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Frequent flyer programs: A partnership primer

SmarterTravel

How Programs Work (and Why They Sometimes Don’t)

As a writer and consultant in loyalty marketing, many individuals and businesses turn to me for advice regarding frequent flyer programs. The questions are sometimes general, sometimes specific, and sometimes suggest broader issues and demand deeper answers. Here’s one of the latter:

“I have accumulated about 50,000 miles on Northwest Airlines by traveling on Continental transatlantic. Will I be able to use these Northwest miles to purchase a ticket on Continental?”

In a word, yes. As a member of Northwest’s WorldPerks program, you have been earning miles for flights on Continental. And just as WorldPerks miles can be earned for paid Continental flights, so can they be redeemed for “free” flights on Continental.

We could leave it at that, but the query really leads us to two deeper questions: How do the interrelationships among airlines and frequent flyer programs work? And perhaps more importantly, why do they work this way?

Let’s begin by defining several key concepts related to frequent flyer programs.

Hosts & Partners

Programs comprise hosts and partners. The host is the airline or hotel, which operates the program, and which in theory has the most to gain from its existence. The partners are the other companies that participate in the program network?they either allow program members to accrue miles (an earning partner), or take awards (a redemption partner), or both.

In our example, Northwest is the host airline (they own and operate WorldPerks), and Continental is one of many partner airlines in the WorldPerks program. But because WorldPerks members can both accrue and redeem miles for Continental flights, Continental is both an earning and redemption partner in WorldPerks.

Continental is also the host of its own program, OnePass. And Northwest is an earning and redemption partner in OnePass. We call the Continental-Northwest relationship “reciprocal frequent flyer program participation”?each participates in the other’s program.

Earning & Burning

If hosts and partners are the players, earning and burning are the plays. Earning miles is just that: any transaction that results in miles being credited to a member’s account. And burning is simply another word for redeeming. It is to miles what spending is to money.

Another way of expressing the same idea is to say that programs have two complementary aspects, accrual and awards. The accrual side is about earning, the awards side about redeeming. While we spend most of our time in accrual mode, it is the awards side of the equation that most enthralls us.

In the beginning, when the programs made their modest debuts as limited-time promotions, members earned and burned only on the host airline. Now, after 20 years of Darwinian evolution, the major programs have multiple earning partners, in every conceivable industry. You can earn miles for buying or selling a home; investing in securities; buying a car; dining at selected restaurants; and purchasing any- and everything from Rice Krispies to Rolexes. And that’s over and above the core airline, hotel, rental car, and credit card partner transactions.

On the awards side, the programs haven’t come nearly as far. While some programs have expanded burning opportunities to include miles-for-merchandise options (most notably AAdvantage through its merger with AOL), the industry trend has been away from offering free hotel room nights and car rentals, as was the norm in the early (some would say “good old”) days of the programs.

Among other things, defining the programs’ two components and tracing their development over time?one expanding, the other not?helps explain the current state of consumer dissatisfaction. With all the myriad ways of earning miles, and redemption still basically confined to a limited number of free airline seats, there are too many miles chasing too few available seats. Result: consumers often find themselves unable to use their hard-earned miles for the award flights they feel they’ve legitimately earned.

Partnerships: Follow the Money

The other important things to understand about the programs are the workings of the partnerships and particularly the revenues and costs associated with them.

Going back to our original example, Continental participates in WorldPerks because they know that the lure of WorldPerks miles will attract a few extra customers (incrementals, in marketing parlance) who otherwise would have flown another airline. And, like any company, Continental is willing to pay for that additional business.

How much? The rates vary according to the number of miles purchased and other variables, but figure that most partners, in most programs, are purchasing miles from the program host for between $0.015 and $0.02 per mile. So when a WorldPerks member earns 5,000 miles for a Continental flight, Northwest might bill Continental for $100 (5,000 x $0.02). Continental accounts for the mileage expense along with other marketing costs, including advertising, travel agency commission, etc. And Northwest adds $100 to the WorldPerks revenue column.

In addition to the extra revenue from additional passengers, Continental also stands to make money when a WorldPerks member redeems miles for a Continental award flight. In such a transaction, Northwest purchases that ticket from Continental at a negotiated rate. This rate will be less than the cheapest fare you or I would be able to purchase the ticket for, but can nevertheless represent a significant revenue source, especially if the seat would have gone empty otherwise.

Miles Are Big Business

If, in discussing the programs in terms of their revenues and costs, it begins to sound like we’re speaking of freestanding businesses?that’s as it should be. The sale of frequent flyer miles has become a huge business for the airlines, and in many cases, the programs have been spun off from their parent companies and operate as wholly owned subsidiaries. What were once simply marketing programs?ways of getting and keeping customers’ business?have become enterprises in their own right, complete with top lines, bottom lines, ROI’s, and all the other bizspeak metrics and motivators of the companies that spawned them.

Rather than exploring all of the complexities of this constantly evolving sector, let us look at one essential detail. There is a point of impact between the miles-for-profit model and the consumer experience. When selling miles becomes the overriding goal?as it has at some of the programs?it creates an incentive to…yes, sell more miles. But as we’ve alluded to above, there’s a limit to the number of seats available for awards. Which brings us back, full circle, to the growing disconnect between supply (awards) and demand (miles).

The above is by necessity a broad and thin summary of the way programs work beneath the surface. Next time you shift from earning to burning mode, and find the host airline’s allocation of award seats is depleted for the period you’d like to travel, you will at least have a better sense of the process by which supply and demand became decoupled.

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