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Why airlines are shifting towards revenue-based loyalty programs

It’s harder than ever to make money as an airline, in large part because flyers have more options than ever. Finding the cheapest flight, booking months in advance to get the lowest price, and choosing the most affordable discount airline can take a few minutes for anyone with a smartphone.

Yet despite this dramatic shift in favor of flyers, customers remain dissatisfied with their airlines. According to the University of Michigan’s American Customer Service Index—an annual survey of consumers across 45 industries—airlines remain in the bottom 20% of U.S. companies (the same place they were 24 years ago) when it comes to customer satisfaction.

This is not an enviable position for any airline to be in if it wants to keep its customers.

Why are flyers so dissatisfied?

Due to declining profits and rising costs, nearly all airlines have been forced to participate in a war of attrition that some industry analysts have called “calculated misery.”

By now, we all know the drill: the best way to cut costs and preserve profits is by downgrading once-basic services. Consequently, flyers must choose between a menu of a la carte services, including in-flight meals and checked baggage.

This is not an easy position for airlines to be in. After all, no airline wants to reduce basic services for their passengers. But the stakes are higher than ever for airlines that want to stay in business.

In our experience, one of the best ways to maintain customer loyalty and satisfaction is by being more generous in one area that customers care very much about: loyalty programs.

How most airline loyalty programs work

Back in the halcyon days when airlines could afford to offer more comfortable in-flight amenities and services, flyers were less demanding (relatively speaking) with their loyalty programs and rewards. They were happy knowing that, somehow, they were passively earning bonus miles.

That’s why most airlines, to this day, offer loyalty programs that are based on a distance-traveled model. For example, if you fly 1000 Economy class miles, you earn more bonus points than if you flew 500 Economy class miles.

Other airlines began to offer fare/class-based loyalty programs due to grumbling in business and first class over distance-based rewards programs being unfair. For a time, this model worked better.

Today, neither model works quite as well as it once did. Because there are more airlines, more flights, more classes, and more in-flight purchases than ever before, ticket prices are more volatile. As a result, many frequent flyers see both the distance- and spend-based models as unfair.

The problem is that the vast majority of airlines are still offering these types of loyalty programs. Worse, they aren’t as transparent as passengers would like them to be in terms of how points are earned or redeemed.

How revenue-based loyalty programs work

In the past few years, some airlines have begun to offer a newer type of rewards program based on the total amount spent by a passenger on all purchases (not just the ticket price). This is called a revenue-based loyalty program.

Here’s why most flyers think a revenue-based loyalty program is more fair:

  • No matter when you book, what class you pay for, what add-ons you purchase, or how many miles you fly, this type of program rewards you based on dollars spent.
  • This type of loyalty program places more value on infrequent flyers (the vast majority of all airline passengers), who in turn feel that they are being treated more fairly
  • Revenue-based loyalty programs are simpler for flyers to understand—and for airlines to explain. Which is probably why many airlines are getting better at being very open about how points are earned and redeemed, too.

But revenue-based loyalty programs have their drawbacks, too. Many old-fashioned flyers, for example, continue to book flights using travel agencies. While this might not affect a distance-based loyalty program, it’s a big issue for revenue-based loyalty programs because airlines have little view into how much passengers are actually spending via travel agencies.

What do flyers really want in their loyalty programs?

Whether you’re thinking of switching to a revenue-based loyalty program or are still offering a fare- or distance-based program, your passengers want one thing more than anything else: fairness.

Revenue-based loyalty programs are increasingly popular because they are perceived as most fair by flyers. But that doesn’t mean you can’t make your current loyalty program more fair for your passengers.

According to the J.D. Power 2019 Airline Loyalty Program Satisfaction Study, nearly half (43–45%) of airline passengers do not know how their loyalty programs work. They don’t have a solid grasp of how to earn rewards points or redeem them.

In other words, taking the time to explain how each part of your Loyalty program works, and ensuring passengers can easily find this information, could greatly increase customer satisfaction.

An excellent way to do this is by offering an easy-to-use mobile app. J.D. Power found that members of loyalty programs who also use the loyalty app are significantly more satisfied. Yet only 56% of airline loyalty members report having downloaded a mobile app.

All airlines should improve their loyalty programs

In 2020 and beyond, airlines must truly come to terms with ever-increasing passenger buying power. This is not a passing trend that is going to reverse course—it is the everyday reality of the airline industry as a whole.

In order to remain competitive—especially when fares are already lower than ever—airlines should offer the best possible loyalty programs to maintain customer loyalty.

One way to do this is by switching to a revenue-based loyalty program. In fact, one European airline saw their penetration rate (i.e., the % of passengers on a flight subscribed to the loyalty program) double in just one year

The airline achieved these numbers by offering a new, revenue-based loyalty program for infrequent flyers on top of their existing distance-based loyalty program for frequent flyers.

The new, revenue-based loyalty program had a penetration rate that was slightly higher than the old program, which had been around for decades. Offered together, over twice as many passengers became loyalty members.

How you can improve your airline loyalty program

One of the largest American airlines used our Loyalty capabilities to optimize their revenue-based loyalty program. This airline was able to be 100% transparent with their loyalty members, showing them in real-time exactly how many points they would earn before purchasing a seat on a specific flight.

Here’s how they were able to do that:

  • Real-time calculations: Our capabilities take into account airport taxes, partner airlines, ancillary purchases, and other pricing considerations.
  • More convenience, less friction: To make booking easier, our capability can be integrated with your website, mobile app, and partner booking sites, too.
  • Radical transparency: Your customers will always know before purchase how many Loyalty/Rewards points they’re getting ahead of time. Customers can also see points in their account before their flight. Points will be redeemable once a flight is complete.
  • More ancillary purchases: For example, if an infrequent flyer has to pay for an extra checked bag, they’re more likely to do so when they still get rewards points for it.

If you want to learn more about how we can work together to boost your loyalty customer acquisition, satisfaction, and retention, let’s get in touch.

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