Yesterday I posted a blog about the merger between US Air (US) and American Airlines (AA) and who wins and loses. Today’s focus is on the future of legacy frequent flier programs overall.
Only a few years ago, we had six competitive legacy carriers and each of them wanted us to be part of their frequent flier programs. Sweetheart deals were common, like 100% bonus miles and double/triple EQM/PQM/MQM offers. With half the choices today – and a constant struggle for airline profitability – expect more of a seller’s market than a buyer’s market looking ahead.
First, a look at this from the airline industry perspective. They are trying to avoid the typical violent swings in profitability and show improved growth in an industry that looks more like a general commodity every day. Their first step was bankruptcy, cleaning up some of their older baggage (so to speak) and making them leaner financially. Yes, AA was late to the game but the results will be the same.
Soon thereafter, they got control of capacity, reducing options for many routes and eliminating others. That’s when the scales tipped in their favor. The days of 60-70% capacity are long gone, replaced by today’s common 80-90% capacity. They achieved historical precedent by clearly taking over the supply side of supply/demand.
Their next step was to control costs. While fuel costs vary with the market, wages are pretty stable and easier to project for the future. All airline employees will tell you about their wage concessions in the interest of keeping their jobs. Combined, these two costs account for perhaps 60-65% of airline overhead.
Finally, they wanted to reduce competition. By all accounts, they have been very successful here. Many unprofitable routes have disappeared and others will probably follow. In my experience, fares have increased far more than the 2% a year that is often quoted. Some routes now cost 50% more than they were just a couple years ago.
With competition cut in half, the future bodes poorly for the existing frequent flier programs as we know them. One airline executive’s comment about “over entitled elites” caused a firestorm but from that side of the table, their FFP is out of control. Of course, they created this mania themselves but now each will have only two competitors instead of five so they are in a position to reduce this overhead as well.
Of the Big Three, most of the FFP ire seems to be directed at Delta Air Lines (DL). That makes some sense since they were the first to go through a merger, allowing more time for adjustments. But is this fair or is Delta’s program a prelude to the future?
While the DL FFP with rollover has been very popular, it has long been known that lower level award tickets are often difficult to find but readily available for very high points. A recent search showed availability to Asia for 305,000 points for a business class ticket, far in excess of the other airlines.
Also, Delta requires a very expensive fare to be able to apply their System Wide Upgrades for international flights. Adding to the pain, Delta recently announced that these higher fares will no longer earn a 50% bonus toward elite status, making the value of their elite certificates somewhere between questionable and worthless. Compared to UA’s fare requirements or AA’s eVIPs, Delta’s program might not appear comparable.
Unlike much of their competition, Delta has not offered any flying bonus miles for elite status since 2010. However, they have replaced those offers with year-end purchases of up to 10K for those needing miles to hit a status level. Note the key word here is purchases.
Moreover, they announced that beginning next year, there will be a minimum spend requirement for elites to achieve status. While this will probably only marginally “thin the herd,” it brings home the message that the airline wants your loyalty but they will only reward it with status if you bring them enough money.
None of these examples are considered FFP-friendly but Delta is also showing us something else. Their airline is profitable, and this profit is consistent. United Airlines is struggling both financially and internally and while US has been a recent darling on Wall Street, the new combined airline will be very different and take years to integrate. Delta may have discovered the magic bullet but it comes at the expense of their frequent flier program. Watch as the other legacies work toward duplicating Delta’s success.
In the end, the Big Three will be like non-identical triplets, similar but each with distinguishing characteristics. There will be plenty of time to watch for trends and program changes because, in my opinion, the US/AA merger will be the most difficult of all. Nevertheless, the focus will be on the quality of frequent fliers moving forward, not the quantity.
This is the New Loyalty in the airline industry.