Strategy in Airline Loyalty: Frequent Flyer Programs

290 Pages·2018·3.48 MB·English

by  Evert R. de Boer (auth.)

EVERT R. DE BOER
STRATEGY IN
AIRLINE LOYALTY
Frequent Flyer Programs
Strategy in Airline Loyalty
Evert R. de Boer
Strategy in Airline
Loyalty
Frequent Flyer Programs
Evert R. de Boer
FFP Investment & Advisory Pte. Ltd.
Singapore, Singapore
ISBN 978-3-319-62599-7 ISBN 978-3-319-62600-0 (eBook)
https://doi.org/10.1007/978-3-319-62600-0
Library of Congress Control Number: 2017955036
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for Olivia and Luc
Foreword I
Airline executives are clearly aware of the forces of disruption and the need
for transformation based on not only what is happening in a wide array of
business sectors (technology, entertainment, retail, and so forth) but also
within the broader travel sector, for example, the hospitality sector and the
air taxi sector. As such, managers at different airlines are working on differ-
ent levels of transformation based on their own actual and perceived situa-
tions as well as the resources available to them. Based on my observations,
however, the transformational initiatives taken so far have tended to be at
the incremental level and related to enhancing the value of existing physical
products. While these incremental improvements are clearly beneficial and
are in the right direction for customers and for the profitability of airlines,
they are not creating anything that is radically different. The situation is
best put in perspective by Peter Thiel, the author of the book, Zero to One.
Many companies, according to Thiel, develop products or services that take
“the world from 1 to n, adding more of something familiar.” However,
what is needed is for a business to develop and create something new that
would take the world “from 0 to 1.1”
Would these incremental changes to conventional airline business models
be sufficient to face, what some people believe, an oncoming tsunami—the
equivalent of a seismic sea wave in the global airline industry? The global
airline industry is perhaps only seeing the forthcoming changes that are
minor. However, the forces of change could become extremely powerful;
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viii Foreword I
creating the likes of a tsunami that has enormous impact on existing players
in the marketplace. Such an envisioned tsunami could be the result of pow-
erful converging forces—the changing consumer expectations, the emer-
gence of platform-based and networked businesses, the proliferation of
smart consumer technologies, and the spread of cross-b order joint ventures
and equity arrangements, just to name four. Moreover, all four forces are
interrelated and along with their connection to consumer networks and
consumer databases, they could warrant a need for a step-change transfor-
mation along the lines suggested by Peter Thiel.
There are airline executives who have begun to explore not only differ-
ent ways to manage the core elements of the business and develop next
generation of e-commerce, but also to investigate the challenges and
opportunities relating to digitizing the airline business. A few airlines are
even looking about the possibility of developing platform-based and net-
worked businesses to address effectively the end-to-end journey chal-
lenges relating to connected customers. They recognize the role of
platforms to help businesses innovate quickly to respond to customers’
changing expectations, behaviors, and preferences. They also recognize
that smart technologies, including data, can empower buyers to commu-
nicate with sellers on many fronts. Moreover, they recognize, based on
the success of new businesses (Airbnb and Uber, for example) that capital
has begun to flow toward the platform-based enterprises because of their
demonstrated growth, global scalability, and huge addressable markets.
It is ironic, however, that while a platform is a relatively new term
within the business world, airlines developed and have been using the
attributes of platform businesses for many years. Let us assume that some
key attributes of platforms are: (1) they create marketplaces for buyers
and sellers to make efficient transactions, (2) they are asset-light, (3) they
enable scalability, (4) they enable businesses to extend their boundaries,
and (5) they enable businesses to acquire and manage data. Then, as
pointed out by Evert de Boer, the author of this book, the frequent flyer
loyalty programs (FFPs), developed by airlines, were platform-based busi-
nesses that provided all five of these capabilities. They certainly created a
marketplace for a broad spectrum of buyers and sellers and they definitely
were asset light. As for the last point about data, airlines’ loyalty programs
not only enabled the acquisition and management of data, but also
enabled the monetization of data.
Foreword I ix
From a historical point of view, traditional airlines developed loyalty
programs in the early 1980s to defend their market shares after low-cost
airlines began to enter the marketplace in different regions of the world.
In the US, for example, the government regulatory polices changed in the
late 1970s enabling low-cost airlines, such as PeopleExpress, to enter the
marketplace. In essence, a combination of two initiatives helped tradi-
tional airlines to defend their market shares. First was the development of
yield management, now known as revenue management, and the second
was the introduction of the loyalty programs, the Frequent Flyer Programs
(FFPs). However, as also pointed by Evert de Boer, there was a third ini-
tiative, the development and use of Computer Reservation Systems
(CRSs) that enabled airlines to keep track of some key elements relating
to customers’ transactions to facilitate the operations of the FFPs.
As expected, the loyalty programs have gone through a number of
transformations to adapt to the changing needs of customers and airlines.
The first transformation in recent years has been to reward loyalty based
on revenue provided instead of miles flown. This transformation is in line
with the pricing framework (a) in which pricing is not necessarily related
to the distance flown, (2) in which the conversion helped to increase
profitability, and (3) in which the loyalty program increased loyalty from
customers that airlines consider to be more important. The second trans-
formation has been the development of the relationship with credit card
companies that has generated billions of dollars. The third transforma-
tion has been the airlines’ offers to use the miles to purchase an incredible
number of products and services in addition to air travel. The fourth
transformation has been to change, on an ongoing basis, the value of the
miles accumulated. In other words, the number of miles required to
receive a free ticket, for example, has been increasing.
Going forward, I believe that airlines that have developed truly data-
driven loyalty programs have the potential to bring about step changes in
the airline business. First, FFPs can provide 360 degree views of customers
based on the available data (transactional and behavioral) and customer-
journey analytics. For example, customers can purchase something other
than seats. It has been reported that a significant amount of miles (as much
as 30 percent for some airlines) is used to make purchase of other products
and services. Second, critical data coming from the FFPs can be used to
x Foreword I
determine the optimal allocation of the number of redemption seats rather
than just the number of seats in the distressed category. Think about the
value of the data coming from partners, not just airlines, but retailers and
financial institutions. Third, carefully designed loyalty programs can be
critical not only in retaining customers but also in getting customers to
book online directly with a big impact on profitability. Just for these three
reasons alone, the new generation of FFPs can generate so much data that
airlines need to make a decision on where the power is relating to data (the
intangible asset), having it, owning it, or sharing it. The key insight from
consumers is that they are willing to share data with trusted airlines if the
airlines are willing to develop personalized interactions.
Back to the question of platforms, although the theory of platforms is
sound, in the end it is all about execution. Based on the experience of
successful business that have developed digital platforms, there are four
critical aspects of the digital environment: developing a digital mindset,
leveraging digital technologies, identifying and implementing digit strat-
egies, and creating a digital workplace. Simultaneous focus on all four
aspects will facilitate the development of a platform-based business in the
context of a digital environment. Moreover, a loyalty program can be the
centerpiece of the digital platform if executed in a strategic way. As Evert
de Boer points out, travel will continue to grow and meaningful loyalty
programs will continue to attract new travelers and get existing travelers
to travel more as well as increase profitability on a sustainable basis
through the development of a competitive advantage.
Note
1. Peter Thiel (with Blake Masters), ZERO to ONE: Notes on Startups, or
How to Build the Future (New York: Crown Publishing Group, 2014),
Preface.
Airline Business Strategist Nawal K. Taneja
Published Airline Business Author
Aviation Professor Emeritus
Columbus, OH
May, 2017
Foreword II
It’s been more than 35 years since the first frequent flyer mile was awarded
and they still capture the imagination of the public.
But the public aren’t the only ones who reap rewards.
The subject of hundreds of academic articles, white papers and the
practice of hundreds of businesses around the globe, travel loyalty pro-
grams remain as relevant as ever but surprisingly ineffective when not
practiced as both an art and a science. There was a time when the axiom
of “if you see a good idea, copy it” played well to the marketing practitio-
ners of the airline business, but these programs also became a victim of
their own success with hundreds of millions of members around the
globe in most any language and most any airline with billion upon bil-
lions of one of the most popular currencies in the world. Somehow sup-
ply and demand doesn’t explain the function and purpose of ‘loyalty’ in
the continuing history of these programs who have nurtured their own
unique definition of “best customer” and “successful business model”.
In this book Evert de Boer tells the stories that comprise their history,
relevance, opportunities and challenges among the topics that serve as a
reference guide for those that want to stand above the ordinary and the
expected. For the most loyal of members of these programs only one
brand “wins”, a stark reality to which share of wallet do you own. This
book researches and presents the nuances and facts of these programs
which account for 2,260,000 results in a Google search.
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