Across the globe, airline Frequent Flyer Programs (FFP) are changing. Airlines are looking to move away from traditional distance and RBD-based programs to ones that reward customers based on their spending. The shift has been warranted by two factors: the desire to reward high-value customers and the need to reduce accounting liability. In this post, we discuss the implications revenue-based loyalty programs have on airline finance. For airlines that haven’t made the switch, there are many factors to consider.
Understanding Revenue-Based in FPPs
When frequent flyer programs were first introduced, fares were simply a function of distance flown. Fares have since become increasingly complex and are now a function of factors like demand, competition, and others. Furthermore, fares paid don’t equal revenue earned due to taxes, surcharges, and fees. These factors have made it imperative for airlines to reward miles based on the portion of fare directly attributed to revenue (a.k.a revenue-based FFPs).
These programs work by having miles accrue based on the amount spent by an FFP member. For example, a member who pays for a $300 ticket will earn fewer miles than one who spends $2,000 on the same flight. Different factors can play into this, including first-class seating, date of purchase, and other premium features.
In other words, these programs reward high spenders with the most miles. This not only encourages loyalty but generates increased revenue for airlines from this small (but high-spending) segment of their customer base. For many airlines, the shift to revenue-based FPPs has become imminent.
Revenue vs. Mileage
While airlines that haven’t moved to this FFP model should seriously consider the switch, revenue-based models do come with some drawbacks. When compared to the traditional distance-based model, these include:
- Implementation: Due to factors like multiple price points, tiers, and program compatibility with partners, revenue-based models are difficult to implement.
- Ability to Earn Rewards: Revenue-based models make it more difficult for mid and low-spend members to earn rewards. This could impact membership and loyalty, as they have less incentive for staying with the program.
- Airline Type: Discount airlines may not see much benefit from revenue-based programs, as their passengers are focused on saving money across the entire customer journey
Despite these drawbacks, revenue-based models can bring numerous benefits to airlines, including:
- Reduced Marketing Spend: Different spend means that not all FFP members are treated equally. Differentiated treatment and targeted benefits are aimed at specific member segments, which reduces overall marketing spend.
- More inclusiveness: Award seats on a flight are a scarce commodity with traditional mileage-based loyalty programs. Due to this, a large number of frequent flyer miles go unused or expire every year. Compared to this, travelers can use their fixed-value points to buy any available seat in revenue based programs ensuring more inclusiveness and higher participation.
For airlines that are still hesitant about overhauling their FFP program entirely, a hybrid model is available that ensure high-spending and cost-saving customers enjoy healthy mile accruals. The model involves a mixed structure where certain class and cabin combinations are eligible for distance or spend-based accrual. The chosen accrual method is then based on the customer’s profile, distance of route history, and other factors.
Rewarding High-Value Customers
With the right FFP, adding a small percentage of the truly high-value customers can add millions in incremental revenue for airlines.
In fact, all major American carriers have moved to a revenue-based loyalty program in the last three years. Other global airlines such as Qantas, Cathay Pacific and South African Airways are also following the revenue based accrual system.
Whether your airline chooses to switch to a revenue-based or hybrid FPP program or not, it’s a conversation that’s worth having. Knowing your options is vital to ensuring your airline is in the best financial situation possible. Otherwise, you’re likely leaving revenue (and loyal customers) on the table.