alphascan
Posts: 795
Joined: Mon Nov 24, 2003 12:04 am

New Frequent Flyer Program Study

Thu Jun 16, 2005 8:57 am

I doubt the "non-believers" like Tango-Bravo will ever admit it, but here is another study that states airline loyalty programs are cash cows for the carriers.

Some snippets:

"The programs undoubtedly have a loyalty effect, concentrating consumers' attention and purchase activity on a select few travel suppliers at the expense of others."

"What can be quantified is the revenue generated by the sale of miles to program partners. And by that measure, the programs are huge."

"Just as the public tends to underestimate the revenue associated with the programs, they also overestimate the programs' costs."

"While the value of a frequent flyer award ticket might be several hundred dollars or more in the eyes of a program member, it only costs the airline $10 to $20."

http://frequentflier.com/ff053005.htm
"To he who only has a hammer in his toolbelt, every problem looks like a nail."
 
ikramerica
Posts: 13762
Joined: Mon May 23, 2005 9:33 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 9:20 am

Quoting Alphascan (Thread starter):
"While the value of a frequent flyer award ticket might be several hundred dollars or more in the eyes of a program member, it only costs the airline $10 to $20."

That's why I like to use miles for the "max value" possible, and use the plan ahead style awards.

I've used AA miles to fly First to Switzerland, "valued" at $13,500 at the time. It "cost" in miles the equivalent of 3 US domestic coach flights.

I've used AA miles to Japan in First, at $14,000+, for the cost of 4 US domestic coach flights.

I'm using CO miles to fly BF to Germany, at $2,700 (current fare sale price), at the cost of 4 domestic coach flights, if you can even find any available at CO.

Other redemptions: a few transcons in First, and a while back, FAT-STT in first on AA.
Of all the things to worry about... the Wookie has no pants.
 
squared
Posts: 352
Joined: Sun May 29, 2005 1:48 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 9:33 am

Frequent Flier Programs, if managed correctly, can become cash cows for airlines.

For example AC's partial spinoff of Aeroplan into an income trust, has met some unexpected demand. The underwriters are asking AC to sell a greater stake in Aeroplan, because demand for the shares are so high (This is partly a result of income trusts being so hot right now, but also a result of Aeroplan's impressive revenues and profits). Aeroplan's value is pegged at around $1.8 billion. If Aeroplan was a cost centre for AC, I sincerely doubt anyone would be running around demanding shares in it.

SQuared
 
BigGSFO
Posts: 2214
Joined: Sun Jun 12, 2005 5:27 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 10:09 am

I'm always using miles to cash in for upgrades. No need to get free flights since the BF flys for AA.

Oh and Ikramerica, I like the Ralph Wiggum reference.
 
Midway2AirTran
Posts: 847
Joined: Wed Jul 16, 2003 7:34 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 11:18 am

Quoting Alphascan (Thread starter):
"While the value of a frequent flyer award ticket might be several hundred dollars or more in the eyes of a program member, it only costs the airline $10 to $20."

I personally think the opportunity costs to the airline in the study are underestimated, especially in the type of revenue environment currently in the US domestically. It sounds more like the same revenue for the airline just being defered into these programs that would have been there if there was no FF program. They have been powerful programs in many cases, but I think it will loose steam with more competition and LCC's on the rise.

I'm not the expert on how all these programs work, they can get very complicated! For one very small example, how does Delta benefit in this case below?..

In my time working at ticketing for AirTran, I notice that many fliers who used credit cards were using their SkyMiles card for AirTran travel. Many in this case joke saying that they earn most of their miles flying AirTran and redeem them on Delta using this method, even with double miles offered by DL.

Where is the significant benefit to DL? I know they get money from American Express(with exception to their financing agreement), but no real loyalty or sufficent revenue is created for DL. Or is this just a unique case for one airline, I'm sure there are similar situations out there though.
"Life is short, but your delay in ATL is not."
 
christao17
Posts: 902
Joined: Sun Apr 17, 2005 12:14 pm

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 12:09 pm

Quoting Midway2AirTran (Reply 4):
but no real loyalty or sufficent revenue is created for DL

But I suspect the revenue IS sufficient otherwise they wouldn't keep doing it.
Keeping the "civil" in civil aviation...
 
Planesmart
Posts: 1734
Joined: Sun Dec 05, 2004 3:18 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 12:39 pm

The most profitable FF programs are where the majority of miles are generated from non-airline sources and predominantly redeemed for air travel.

Where the USA and Rest Of the World diverge, is the tendency for US-based airlines to give FF's free upgrades based on accrued miles. In the ROW, yes you can upgrade, and it will cost you X miles.

The result is that in the USA, FF see upgrades as a right, which ultimately means revenue per sqm from say business is lower than economy. That just wouldn't happen overseas.
 
Glareskin
Posts: 1002
Joined: Fri Jun 03, 2005 9:35 pm

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 1:05 pm

Quoting Alphascan (Thread starter):
While the value of a frequent flyer award ticket might be several hundred dollars or more in the eyes of a program member, it only costs the airline $10 to $20

That's a perfect win-win situation, isn't it?
There's still a long way to go before all the alliances deserve a star...
 
alphascan
Posts: 795
Joined: Mon Nov 24, 2003 12:04 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 1:24 pm

Quoting Glareskin (Reply 7):
That's a perfect win-win situation, isn't it?

It appears to be working quite well Glareskin, yes.
"To he who only has a hammer in his toolbelt, every problem looks like a nail."
 
cairo
Posts: 889
Joined: Mon Jun 06, 2005 2:41 pm

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 1:25 pm

The question is not whether FF programs are profitable, they definitely are. The question is: do they build brand loyalty among the flying public?

All the majors offer more or less the same FF program, you can get anywhere through their alliances. No FF program offers anything special.

THIS IS KEY: if airline FF programs built loyalty, the legacies would be able to charge a premium based on the popularity and loyalty to their FF program. This doesn't happen. At all. WN determines pricing in all markets it serves, the rest just follow along. Where there is only legacy competition on a route, both legacies just charge exactly the same price. FF builds no loyalty on an overall basis, people choose first because of schedule and price, they then may stay loyal for a while to who first offered them the best schedule or price, if they live in other than the 23 top markets contolled as hubs.

If I fly 3 times 300 times a year, I'm going to try to stick to the same airline, even if they sometimes aren't the cheapest or best scheduled. But I'm going to start with the airline that gives me the schedule/price I want and then build loyalty from there. All legacies are going to more or less even out on this.

A real value of FF programs besides the income they earn from selling miles to 3rd parties (credit cards, mortgage brokers, hotels, etc...) is the information gathered about customers and their habits.

This is more valuable than the 'loyalty' earned by offering rewards that are no different than the rewards offered at the competition. Because of AAdvantage, AA is able to keep track of 60 million plus individual customer habits and tailor their pricing and schedule (the only real things that matter to most fliers today) accordingly.

Cairo
 
alphascan
Posts: 795
Joined: Mon Nov 24, 2003 12:04 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 1:55 pm

A very well thought out and informative post Cairo. Thanks. If I played the RU game, you'd be on my list.
"To he who only has a hammer in his toolbelt, every problem looks like a nail."
 
zvezda
Posts: 8891
Joined: Sat Aug 28, 2004 8:48 pm

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 4:10 pm

I must disagree with Cairo. While FF programs do not help an airline build market share (because all the other airlines have similar programs), they do build loyalty. As Cairo correctly points out, most passengers who fly between 3 and 300 times per year stick to one carrier. This is loyalty. The main benefit to the airlines is that it reduces competition. Less competition means higher profit margins. Fares are matched, but at higher levels than they would be without FF programs. That benefits all the airlines at the expense of passengers. The value of the marketing information is secondary.
 
ikramerica
Posts: 13762
Joined: Mon May 23, 2005 9:33 am

RE: New Frequent Flyer Program Study

Thu Jun 16, 2005 4:19 pm

Quoting Alphascan (Reply 10):
A very well thought out and informative post Cairo. Thanks. If I played the RU game, you'd be on my list.

That comment was clever enough to put you on my list, even though I usually don't bother with that sort of thing. But I do love irony.
Of all the things to worry about... the Wookie has no pants.