. Airlines Put the Squeeze on Loyalty | Northstar Meetings Group

Airlines Put the Squeeze on Loyalty

As airline loyalty programs continue to evolve, are they fostering more disloyalty than loyalty?

Who hasn't dreamt about having that moment from the movie "Up in the Air"? It's when George Clooney's character reaches the 10 million-mile mark, and the pilot hands him a special card, telling him, "We really appreciate your loyalty."

For the overwhelming majority of flyers, this will only be a dream. And given the way airline loyalty programs keep changing, it seems even fewer passengers will ever reach such heights.

Are you finding it much more difficult to obtain and keep elite status? If you have status, is it harder to get upgrades or award flights? Well, you're not alone.

Airline loyalty programs have evolved tremendously since they first debuted. American Airlines was the first to launch one in 1981. The frequent-flier program concept was simple: track the number of miles flown by each AAdvantage member as a measure of his/her revenue contribution, and loyalty. Rewards were straightforward: free tickets and upgrades.

Today, some programs, including American's, still operate, more or less, on that same principle. But that is quickly changing. Now, when you fly on Southwest Airlines, Delta Air Lines, or United Airlines, for example, it's not how many miles you fly that go toward earning rewards. It's how much you spend.

"It used to be so much easier to get status because it was really based on the number of miles you flew," explains George Hobica, founder and editor-in-chief of Airfarewatchdog.com, a consumer travel website. "Now, they give more miles or points for more expensive tickets, and the pricing is dynamic."

"When programs first started, they were for frequent fliers," says Brian Kelly, founder and CEO of The Points Guy, a popular website for frequent fliers. "Now, they're about frequent spenders."

Hey, Big Spender

This revenue-based style of loyalty program isn't an entirely new concept, however, says Tim Winship, an airline loyalty program expert and editor and publisher of FrequentFlier.com. "What United and Delta have done with the implementation of a revenue-based program is not new," he says. "JetBlue Airways, Southwest, and Virgin America all have had spend-based programs in place for several years now."

Hotels and travel rewards credit cards have long operated on revenue-based platforms. Many airlines are also seeing non-flying activity generating a large number of miles for their respective programs. "American announced this year that more than 50 percent of miles created were from non-flying activity, like credit card spend," says Kelly.

Today, airline loyalty programs are big business. United sold $5.1 billion in frequent flier miles in 2012; in comparison, it generated $25.8 billion in airfare revenue that same year.

Airlines make a lot of money selling miles or points to partnering credit card companies for co-branded credit cards. "Delta was bailed out of bankruptcy by its loyalty credit card partnership with American Express," says Kelly. Last year, nearly 53 percent of all U.S. credit-card holders had a card associated with a hotel, airline, or other type of merchant, up from 46.4 percent in 2010, according to a Simmons National Consumer Survey data survey that was compiled by Packaged Facts, a marketing firm.

Bottom line? These programs are here to stay. Kelly notes, "Airlines have a vested interest in making us consumers still want miles."

So, what's changed? "What's new is that two of the three largest U.S. programs have finally come around to adopting that model," Winship points out. Last year, Delta and United announced they would adopt dollar-based earning schedules and many industry experts believe that American will follow suit once it finalizes its merger with U.S. Airways.


Keeping elite status on airlines like United and Delta is also spend-based. "Delta and United are not only rewarding based on how much you spend, but also on elite status," explains Kelly. "You have to spend a certain amount, and jump through more hoops to retain elite status. It's about the big spenders."

If you ask airlines why they transitioned to revenue-based loyalty programs, they'll argue that this structure definitively rewards their best customers -- a must for any loyalty program.

"In the old program that we had, the flights were weighted the same so if you flew a short-haul flight you got the same amount of points as someone who flew on a long-haul flight," says Jonathan Clarkson, director of Rapid Rewards and partnership development for Southwest, explaining why Southwest decided to go spend-based with its Rapid Rewards program back in 2011. "Medium- and long-haul travelers weren't getting commensurate credit for those longer trips, so by recognizing the cost of the ticket in terms of the earn calculation, we felt that made more sense, especially for those who are traveling frequently."

Praveen Sharma, vice president of loyalty for United, noted similar reasons for its program changes. "The basic premise was making sure we acknowledge and reward our best customers," he says. "We saw a situation where people were traveling similar distances but giving different revenues, and earning the same amount of miles. If someone's paying $1,000 for her ticket versus someone who is paying less, she should be getting more miles. It's moved from frequency to value so that we can differentiate and provide great service and exclusivity to the right members."

What's making it easier for airlines to know exactly who their best customers are? You can thank technology. "Airlines can track what people are actually spending now," explains Winship. "So they can portion out rewards accordingly, rather than rely on the old mileage-based model, which was never a very accurate reflection of how profitable a customer was."

Not-So-Friendly Skies?
Not all travelers are happy with the changes. "It's been disconcerting, to say the least, for some fliers who've become acclimated over 35 years, over the course of the history of these programs," says Winship.

"Disconcerting" is one way to put it. If you simply Google terms for "frequent flyer program" or "airlines," you're bound to find many sources denouncing the recent changes.

Jeffrey Pfeffer, a professor of organizational behavior at the graduate school of business at Stanford University, wrote an opinion piece for Fortune in October titled, "How Airline Loyalty Programs Seduce and Abandon You." His advice? Don't give into any of the airline loyalty programs. He told Incentive, "Airlines are walking a fine line between trying to do something to reward passengers and to do that without wasting any money. The second priority seems to have taken precedence over the first." He adds, "Airlines don't reward your loyalty to them, so you shouldn't be loyal to them."

"The effect this change is having, from a consumer standpoint -- and this is intentional on the airlines' part -- is that the programs increasingly disproportionately reward those customers who are the most profitable, at the expense of the infrequent leisure travelers whose revenue contributions are significantly less," explains Winship.

When asked about the feedback United has received since it changed its program, Sharma said, "I wouldn't say we got a big backlash. I'm not saying everyone was happy. There are some groups who are happy and some who aren't. I personally do not think, based on the feedback I've seen, that it's been negative. Any change to our loyalty program we take very seriously. It's a cornerstone of our business strategy, and we are very conscious of the loyalty aspect of our loyalty program."

When you consider rising airfares, standard checked bag fees, fewer onboard perks, and fewer airlines to choose from, it's no wonder many consumers feel frustrated about air travel in general. "Sometimes, it's such a hassle now to fly, or to use miles or points, that not only are people not being loyal to one airline anymore, but they're not being loyal to air travel," says Hobica.

In this year's Freddie Awards, an annual event recognizing the best travel loyalty programs, American Airlines AAdvatange was named Program of the Year and Best Elite Program in the Americas. Southwest Airlines Rapid Rewards won Best Customer Service and Best Redemption Ability, as well as Best Loyalty Credit Card in the Americas. Notably, Delta and United -- the two carriers that changed their programs -- were not included.

Airlines are businesses, and they need revenue to stay in the air. It makes sense for them to reward their most frequent and highest-spending fliers. But are they doing so at a cost? Are they generating more disloyalty among the general traveling public? If so, should they care? If they do, what can they do to build and keep loyalty, without sacrificing profits?