from a cost center to a massive profit center, at least for many airlines.
We frequently we see airlines devalue their frequent flyer programs over time, and the trend is toward rewarding those business travelers who spend the most, while making these programs less lucrative for leisure travelers, who might be booking less expensive tickets.
For example, we’ve just seen British Airways announce major changes to its loyalty program, whereby earning status will be tied directly to spending. Most consider these changes to be horrible, as the program will become a lot less rewarding. However, I also see some people say “great, this makes perfect sense, since it’s the highest revenue flyers who should be benefiting from airline loyalty programs.”
Strictly from the perspective of maximizing profitably, I strongly disagree with that sentiment. Call it a hot take, if you’d like, but let me explain why…
Airlines are very low margin businesses
The first thing that can’t me emphasized enough is how low margin the airline industry is, even during the best of times. For example, Delta is the world’s most profitable airline, and in the first half of 2024, the airline (sort of) lost money actually flying passengers.
Delta’s passenger revenue per available seat mile was 17.81 cents, while Delta’s cost per available seat mile was 19.63 cents. So strictly from a passenger revenue standpoint, the carrier’s costs were around 10% higher than passenger revenue.
In the end, Delta’s total revenue per available seat mile was 21.69 cents, for a healthy margin of around 10%. So, where does that extra revenue come from? While cargo factors into it, the single biggest source of profitability there is the loyalty program.
What’s my point in saying this? Of course airlines need the customers who are booking their most expensive tickets. But you know what else they need? The people who are booking cheaper tickets as well:
- On some level, you have to view airline costs and revenue on an incremental basis; yes, the traveler who books the last minute business class ticket for $5,000 is important to the airline, but so are the 10 people who book a last minute $500 basic economy ticket, especially in seats that would otherwise be empty (like across the Atlantic on most routes in winter)
- Generally speaking, the lower fare a passenger is, the lower the opportunity cost is of carrying them; it’s possible the airline could’ve sold that last expensive business class seat to someone else, while it’s likely a last minute basic economy ticket that’s for sale might’ve otherwise gone out empty
- As airlines increasingly move to flying larger and more fuel efficient narrow body jets (like the A321neo and 737 MAX 9), they have more seats to fill, and the incremental trip costs for those extra seats are incredibly low
For airlines, the cents really make the dollars. The reason I say this is because even the most profitable airline can’t afford to just take passengers on cheaper fares for granted. Airlines need those passengers to turn a profit, and those passengers also have a lot of choices as to which airline they’ll fly.
Let me take it a step further — trying to poach low fare passengers from ultra low cost carriers has proven incredibly profitable for US airlines. For example, Spirit used to be one of the highest margin airlines in the US, and is now in bankruptcy protection.
But as the legacy carriers increasingly leaned into basic economy, it has helped not only improve their direct profitability from carrying passengers, but it’s also an opportunity to get more people engaged in the loyalty program, selling them credit cards.
Airlines should incentivize, not reward
Maybe it’s semantics, but just practically speaking, airline loyalty programs are designed to incentivize travelers to engage in profitable behavior, and not simply to reward passengers for something they’d do anyway. Most airlines are publicly traded, for-profit companies, so my point is simply to say that airlines aren’t charities (even if their balance sheets often suggest otherwise).
So I think the wrong way to frame an airline loyalty program is to essentially say that the highest fare passengers are the only ones who should be significantly rewarded, while everyone else should get table scraps.
If someone books a $10,000 business class ticket, to what extent is their purchase decision driven by the loyalty program, rather than by the schedule and route? In a vast majority of cases, I’d assume the motivation is primarily not the loyalty program.
Similarly, if someone is a business traveler and their company has a major corporate contract with an airline, with no personal control over which airline they fly, what’s really being gained by disproportionately rewarding those people?
Getting back to British Airways, let me pose this question. Which of the following two travelers do you think is more likely to change their behavior because of changes to a loyalty program?
- A London-based business traveler who spends $50,000 per year on the airline, where their company either has a major corporate contract with for the airline, or where British Airways is the only airline that operates in the markets they need
- An Amsterdam-based leisure traveler who spends $15,000 per year on the airline, and who chooses to fly the airline over competitors, even when it’s a little more expensive
Loyalty programs make us act irrationally
One of the things that’s so brilliant about airline loyalty programs is that they make us act irrationally. For example, if you look at elite status with the major US carriers, what do the perks actually cost airlines?
- You’re given the illusion that you have a shot at an upgrade, when in reality, odds are that you won’t actually clear, since airlines sell a vast majority of these seats
- You’re given access to a lounge, where the incremental cost of admitting another passenger is very low
- I’d almost view the main cost of elite status to an airline being the potential lost revenue that people may otherwise spend on extra legroom seats, should their elite status give them access to that seating
Going back to British Airways massively hiking the requirements to earn status:
- Those who are constantly paying for first and business class already get lounge access, so really aren’t getting much incrementally for earning status, and therefore might not be swayed as much as a leisure traveler who controls their own plans
- Travelers can continue to earn oneworld elite status with other programs, and continue to use British Airways’ lounges, so it’s not like this is going to suddenly make British Airways’ lounges quiet
Of course airlines need to find the right balance, but I really think British Airways took it too far here. I mean, £20,000 needs to spent to earn Gold status? There are plenty of people who previously earned that status for a tiny of fraction of that amount. And what are people really getting in return for such a big investment?
Bottom line
Airlines of course love passengers who spend the most on tickets, just outright booking first and business class with little regard for the price. However, those aren’t necessarily the passengers who will be most swayed by loyalty programs.
The goal of airline loyalty programs should be to incentivize business to the airline. Given how absurdly low margin the airline industry is, airlines can’t afford to even take your average leisure traveler for granted. They make up an important revenue stream for the airline, and for that matter, they’re also the travelers who can often be most easily swayed by these programs.
What kind of travelers do you think airline loyalty programs should be most focused on?
Those most loyal i.e. those that most ofte. pro-actively choose themselves to fly with you. This isn't always those that spend the most because often those are people flying for business on company dime and have no choice who they fly - the crucial bit is they are not choosing to fly with you. I think most airlines completely miss this.
Here’s counter argument, and I’d be interested to know what you think!
Economy short haul fares are sold with razor tight margins to compete with EU low cost carriers.
It wouldn’t surprise me if BA makes a small loss on every low-fare economy short haul flight taken by an elite traveller.
First, there is the cost of lounge access. Even though this is quite low, a traveller can rack up a $5-10 cost...
Here’s counter argument, and I’d be interested to know what you think!
Economy short haul fares are sold with razor tight margins to compete with EU low cost carriers.
It wouldn’t surprise me if BA makes a small loss on every low-fare economy short haul flight taken by an elite traveller.
First, there is the cost of lounge access. Even though this is quite low, a traveller can rack up a $5-10 cost for BA in alcoholic drinks and food, or more if they bring a guest.
Then there’s the fact that elites don’t pay many ancillary charges which help make those fares profitable — eg BA restored seat selection for hand baggage only fares for elites some years ago.
If BA is to give away these benefits on economy short haul flights, it needs to be confident that the traveller is bringing in enough revenue elsewhere to offset those losses.
Given some of the anomalies around status earning (you could get 80% of the way to Gold on one £1.5k journey), those gaming the system (no shade btw) might not be doing so.
You're 100% right, the paid business class passenger gets priority access, early boarding, extra luggage etc, he doesn't care about loyalty, only the economy traveler really cares, I'm ashamed to say how much a year I used to spend more just to fly UA because of the loyalty perks. Due to recent hikes I'm still debating wether effort is worth it.
Between me and my family I spend about $30-40k a year on UA
I personally think airlines are doing a great job incentivizing both types of travelers.
Get us to pay an annual fee for an airline credit card, give us some ‘benefits’ (lounges, priority boarding) to make us feel important, and this alone is sufficient to incentivize many lower fare travelers to fly with a certain airline. If you don’t travel often, a slightly more inconvenient routing is not a big deal, especially if you have lounge...
I personally think airlines are doing a great job incentivizing both types of travelers.
Get us to pay an annual fee for an airline credit card, give us some ‘benefits’ (lounges, priority boarding) to make us feel important, and this alone is sufficient to incentivize many lower fare travelers to fly with a certain airline. If you don’t travel often, a slightly more inconvenient routing is not a big deal, especially if you have lounge access (at least that is how I think most of us think).
For high fare business travelers, give us more miles per dollar spent, confirmable upgrade certificates (very different than complimentary upgrades which I don’t factor value in anywhere), short lines to check in, and most importantly for me better phone and IROPS support. This is in the form of actual high tier airline elite status. This ensures we are loyal to an airline for leisure travel in addition to the business travel, and feels warranted given the high spend with the airline.
With the current setup, both high fare and lower fare travelers are incentivized to be ‘loyal’. I think the problem is too often all we associate loyalty with is free upgrades, but take those out of the equation (they basically are anyways), and the setup makes a lot of sense to me.
I read the changes yesterday and pushed me to book 2 summer J tickets which would have been on BA to SK.. why? I usually travel enough J flights a year to get BA Gold, but I'm not going to spend $27000 for it. So now I'll take the $12000 plus wife's $6000 and free agent again. BA saves Emerald lounge access (which Heathrow sucks now) to business lounge if I ever fly them and they lose likely $15000-18000 in revenue bc gives me a reason to avoid Heathrow anyway.
I fly BA because I want to support the year round Pittsburgh flight which was a big get for the airport and I’d rather deal with connecting at Heathrow than the headache of connecting from international to domestic in the US. BA serving non hub markets I’m sure is a big factor for many. I would have and still might get some status off the business class ticket I got at a good price depending on what sort of conversion they do but it’s not the biggest factor.
I am a frequent business traveler who travel mostly on pre-economy (international) and economy seat (domestic). I like the revenue based program because it gives me more incentives since I can earn more from it than the distant-based program.
Plus, all the hotel reward program is revenue based, the travelers earn the points from the room price. It seems fine to everyone.
Airline accounting is highly suspect. The frequent flyer program would be literally worthless without the flying, so the profits should go to the flying.
Yet they somehow manually misallocate costs to artificially make the frequent flyer program profitable!
Either way, programs have found out that they can sell miles instead of using them as a reward for their flyers, and that's what they are incentivizing: making poor idiots fall for the fallacy that it's better...
Airline accounting is highly suspect. The frequent flyer program would be literally worthless without the flying, so the profits should go to the flying.
Yet they somehow manually misallocate costs to artificially make the frequent flyer program profitable!
Either way, programs have found out that they can sell miles instead of using them as a reward for their flyers, and that's what they are incentivizing: making poor idiots fall for the fallacy that it's better to earn an airline mile.than 2 cents of hard cash for every dollar spent.
@Lune: "Either way, in the grand scheme of things, those loyalty program profits are nowhere near as much of a contributor to the overall, long-term health of an airline, as the current internal accounting numbers suggest."
You've lit a rather potent fuse here, buddy........ #PremiumFanBooi
Reward the most profitable customers. Those that pay first or at least upgrade through cash offers, those with co-branded credit cards and fly often. Someone buying basic economy fares will never generate one penny in profit for the airline. Why would they expect to be rewarded?
Status is a consequence of something you have to do anyway. You fly because you need to to, then status appears.
This whole concern of who "deserves" status is simple. Those who fly enough to meet the given criteria of the airline deserves status.
You would think. But, as an example, there are British Airways members who do a certain Jersey tier point run by which they can earn & maintain Gold or Gold Guest List for a pittance. For some, it's first class lounges when flying economy to Hamburg. For others, it's access to the Concorde Room. That has an effect on us. All of a sudden, the priority check-in is swamped, the lounges are over-crowded, and (in...
You would think. But, as an example, there are British Airways members who do a certain Jersey tier point run by which they can earn & maintain Gold or Gold Guest List for a pittance. For some, it's first class lounges when flying economy to Hamburg. For others, it's access to the Concorde Room. That has an effect on us. All of a sudden, the priority check-in is swamped, the lounges are over-crowded, and (in some cases) award inventory if affected. The airlines need to decide.
Ben-
Thank you for this thoughtful piece. It brings together a lot of interesting things, but I do see some areas for further exploration.
1) To start, you mentioned in your excellent piece yesterday about your writing process that you appreciate when your readers point out grammar issues or other errors that naturally occur as you work to create content. With that in mind, I ask you to review this piece and proofread,...
Ben-
Thank you for this thoughtful piece. It brings together a lot of interesting things, but I do see some areas for further exploration.
1) To start, you mentioned in your excellent piece yesterday about your writing process that you appreciate when your readers point out grammar issues or other errors that naturally occur as you work to create content. With that in mind, I ask you to review this piece and proofread, as there are many repetitive phrasings, words, and grammar errors throughout. This review will strengthen you otherwise excellent piece.
2) Your analysis of the hypothetical Amsterdam passenger, though interesting, is flawed. Your central assumption is that the passenger will pay MORE to fly BA and go out of their way to do so. In actuality, they will most likely pay LESS. KLM is the dominant airline in amsterdam, and prices with accordingly - a premium for its nonstop services. Other airlines, whether they're BA or Swiss or whoever, generally price LESS to get the local passenger to fly them over the more convenient nonstop flight. This is a practice that has been seen in hub captive markets all over the world - something that USAirways was famous for in Dallas and Charlotte and Chicago, etc, before it merged with American. These passengers are paying less, not more to fly BA, and their reward should be the lower fare, not more benefits.
3) The Amsterdam-based traveler is probably the last thing BA is looking to fill their LHR-bound planes with. Of course they're welcome, but more likely, they're trying to fill it with LHR-based biz travelers and then passengers from throughout the BA longhaul network traveling TO Amsterdam. Those are more high yielding than the low-yield Amsterdam-based traveler looking to escape KLM's high prices.
4) You should also examine, for BA at least, the different incentives it has in the loyalty space. Clearly, AA/DL/UA benefit from an environment in the US where credit card issuers can charge high merchant fees. European and UK carriers cannot. This fundamental difference is completely what shapes the very different approaches that these carriers can take to making money from credit card issuers/ loyalty programs. BA cannot do what AA/DL/UA can do in their home markets, and that is fundamentally what is driving this change. BA simply cannot make the same amount of money from its credit cards and from selling points that AA/DL/UA can. So it has to try to get more $$ From selling tickets. As others have pointed out, your analysis of the pax/ loyalty revenue might not be totally accurate based wholly on publicly available accounting.
5). IN this specific case, at the end of the day, for better off or for worse, BA rules the roost at LHR, the richest and highest yielding market in the world. People from LHR will pay the prices BA wants for the convenience, and those going to LHR will do the same. Until those fundamental basics change, nothing else will, and BA simply doesnt have to reward behavior that doesnt align with its interests.
"This review will strengthen you otherwise excellent piece....."
;)
The London business passengers may generate sufficient demand for BA's New York flights, but they cannot possibly support their routes to places like Cincinnati, Nashville, San Antonio or whichever other third-tier US cities they fly.
The AMS business class passenger who has to connect to those places will obviously prefer an airline which will reward them with lounge access for their cheap intra-Europe flights than one which won't. Without the draw of a half-decent...
The London business passengers may generate sufficient demand for BA's New York flights, but they cannot possibly support their routes to places like Cincinnati, Nashville, San Antonio or whichever other third-tier US cities they fly.
The AMS business class passenger who has to connect to those places will obviously prefer an airline which will reward them with lounge access for their cheap intra-Europe flights than one which won't. Without the draw of a half-decent loyalty scheme, BA would have to price those lower than LH in order to remain competitive. Not doing so might undermine the viability of those routes.
Shrinking one's way to profitability might work in the luxury goods sector, but it's far from guaranteed to pay off in the airline business.
The Amsterdam-based business traveler is not considering BA at all to get from Amsterdam to Lyon (or other points in continental Europe) via London. That simply is something that wont happen. If they're doing that, then price is their main motivation, and that's not something that should be rewarded. The reward is the cheap price, whose savings they could use on something else.
Main point being, this fictitious "Amsterdam-based business traveler" is most likely...
The Amsterdam-based business traveler is not considering BA at all to get from Amsterdam to Lyon (or other points in continental Europe) via London. That simply is something that wont happen. If they're doing that, then price is their main motivation, and that's not something that should be rewarded. The reward is the cheap price, whose savings they could use on something else.
Main point being, this fictitious "Amsterdam-based business traveler" is most likely a work of pure fiction if he is willing to spend hours more on a journey for lounge access rather than just get there quickly on the company dime. More likely, it's somebody who spends very little, wants to save money, and isnt inconvenienced by the connection. That person's cheap connecting fare simply doesnt pay for the lounge access, sorry. BA will be happy to transport them, but doesnt need to provide them with incentives other than a cheap fare to do so.
AGain, Ben's premise is that these Amsterdam based pax are paying MORE to fly BA. They're paying less.
As far as the Cincinnati/Nashville/Austin/ "3rd tier" U.S. cities, those flights are made up of over half of people just going to/ from London, either originating in London or origninating in those cities and going to London. The remainder are the gravy - those going beyond London to points in Europe or other points of BA's network such as Amsterdam, India, etc. But the highest value people are those paying for the privilege of flying into what is still a close-in, constrained airport with a disproportionate amount of wealth and commerce that commands high fares.
Grr, this website is once again munching my comments.
TLDR; I don't think that BA's breakeven load factor for the third tier US cities is only just over 50%, but I am happy to stand corrected if you can dig out the data.
I never said anything about breakeven load factor. I only said that probably over 50% of the traffic on those sectors is just going to / from London, whether it originates in London or originates in those cities. The rest comes from the transit traffic originating either in those cities or on the other side of London. NOwhere online or anywhere else will BA reveal what their breakeven load factor is. That said, I've worked...
I never said anything about breakeven load factor. I only said that probably over 50% of the traffic on those sectors is just going to / from London, whether it originates in London or originates in those cities. The rest comes from the transit traffic originating either in those cities or on the other side of London. NOwhere online or anywhere else will BA reveal what their breakeven load factor is. That said, I've worked in network planning and profitability analysis for both domestic and international airlines, and generally, when the proportion of local traffic is high, and flow traffic is low, especially in high fare markets such as LHR, the easier it is to be profitable off the captive market since the fare is spread over fewer segments.
This falls under the acting irrationally bucket but one point to add is loyalty programs get business travellers to fly more than they need to. Yes, most have to fly the airline on their corporate program but they also generally get to decide when they need to take a business trip. I’ve certainly added on trips I didn’t need to do just to get my status and I’m sure many others have too.
I agree, also some corporate travellers decide to book last minute even they know way in advance that they need to be travel, to increase the fare and get more points.
On the other hand, even if a company has an agreement with an airline, you can usually use another airline under certain conditions (better route, departure times…). It is quite easy to play with Concur to travel with your preferred airline and not with your company preferred airline
I think there might be an accounting misunderstanding in your analysis Ben.
The "Flying" business may look loss-making, while the "Loyalty" business may look like it's printing money. But that does not tell the whole story.
The loyalty business "buys" seats for very cheap from the "Flying" business that they assign to loyalty customers. The profit is assigned to the loyalty business and the flying business just has to carry the dead weight...
I think there might be an accounting misunderstanding in your analysis Ben.
The "Flying" business may look loss-making, while the "Loyalty" business may look like it's printing money. But that does not tell the whole story.
The loyalty business "buys" seats for very cheap from the "Flying" business that they assign to loyalty customers. The profit is assigned to the loyalty business and the flying business just has to carry the dead weight for free. But it's not clear that the loyalty business is paying the proper cost of opportunity of the seats they use (i.e. get assigned the revenue those seats would have commanded if they were regularly booked at the time they were assigned to loyalty customers).
It's ok to do so as the companies are integrated and overall in the end it does not change anything on the bigger picture.
I wonder if loyalty program profitability is a "trick" to make the flying business appear less profitable and pay less tax or less profit sharing for example. Or in the case of IAG transfer more profits to Qatar or who knows where.
My point is the public numbers are probably not the whole truth and the profitability of the loyalty programs is probably a bit overblown for reasons we don't yet quite grasp.
Exactly this. I've made the same point before. Profitability numbers can be altered by simply assigning a higher price to the seats that the loyalty program "purchases". All of a sudden their "profit" gets transfered to the flying part of the corporation.
It's well known that internal accounting for award costs is very low. Even for partner awards across companies (ie what American pays Qatar when someone redeems AA miles for a QR ticket). The...
Exactly this. I've made the same point before. Profitability numbers can be altered by simply assigning a higher price to the seats that the loyalty program "purchases". All of a sudden their "profit" gets transfered to the flying part of the corporation.
It's well known that internal accounting for award costs is very low. Even for partner awards across companies (ie what American pays Qatar when someone redeems AA miles for a QR ticket). The question is why. I believe the answer is historical: miles programs were viewed as a marketing expense, but a very cheap one because they were giving away seats that were otherwise empty. Especially in the 80s and 90s before modern seat management, the average load factor was much lower, so someone redeeming an award didn't bump a revenue passenger, and his cost was basically nothing. Thus, the costs for awards was set (accurately, at the time) to be quite low.
Now, however, load factors are much higher, and it's much more likely that a seat given as an award will bump a revenue passenger, or at least affect the (now far more dynamic) pricing algorithms in such a way as to possibly reduce the total revenue for that flight.
We're seeing airlines respond to this by reducing seat availability. But why don't they simply raise the internal accounting of the seat cost when an award is redeemed? I would guess for 2 reasons: first, historical inertia. Second, because in a large corporation, accounting is simply war by other means. Whoever is more powerful gets to claim more revenue and push their costs to other divisions. Internal profit and loss tends to reflect who has relative power vis-a-vis other departments than some "rational" accounting of money flows.
Keeping that in mind, credit card relationships tend to be handled by the finance department, by externally recruited MBAs and high priced consultants who can work an excel spreadsheet but can't do anything else. Flight operations tend be run by engineers and line workers promoted from the bottom rungs. It's well known that within American corporations, financial management has become far more powerful than internal operations from the day-to-day work of the company. Just witness Boeing...
Putting it all together, the polished folks running an airline's credit card relationships are probably far more influential in the C-suite than the operations guys who aren't far removed from having dirt under their fingernails. And those financial managers make sure that their costs (ie the cost of redeeming a seat) remain low so they can juice the profits their departments can show; after all those profits are what determine their annual bonuses and promotions. And operations guys fight back as much as they can by limiting award seats, but otherwise probably don't put up much of a fight because the number of award seats is still low enough to not be worth fighting this cost accounting.
Bottom line is that every mile sold represents a liability, not a revenue (miles held in your FF account are even accounted for as liabilities under GAAP), and certainly not a profit, unless you are convinced most miles will never be redeemed (in which case customers will eventually wise up and stop earning them) or their redemption cost is less than than what they're sold for (which is helped by keeping redemption costs artificially low). Either way, in the grand scheme of things, those loyalty program profits are nowhere near as much of a contributor to the overall, long-term health of an airline, as the current internal accounting numbers suggest.
I hope DOT investigation into the loyalty schemes (which are a hidden private currency with unpublished conversion rates) will turn loyalty schemes into something more transparent but I doubt they'll amount to anything before Jan 20
Your central assumption is wrong, hence you can't draw the conclusion you're making.
People who book very expensive tickets and are flying a lot actually can be brought to bring incremental business to the airline through loyalty program incentives!
I could pull up statements from loyalty program executives at Qantas, Virgin Atlantic, and Lufthansa that are telling us this.
Yeah, these people are busy in their job so the story they only fly when they...
Your central assumption is wrong, hence you can't draw the conclusion you're making.
People who book very expensive tickets and are flying a lot actually can be brought to bring incremental business to the airline through loyalty program incentives!
I could pull up statements from loyalty program executives at Qantas, Virgin Atlantic, and Lufthansa that are telling us this.
Yeah, these people are busy in their job so the story they only fly when they must sounds plausible. But it's not true. These are middle and upper management which can decide for themselves whether to fly first or business class to join in a meeting. And the fact is they decide not merely based on the best interest of their company, but very much factor in loyalty incentives.
There are a bunch of programs such as Qantas which have done very well by focusing on top-tier elites and very high spenders.
I think in the US, credit cards are tremendously profitable which complicates the picture. Outside the US, it has been a good strategy for airline loyalty (including BAEC!) to concentrate on the higher elite tiers. The lower elite tiers exist to get young people on the hamster wheel. But the big bucks are made with those who rise up the ranks towards the top.
I believe you’ve mixed up earning spendable miles and earning tier points. Your theory is correct when it comes to miles, the top notch indeed make choice according to who will reward them best with miles. However, when it comes to tier points, they probably should be able to earn gold or above regardless the method, so their decisions will unlikely be affected by the change BA just made. On the other hand, it’s those...
I believe you’ve mixed up earning spendable miles and earning tier points. Your theory is correct when it comes to miles, the top notch indeed make choice according to who will reward them best with miles. However, when it comes to tier points, they probably should be able to earn gold or above regardless the method, so their decisions will unlikely be affected by the change BA just made. On the other hand, it’s those who fly more economy that are affected by this change more and will probably steer away from accruing miles with BA. That’s why I think and Lucky would probably agree changing tier points to spending based is wrong, while earning miles based on spending is much more reasonable.
I should be rewarded most.
If someone is already paying for business class, they don't need elite status. At all.
So I really don't understand why elite status is reserved for people who pay for business class. Like what purpose is that serving, to whom?
These people may not choose or afford business class in their family leisure travel. Then the elite status which can give them good seat options, lounge access, priority boarding and/or additional luggage matters.
Ben asks "What kind of travelers do you think airline loyalty programs should be most focused on?" and the answer obviously is "all of them". Carriers outside North America face materially different situations from USA's big 3 (and to some extent Air Canada) because most countries don't have credit cards with generous Welcome Bonuses and Spend bonuses. Outside North America, laws prevent credit card transactions from generating 3%, 4%, 5% commissions, common in Canada and...
Ben asks "What kind of travelers do you think airline loyalty programs should be most focused on?" and the answer obviously is "all of them". Carriers outside North America face materially different situations from USA's big 3 (and to some extent Air Canada) because most countries don't have credit cards with generous Welcome Bonuses and Spend bonuses. Outside North America, laws prevent credit card transactions from generating 3%, 4%, 5% commissions, common in Canada and USA. Delta, United, American, Air Canada make nontrivial revenue selling points to credit card issuers. But Airlines elsewhere lack this revenue. I don't know where BA sits on this scale but it has to be a major issue when deciding loyalty program strategy at any airline. If high-balance BA points collectors are earning from heavy flying, while high-balance collectors at AA or Delta are mostly earning from card spend, surely we should expect very differnt loyalty programs.
Great article Ben
You’re only as valuable as how much money you spend on tickets on an annual basis .
If you want to fly first class then buy a first class ticket. If you want an upgrade then purchase an upgrade. Anyone who thinks they’re entitled to a complementary upgrade is delusional.
Upgrades aren't the issue. The value of elite status, particularly for short haul travel, is in the ground benefits.
I'm not interested in a couple of slices of ham and a mediocre cup of filter coffee onboard, I just want to avoid the queues and have a half-decent espresso or glass of wine in the lounge while waiting for my connection. The alliances promise those benefits for status pax, so it's only reasonable to expect to receive them.
Agreed. However, those ground services have a certain capacity. They must adjust the qualifications to ensure the number of those eligible does not exceed that capacity. When that adjustment occurs, some will retain benefits and others will not. Rather than admit they didn't make muster, those who are cut lash out at the airline or alliance as being reprehensible and unfair.
Absolutely, the problem with BA in particular is that they made it way too easy, especially with the package holiday offers. However, what they're currently doing is to make it way too hard and in the process disengaging a significant amount of customers, some of whom would still be able to qualify.
The concept of flying every single week in business class and still not making gold at the end of the year is...
Absolutely, the problem with BA in particular is that they made it way too easy, especially with the package holiday offers. However, what they're currently doing is to make it way too hard and in the process disengaging a significant amount of customers, some of whom would still be able to qualify.
The concept of flying every single week in business class and still not making gold at the end of the year is amusing to me, and it means that a lot of high yield passengers will have virtually no incentive to book with BA as opposed to their competitors. If £600 gets you membership in both easyJet plus and a lounge scheme, there's no reason to worry about BA's spending requirements.
If you look at flyertalk, most complaints about fairness have to do with the lack of notice and the limited clarity on soft landings. The only people who are properly angry about this are those who'd been aiming at lifetime status and are now being told that they'll have to spend best part of two million quid to become GGL. Other than that, there are a couple of people who are happy about the changes as they will make the cut and think they can look forward to quieter lounges, but everyone else is just calmly setting out that they have no interest in continuing to book BA in preference to the competition.
The airline is a business. Its leadership establishes goals. Its leadership establishes strategies as to reaching those goals. What do any of us know about airline customer segmentation? It's their game. We choose which game to play.
Yes, they're super enlightened and have a great track record, as their recent brunchgate U-turn can testify.
It has nothing to do with being enlightened. And, if their track record is not great, is yours better? Just remember, Ted Williams *only* batted 0.400. Sure, there are things we'd all like. But, so many people are like the one reader who commented a couple of years ago, "Why do only the people in first class get champagne & we in economy don't? It isn't fair." Or, the guy who goes into a lounge with an empty gym bag only to exit with a full one.
Are you sure you've actually read what I wrote?
I'm not talking about fairness, and I am not affected by the changes- it's been like 12 years since I last flew BA and I only opened an account with them a few months ago so that I can transfer a few orphaned miles from AY to IB.
I'm talking about the rationale for the changes and its likely impact on the bottom line. This...
Are you sure you've actually read what I wrote?
I'm not talking about fairness, and I am not affected by the changes- it's been like 12 years since I last flew BA and I only opened an account with them a few months ago so that I can transfer a few orphaned miles from AY to IB.
I'm talking about the rationale for the changes and its likely impact on the bottom line. This only makes sense if they're trying to shrink their way to profitability, and I think that it's a huge gamble that's unlikely to work for them. I'll be watching the drama unfold (and possibly the carnage that ensues) from a sterile but efficient SEN lounge.
While understanding the economics, I would love to see airline loyalty programs to just run on the 'ass in seat' principle. All the CC perks are massively dilutive and lead to overcrowding of lounges and limited award seat availability.
The CC spenders will rarely fly. If you’re a road warrior not to worry.
Road warriors have long been losing out. If you fly 100 flights in discounted economy you would desperately need a status - but you will never get it …
Ben, thank you for such a great article - this take cuts right to the heart of the issue.
I am gobsmacked at the scale of the BA changes, mainly because it will eliminate every casual high-spend traveler (in your excellent example an Amsterdam-based passenger) who CHOOSES BA and spends a bit more to gain OW Emerald benefits.
One topic that you touch on, but needs more attention, it is the lack of value proposition...
Ben, thank you for such a great article - this take cuts right to the heart of the issue.
I am gobsmacked at the scale of the BA changes, mainly because it will eliminate every casual high-spend traveler (in your excellent example an Amsterdam-based passenger) who CHOOSES BA and spends a bit more to gain OW Emerald benefits.
One topic that you touch on, but needs more attention, it is the lack of value proposition for existing Golds to make the effort for the new spending requirements. I'm lucky enough that I book my own business travel and between that and my leisure travel, as a London-based flyer, I could choose to qualify under the new requirements. But - WHY? What additional benefits would I ever see? An airline that cuts catering to the bone?
The issue here isn't that BA has changed the programme. The issue is that they have taken it so far, without any corresponding investment in onboard or lounge product, or benefits, that I am mystified why anyone with a choice would aim for Gold status now, rather than start trying other options.
What Kerry said. And I'm a similar story: the airports nearest to me are Star Alliance (LHG) fortresses. I do a mix of flying, but my work flights are paid by from a variety of sources, none of which will allow me to book anything more than economy. On my calculations, I'd never earn status with them, or only with difficulty. So I fly AF/KL, take the layover, work in the lounge, and I cost...
What Kerry said. And I'm a similar story: the airports nearest to me are Star Alliance (LHG) fortresses. I do a mix of flying, but my work flights are paid by from a variety of sources, none of which will allow me to book anything more than economy. On my calculations, I'd never earn status with them, or only with difficulty. So I fly AF/KL, take the layover, work in the lounge, and I cost less to the people paying my ticket. It might cost more than locos, but if something goes wrong, I'm taken care of. With my leisure flights, I book a nicer cabin (higher margins for the airline) and get status with Flying Blue. I win, FB wins, AF/KL wins. The only loser is LHG.
Call it irrational, it works for me. If FB went revenue-based, I'd probably just fly more nonstops with LHG.
Interesting read to add some more data to the discussion: https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who-Pays-for-Your-Rewards-Redistribution-of-the-Credit-Card-Market-530801
This is a really fantastic article - one of my favorites that you've written. Thanks Ben!
I don't understand why the passenger in Amsterdam would put themselves through a time-wasting transfer at T5 when KLM could get them to their destination non-stop.
AMS is a main hub with lots of direct flights, so airlines selling connections obviously need to offer compelling fares and KLM can charge more for the direct.
However, if your local airport is LYS/MAN/BIO etc, you tend to have to connect anyway, so the frequent flyer benefits may well sway your decision- if you fly with any frequency from such an airport, you're unlikely to choose an airline that doesn't offer any perks....
AMS is a main hub with lots of direct flights, so airlines selling connections obviously need to offer compelling fares and KLM can charge more for the direct.
However, if your local airport is LYS/MAN/BIO etc, you tend to have to connect anyway, so the frequent flyer benefits may well sway your decision- if you fly with any frequency from such an airport, you're unlikely to choose an airline that doesn't offer any perks. Even easyJet and wizzair offer subscription services including things like fast track security and extra bags.
@Throwaway..
You meant to say "... KLM can charge more for the nonstop.
BA competes hard at AMS actually. They charge a fraction (often well under half) of the price for longhaul business class routes originating at Schipol, compared to their own non-stop prices from London, and compared to KLM's nonstop prices (and KLM offers an even less-inspiring J product somehow).
They obviously do compete hard there, they have to offer attractive pricing. What I was saying is that they can use price to counter the handicap of the LHR connection vs the direct flights on KLM, but that loyalty benefits are more important to passengers who have to connect in any event...And their changes are going to turn an awful lot of those pax off.
Ben's assumption is that the Amsterdam based traveler will spend more to be loyal to BA, so therefore should be rewarded for it.
As others have stated here, no, they will not. They will spend less, because BA has to charge less to the Amsterdam-based customer to be able to lure them away from significantly more convenient nonstop (but pricier) connections on BA.
They're paying less. That's what should keep them "loyal" to...
Ben's assumption is that the Amsterdam based traveler will spend more to be loyal to BA, so therefore should be rewarded for it.
As others have stated here, no, they will not. They will spend less, because BA has to charge less to the Amsterdam-based customer to be able to lure them away from significantly more convenient nonstop (but pricier) connections on BA.
They're paying less. That's what should keep them "loyal" to BA, and they shouldnt be rewarded more for that.
Besides, I dont really think the Amsterdam-based traveler is who BA is going after on their Amsterdam flights. They're either going after people from destinations through BA's global network (primarily North America, but some Africa, Asia, and maybe Brazil/Argentina too) and local London point of sale biz travlers. That's it. It's people traveling TO Amsterdam they're targeting, they're NOT going after a big portion of the local Amsterdam market. The analysis is flawed.
But will they be prepared at least as much to connect at LHR as the LH prices via FRA/MUC/ZRH, or will BA need to compensate for the lack of a decent FFP by discounting prices even further?
Let BA do what they want, they'll get their judgement by the customer. And I strongly hope that many of them feel offended by the communication around that change. Like we are stupid and do not comprehend that those changes mean a major devaluation of what I have today. Someone just called me an idiot basically.
Airline loyalty programs are a form of Gachapon. It's gambling. As well no different than gaming loot boxes. The system needs to be made illegal, regulated, or highly reformed.
made illegal? On what grounds?
@James K
Google "loot boxes" in relation to gaming platforms. You can read how the lure of prizes constitutes a form of gambling when they are inconsistent or unknown as to what you will get from one day to the next. I worked in marketing for some of these systems on behalf of gaming platforms. FF programs are embracing the same psychological programming. You dangle a carrot as the choice prize which is "rare" while...
@James K
Google "loot boxes" in relation to gaming platforms. You can read how the lure of prizes constitutes a form of gambling when they are inconsistent or unknown as to what you will get from one day to the next. I worked in marketing for some of these systems on behalf of gaming platforms. FF programs are embracing the same psychological programming. You dangle a carrot as the choice prize which is "rare" while you are actually offered far less in the end. The rare is elusive and unknown as to when or how you will get it. But it's dangled there to keep you coming back and paying, playing, buying, more because you believe it is attainable.
Says someone who has no status on any airline.
@Ord is whatever it is...
In fact I am UA 1K, Plat Pro with AA, Delta Gold, Hyatt Lifetime Globalist, Bonvoy Lifetime Platinum, Four Seasons Elite, Mandarin Oriental Elite. I Prefer Titanium, should I go on? I have nearly 3M miles with AA. I have just under 2MM with Delta. I have 1M with UA. Not including other fringe programs I have dabbled in over the years like Alaska, BA, and AF. Any more questions?...
@Ord is whatever it is...
In fact I am UA 1K, Plat Pro with AA, Delta Gold, Hyatt Lifetime Globalist, Bonvoy Lifetime Platinum, Four Seasons Elite, Mandarin Oriental Elite. I Prefer Titanium, should I go on? I have nearly 3M miles with AA. I have just under 2MM with Delta. I have 1M with UA. Not including other fringe programs I have dabbled in over the years like Alaska, BA, and AF. Any more questions? And if you would like screenshots of each let me know...I will gladly email you if you provide here or post screenshots here if you prefer. I am here to provide you with the best service possible in response to your callous judgement.
Excellent group of posts!
And thank you for putting names to the concepts (gachapon and loot boxes) of what I've come to understand defines frequent flyer programs and, to a lesser extent, redeemable points programs; once I came to understand those concepts, I switched my focus to cash back and redeemable points that can be converted (reasonably) to cash.
It's amazing that no one, least of all the points-and-miles bloggers who waste lots of bandwidth...
Excellent group of posts!
And thank you for putting names to the concepts (gachapon and loot boxes) of what I've come to understand defines frequent flyer programs and, to a lesser extent, redeemable points programs; once I came to understand those concepts, I switched my focus to cash back and redeemable points that can be converted (reasonably) to cash.
It's amazing that no one, least of all the points-and-miles bloggers who waste lots of bandwidth and use tortured logic to legitimize those schemes, has ever written a comprehensive article outlining those concepts. Seems like there's gold (clicks, attention, and interaction) for the guy who can do that.
Where's Natasha Dow Schull (Addiction by Design, ISBN 0691160880) when you need her?
I'm looking fwd to way emptier BA lounges
Here’s the thing though. If you reverse your question Ben: Which passengers cost the airline the least to give status to? The people that already have lounge access included with their tickets, the ones who can’t be upgraded because they’re already on the highest fare, etc.
You’re basically not giving them anything but the status itself, essentially rendering it a free gift (or not a gift at all).
But that's exactly the point.
When I am flying in Y/premium economy, I will always prefer to go for flights with the airline(s)/alliance(s) with which I have status, and I will happily take a less convenient connection and/or pay a bit extra in order to enjoy my elite benefits.
On the other hand, when I am flying in business/first, I will just choose whoever's offering the best price/schedule/product. My elite status would be completely...
But that's exactly the point.
When I am flying in Y/premium economy, I will always prefer to go for flights with the airline(s)/alliance(s) with which I have status, and I will happily take a less convenient connection and/or pay a bit extra in order to enjoy my elite benefits.
On the other hand, when I am flying in business/first, I will just choose whoever's offering the best price/schedule/product. My elite status would be completely irrelevant to my purchasing decision, unless I am desperate to secure some miles towards renewing it. My business class ticket will typically include all the main ground benefits I need, and I'm not going to worry about whether I can check in at the F desk with a J ticket as a *G, or send a third suitcase to the hold as a SkyTeam Elite.
So the same status that's pretty valuable when I'm in Y is effectively irrelevant when I'm in J, and that's why I don't see much point in a status that can only be achieved by always flying upfront.
Yeah I agree 100%. That was exactly my point too. The reason why it’s useful is because you actually get something (with status, flying economy). But that means it actually costs the airline something. So they much prefer giving empty perks that nobody upfront uses, because it won’t cost them anything. Their interests are polar opposite from the average flyer as they want to give away the least and ff want to get the most....
Yeah I agree 100%. That was exactly my point too. The reason why it’s useful is because you actually get something (with status, flying economy). But that means it actually costs the airline something. So they much prefer giving empty perks that nobody upfront uses, because it won’t cost them anything. Their interests are polar opposite from the average flyer as they want to give away the least and ff want to get the most. And airlines / publicly traded companies will always do what’s best for them.
Sadly this is extremely short sighted on their part and I 100% agree with you and Ben that it’s the frequent flyers riding in the back that will care the most about the status and perks which they run a risk of losing.
The only argument I see here is just that the elite pool is too large. If I don’t book far enough in advance, most of the MCE seats on AA are gone. My favorite plat benefit is getting those seats together as a family of 3. Also, lounges are absolutely slammed with people to the extent they’re more chaotic than the terminal. I transited through LHR the other day, couldn’t find a seat in the...
The only argument I see here is just that the elite pool is too large. If I don’t book far enough in advance, most of the MCE seats on AA are gone. My favorite plat benefit is getting those seats together as a family of 3. Also, lounges are absolutely slammed with people to the extent they’re more chaotic than the terminal. I transited through LHR the other day, couldn’t find a seat in the BA lounge (one world emerald traveling with a group in club Europe). However, I’m not sure why airlines want to decline this revenue in search of some theoretical customer who will spend more for a slightly more exclusive experience.
I completely agree with your take. And I think BA (to take the most recent example) have gone too far to the extreme. Airlines are a low margin business. And they have capacity which will otherwise be empty which can be used to incentivize loyalty and maximize profit.
If you have an empty premium seat on a plane it's likely suboptimal for the business. This is why the upgrade system in the US is...
I completely agree with your take. And I think BA (to take the most recent example) have gone too far to the extreme. Airlines are a low margin business. And they have capacity which will otherwise be empty which can be used to incentivize loyalty and maximize profit.
If you have an empty premium seat on a plane it's likely suboptimal for the business. This is why the upgrade system in the US is so compelling. With a large enough data set behind it, it's not losing any revenue upside to the airlines. And at the same time, it incentivizes my loyalty and maximizes my spend (copays, earning miles etc).
We'll see who gets creative about this stuff again outside the US. But I don't think the "reward the corporate spend and nothing else" version of BA is going to be permanent, I think there is competition out there.
There does not seem to be much of a difference in the benefits from the loyalty programs of any of the major airlines, at least not the major US airlines. If one airline were to increase benefits and it helped their business, others would follow suit, erasing any benefit, In other words, there's no real incentive for them to improve loyalty programs.
On the other hand, things like additional revenue from paid upgrades or cheaper...
There does not seem to be much of a difference in the benefits from the loyalty programs of any of the major airlines, at least not the major US airlines. If one airline were to increase benefits and it helped their business, others would follow suit, erasing any benefit, In other words, there's no real incentive for them to improve loyalty programs.
On the other hand, things like additional revenue from paid upgrades or cheaper premium seats that would otherwise go unsold is additional profit.
There does not seem to be much of a difference in the benefits from the loyalty programs of any of the major airlines, at least not the major US airlines. If one airline were to increase benefits and it helped their business, others would follow suit, erasing any benefit, In other words, there's no real incentive for them to improve loyalty programs.
On the other hand, things like additional revenue from paid upgrades or cheaper...
There does not seem to be much of a difference in the benefits from the loyalty programs of any of the major airlines, at least not the major US airlines. If one airline were to increase benefits and it helped their business, others would follow suit, erasing any benefit, In other words, there's no real incentive for them to improve loyalty programs.
On the other hand, things like additional revenue from paid upgrades or cheaper premium seats that would otherwise go unsold is additional profit.
If they decrease benefits to the point that it hurts revenue or profit from selling miles, then they'll adjust, but we're plainly not there.
Contrary to what's written in the article, airlines are not low margin businesses. Health care is far lower margin. What the airlines are is that their fixed costs are high.
Airlines may do as they please, whether they want to encourage credit card use or continued loyalty as far as buying airplane tickets. What I, as a passenger, object is devaluation of miles. Award me the miles and keep the award levels the same. If...
Contrary to what's written in the article, airlines are not low margin businesses. Health care is far lower margin. What the airlines are is that their fixed costs are high.
Airlines may do as they please, whether they want to encourage credit card use or continued loyalty as far as buying airplane tickets. What I, as a passenger, object is devaluation of miles. Award me the miles and keep the award levels the same. If the airline has problems, they can devalue the number of miles awarded for future flights.
Example. rural hospitals have an average profit margin of 0.3% compared to the 10% that Ben cites that airlines can achieve. (source: Kaiser Foundation)
C'mon @derek. Healthcare low margin?
CEO don't get shot because margins are low.
Health insurance companies are not the same as hospitals. Health insurance companies put the squeeze on hospitals as they do to people they insure.
Airlines are a perennially cyclical and unpredictable business though. A 10% margin this year may turn into 6% losses next year on the back of a recession and/or some geopolitical turmoil in the region - just ask Finnair how their strategy to connect Europe to the Far East is going.
The big US3 don’t see their poached ULCC passengers as profit centers but they have slowed their competition’s growth
Since most Delta flights now have high speed WIfi and it will be systemwide soon and it takes a SkyMiles number to access it, that is how Delta builds loyalty with the most price sensitive customers. Then they peddle Amex credit cards to those customers to accelerate loyalty. Other airlines are copying that model.
And...
The big US3 don’t see their poached ULCC passengers as profit centers but they have slowed their competition’s growth
Since most Delta flights now have high speed WIfi and it will be systemwide soon and it takes a SkyMiles number to access it, that is how Delta builds loyalty with the most price sensitive customers. Then they peddle Amex credit cards to those customers to accelerate loyalty. Other airlines are copying that model.
And the big 3 grant millions of domestic and international coach awards. Fixation with upgrades and premium cabin award tickets will leave anyone disappointed
BA has totally screwed the pooch here on par with Neville Chamberlain announcing he had obtained Peace in Our Time. They will be in significant financial trouble because of this as wide swaths of loyal BA flyers start matching elsewhere and finding they can earn meaningful status at far less than 20000 GBP. It's just insane how obtuse BA management is. They will bleed PE, Economy, and discount business customers while retaining the high end....
BA has totally screwed the pooch here on par with Neville Chamberlain announcing he had obtained Peace in Our Time. They will be in significant financial trouble because of this as wide swaths of loyal BA flyers start matching elsewhere and finding they can earn meaningful status at far less than 20000 GBP. It's just insane how obtuse BA management is. They will bleed PE, Economy, and discount business customers while retaining the high end. IAG is in BIIIIIIIIG trouble
It is about the same that United requires for 1K slight more than AA requires for Ex Plat. People will get used to it.
A couple of comments
1) Many major corporations have tiers of airlines - so “most preferred,” “less preferred,” etc. In these cases, loyalty programs do absolutely have an impact on what $10,000 business class ticket a corporate traveler flies. If someone is loyal to a particular airline due to a loyalty program, he/she will go the extra mile to select the “less preferred” over the “most preferred” airline until a travel manager or someone...
A couple of comments
1) Many major corporations have tiers of airlines - so “most preferred,” “less preferred,” etc. In these cases, loyalty programs do absolutely have an impact on what $10,000 business class ticket a corporate traveler flies. If someone is loyal to a particular airline due to a loyalty program, he/she will go the extra mile to select the “less preferred” over the “most preferred” airline until a travel manager or someone else makes a comment
2) I am surprised that more airlines don’t try to reserve award space for their elite customers. For example, AA EXP members should have access to much more exclusive award space at lower prices. Actually encourage people to earn status on your airline by making it easier to book rewards
Or they play around with their flight filters in their corporate travel department app until it only shows the airline they want...
Then these people get personal credit cards on that airline, they interact with that airlines shopping portal, and choose that airline for personal travel. Essentially these people gift the airline the hat trick of revenue streams.
Exactly.
When buying with OPM, normal consumer behavior goes out the window.
And airlines know it. Which is why they try to milk OPM with dangling status for ever more "spend".
Since the money is not mine, believe me, I will fiddle with my ticket until I can pad my 'spend'
This makes perfect sense, and thank you for the breakdown. Since 2020, BA has targeted high-spending leisure travellers -- this will totally put them off flying with BA and will draw them towards 'destination' airlines and whoever provides the cheapest business class fare, in my opinion, rather than incentivising them to fly BA. And, as you say, business travellers won't change their behaviour. I can only see this as a net negative for BA and...
This makes perfect sense, and thank you for the breakdown. Since 2020, BA has targeted high-spending leisure travellers -- this will totally put them off flying with BA and will draw them towards 'destination' airlines and whoever provides the cheapest business class fare, in my opinion, rather than incentivising them to fly BA. And, as you say, business travellers won't change their behaviour. I can only see this as a net negative for BA and symptomatic of their disastrous short-term thinking.
One can only hope they backtrack on this (like they are seemingly going to do with their stupid 'brunch' services), but I see that as unlikely.
BA management is totally obtuse. This is Maginot line thinking in 1939. They will be obliterated just like the French.
@Matthew
Hardly, the BA fan base in so entrenched in BA being a great airline that they'll keep flying....
The switch to high-spending leisure customers was because travel for business cratered after Covid.
Is this an indication that business travel is back, or have BA just got it wrong?
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