programmes as well as commissions from hotels, car rental companies and other services sold by the carriers. But for US carriers, selling frequent-flyer points to credit card companies and others is the most lucrative way of bringing in extra revenue. The top six airlines (Alaska, American, Delta, Hawaiian, Southwest and United) earned 55 per cent of their total ancillary revenues – US$18.1 billion last year – from their reward programmes. Delta alone made more than 62 per cent of its ancillary revenues from Sky Miles. In contrast, the 109 global airlines outside the US included in the Idea Works database earned only 15 per cent of their total ancil- lary revenues from selling reward miles; the most lucrative source of extra revenue for them was baggage fees (30 per cent). Given the importance of Sky Miles to
Delta’s ancillary earnings, it’s perhaps surprising that it was the first of the three remaining US ‘legacy’ carriers (Delta, United and American) to instigate at the start of 2015 such a fundamental change to its rewards programme, by linking reward miles to fares rather than mileage. But it was not the first airline to recognise
that the original basis for rewarding flyers on distances flown was flawed. Air New Zealand in 2004, with its Airpoints rewards programme, was first, and it was followed over the years by several others, includ- ing Virgin Australia, Vueling, Jet Blue and Air Asia.
Southwest Airlines, the biggest US do-
mestic carrier, also relaunched its Rapid Rewards scheme in 2011 on a revenue- based model. And Delta was even partially scooped by Qantas, which in July 2014 implemented a new system with a complex formula based on regions travelled within various fare categories.
FOCUSING ON SPEND Perhaps the real question is why it took Delta and other major airlines so long to change. Reward programmes in other sectors of the economy are centred on spending rather than an arbitrary metric, such as distance. Hotels, for example, base their loyalty scheme rewards on room rate and other spending by guests. Tesco’s Clubcard awards shoppers with one point per pound spent – not on the number of times you visit its stores.
BUYINGBUSINESSTRAVEL.COM
Load factors have risen steadily this decade following the recovery from the economic crisis of 2007-08
But there was another factor behind the airlines’ switch to a revenue-based model. When the first loyalty schemes were launched in the early 1980s, airlines were struggling to fill the new generation of larger aircraft, especially given the weak global economy at the time. So a loyalty scheme made sense to help fill empty seats by encouraging more travellers to fly by using their ‘free’ miles. The aviation landscape has changed since then, and load factors have risen steadily this decade following the recov- ery from the economic crisis of 2007-08. Last year saw a 6.5 per cent increase in global passenger demand (as measured by passenger revenue kilometres), above the ten-year average growth rate of 5.5 per cent, according to IATA. Now it makes sense to focus on pas- sengers who spend the most and fly most frequently: travellers with elite status in the airline reward programmes.
REVENUE vs DISTANCE MODEL But it was no snap decision by Delta to switch: it reportedly started planning the change to a revenue model five years before the January 2015 relaunch of Sky Miles. United, which merged with Continental in 2010, swiftly followed suit in March last year, while a month later British Airways made changes to its Executive Club loyalty scheme. While not explicitly switching to a revenue-based model, BA effectively did make the transformation. The major change was that discounted economy fares would earn only 25 per cent of the miles flown per flight, while more expensive last-minute and premium cabin fares would earn up to 300 per cent of miles flown. Hence, a BA flight travelling the 3,400 miles from New York’s JFK to London
Heathrow before the switch would have seen those at the budget end earn 3,400 points and those in first class 6,800. After the change, that range went from 850 to 10,200. And BA’s On Business scheme for small- and medium-sized enterprises (SMEs) has also changed to a spend-based model (see panel, p28) The seemingly slow response of Ameri-
can Airlines to these changes is explained by its need to complete the integration of US Airways, acquired in late 2013 but only finalised last October. American, however, has also adopted a cautious approach to changing its AAdvantage programme: in January, for example, it changed the quali- fications for elite status in its programme, basically making it easier to qualify. This was good news for those who might struggle to join these elevated ranks, but not so good for those who would easily qualify, since there will now be more members chasing upgrades. In March this year, American’s next move
was to effectively devalue the worth of its reward miles, matching the changes by both Delta and United. And the final change is expected “in the second half of 2016” according to the airline, when reward miles “will be calculated based on what you pay for your ticket (base fare plus carrier- imposed fees, excluding any government- imposed fees) and your elite status”. It adds: “The higher your status, the more
you’ll earn.” Thus, AAdvantage’s lowest elite status – a ‘member’ – will get five free miles for each dollar spent, while those in the top level (Executive Platinum) will receive 11 miles per dollar. Even though Delta made its own pro-
gramme changes nearly a year ago, it is still tinkering with the system. From May 16, Delta is sharply reducing an existing benefit for its elite status travellers: previ- ously Diamond and Platinum members – the two highest elite levels – could get up to eight people travelling with them up- graded to Delta’s Comfort+ class (premium economy). Now it will be only one. From the beginning of June it is also changing the way it prices awards for re- demption. “The number of miles needed will change based on destination, demand and other dynamics,” says Delta. Effectively, it is moving to a dynamic- pricing model, the same as the way it and
BBT MAY/JUNE 2016 27
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