Friday, February 03, 2006

Frequent Flyer Miles are as Good as Cash

As more and more airlines struggle with profitability, one of the issues on the table seems to be the frequent flyer programs.
I frequently travel as a "real person" (buying a full fare ticket), and belong to a couple of these programs.  On occasion, I've even cashed in my miles for a free ticket or two.  Lately I've been reading that a lot of these programs may be changed, and it seems to be in a way less advantageous to us travelers.
When I talked with crew members about the state of the industry, one of the consistent questions is why we are giving away so many tickets.  Why are members of our frequent flyer program allowed free upgrades?  (Rarely is it that I see a full fare passenger in first class; they are usually all upgrades.)  And why, when they aren't available, do the expect their free amenities to be provided to them in coach class?  Why are we providing so many seats to be used for miles when we can't fill the ones we have with paying passengers and make a profit?
All these are legitimate questions, and even though I understand the marketing and branding value of frequent flyer programs, it makes me wonder about their viability at a time when air travel is so cheaply priced. 
Then I come across this Reuters article which explains how the airlines sell their mileage credits to a variety of sources, including hotels, restaurants, credit card companies, banks, car rental companies, etc.  Turns out this sale of miles yields a very big influx of cash to the airlines.  It's a billion dollar a year business.  
Air Canada has spun off their loyalty program into a separate business unit, raising some 250 million dollars in cash.  Although no U.S. carrier has announced a similar plan, yet, there appears to be potential for such a move.
Looks like we're not just in the transportation business anymore.
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Gary said...

Not just in the transportation business anymore? The only reason United is still in business is to support the underlying credit card business. The bank which issues their co-branded Visa card was the lead provider of debtor-in-possession financing and then came back with more for their exit financing.

The only truly consistently profitable part of United has been its Mileage Plus program...

American Express pre-purchased half a billion dollars worth of miles and extended an additional hundred million dollars' credit in an attempt to keep Delta out of bankruptcy.

Juniper bank kicked in about $400mm to the merger of America West and USAirways, and got to issue their co-branded credit card in return.

Those miles have kept the planes flying!

And the hyper accumulators of those miles generated revenue for the airline before ever getting seated up front. ;)

Astroprof said...

Even if 1st class is only upgrades, then it seems that it would still be a good idea to reward people who are regular customers with some perks. That way they always buy tickets with your airline instead of the competitors. Now-a-days, there is little proclivity towards brand loyalty, so you have to entice people to stick with one brand.

Fly Girl said...

Gary: I think we've always known that it's not just the transportation business anymore, it's just hard to accept sometimes.

Astroprof: I have no problem with rewarding frequent flyers with free upgrades -- if the seats are empty. But a free upgrade should not result in a full fare first class passenger not being able to buy a seat. I've seen it happen all too many times.

Free upgrades are different from cashing in miles for an upgrade.

Astroprof said...

Oh. I may have gotten caught in terminology. I was thinking that the free upgrades were cashing in frequent flier miles. So, what is the difference?

pacificdude said...

Well, to be devil's advocate here, I have to say that I know a number of people in our corporation who fly one particular airline any chance they get because they're apt to get the free upgrades from all their frequent flying. They're putty in the palms of the marketing department, doing exactly what they're supposed to. These folks sink considerable amounts of $/£/¥/€ into the airline industry every week. If this airline doesn't give them perks, they'll move on to someone who will. It's an unfortunate thing for the airlines, eat or be eaten.

Gary said...

fly girl, if upgrades are displacing full fare F then the problem isn't with the mileage programs it's with the airline's yield management folks. Upgrades come out of restricted inventory classes that should have availability no greater than the seats that will otherwise go unsold.

Fly Girl said...

Astroprof: Free is just that, free. No use of miles required. If miles are used, it's considered a "paid" upgrade because the passenger is "paying" in miles.

Pacific Dude: I know that the upgrades are enticement for some people, and aren't for others. With few exceptions, I think most people shop for price, rather than brand loyalty. Many corporate travel departments operate and choose on the guideline of lowest pricing.

Gary: Yep. That's the way it's supposed to work. "Supposed" to is the big qualifier here. If that's the way it happened, you wouldn't hear as many complaints. Doesn't always work that way, though.

Anonymous said...

The airlines only have themselves to blame for this mess. It is impossible to predict how much the product is going to cost. Whether you pay very little six months in advance or a lot the day before, the plane and seat you get is the same. Imagine if everytime you went to the supermarket for some milk, it cost anywhere between 10c and $100 per gallon. As a consumer you would end up obsessed over the cost. So the airlines have now successfully trained their consumers to focus on the price. I've seen reports that even a $5 difference is enough to make people go with a "cheaper" flight.

Having inflicted this on themselves, they have to resort to anything to try and stop people making decisions purely on cost even though the products are almost identical (and getting more identical each day). Rewarding frequent flyers is about the only thing possible. The irony is that frequent flyer miles are pretty much standard - they don't wildly vary. If the airline charges 35,000 frequent flyer miles to go to Hawaii then that is it. And you can fly any 35,000 to earn those. No surprises, no randomly fluctuating prices etc.

What I would really like to see is sane and sensible pricing.

Fly Girl said...

Yes, the airlines share a substantial portion of the blame, although I'm not willing to lay 100% of it at their feet.

I'm all for realistic fare pricing! This would allow for fluctuations, though, just like at the supermarket and your milk example. When the cost of fuel, labor, etc., increase, so does the price of air fare. That's what happens in every other business -- cost increases to reflect the price of providing the goods or services.

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