Up until now, the race to increase the size of loyalty programs has been the main way for airlines to assert their power in this area, but it may not last. Issuing miles will suffice.
In this article, we’ll see how the concept of the frequent flyer program is gradually becoming too narrow for airlines, when in fact it’s nothing more than a marketing tool for a business of the future: miles.
In this article:
- Customer or airline: a different vision of loyalty programs
- Business model and marketing of a loyalty program
- The race for members: a losing battle
- Loyalty program vainly seeking airline members
- The single currency, the future of loyalty?
- A geographical war
- Bottom line
If we ask the question: “What is the best loyalty program?”, we’ll get radically different answers, depending on whether we’re talking from the customer’s or the airline’s point of view.
Customer or airline: a different vision of loyalty programs
Even if everyone’s expectations dictate their own approach, the customer’s criteria for a good loyalty program are well known. When choosing an airline loyalty program, the customer will take two things into account: on the one hand, the benefits granted, and on the other, the possibility of earning and spending miles.
If we look at the airline side of things, we’ll most often talk about the number of members, because it’s obvious that if a loyalty program is good, it has many members. This is far from true: it’s all a question of network, catchment area…sometimes passengers don’t choose their usual airline, they are bound to use one. And as they choose (sometimes wrongly) this airline’s loyalty program instead of another, the number of members in a program doesn’t really reflect its quality but rather the unavoidable character of the airline that owns it.
On the other hand, one thing is certain: the more members a program has, the more money it can make, and that’s what the airlines are interested in, even if these aren’t the figures they’re most pleased to talk about.
Unsurprisingly, each sees what the program brings in, and the interests of the two may even seem opposed if we forget that for the airline, not only is the program an investment in future revenues, but it also generates its own income.
Business model and marketing of a loyalty program
From the outside, it may seem that the business model of a loyalty program is quite simple: distribute benefits and advantages. With a little hindsight and lucidity, we can take a slightly clearer view: it’s all about getting the customer to spend enough to finance the benefits that are offered in return. It’s already closer to reality, but it’s inaccurate.
The business model is the sale of miles, the profits are just the marketing that goes with it.
We’ve explained it many times before, so I’ll keep it short: when a customer receives miles from an airline, credit card issuer or non-airline partner of the program in general these miles have been purchased by the partner from the program in order to offer them to the customer.
And that’s true even if you might think that the airline and the program are the same thing. In practice, most programs are subsidiaries, economically independent entities even if the airline is the sole shareholder. There’s a financial transaction between the two, even if in the end it’s consolidated. And when that’s not the case, there are internal mechanisms that achieve the same result.
And when the customer uses his miles with the airline or a partner to buy something, there is a transaction in the opposite direction.
The program’s business model is therefore the sale of miles, and its only challenge is to sell them for more than it costs to compensate for their use.
The sale price is at the discretion of the program, provided that the partner makes a profit in relation to what the customer spends to earn these miles. As far as compensation is concerned, it can play on the validity date of the miles (so that they “disappear” before being used) or the redemption scale when converting the miles into a purchase ticket or something else.
And to put it bluntly, the loyalty program business is very profitable. So profitable that the loyalty program is often worth more than the airline itself! Besides, you never win with a loyalty program: you’ve more than paid for what you get.
But customers still need to want to spend their money with partners who will buy miles with which they can treat themselves to flights or something else. That’s where the benefits come in: the bigger they look, the more the customer is attracted.
But in the end, if we look at things objectively, the benefits offered are nothing more than marketing to keep the mileage machine running.
The race for members: a losing battle
For the mileage machine to sell more and more miles, it needs more and more members. Or so it seemed until now.
But as we’ve seen, a “good program” isn’t enough to attract members. Most passengers will choose the program of the airline they fly with most, and won’t even think of choosing that of a partner airline within the same alliance if it’s more generous (and that’s a shame). So don’t even think of customers choosing an airline for their program.
The number of members is most often a function of the airline’s size, i.e. its ability to be a key player for a given customer base.
The programs of the American majors all exceed 110 million members, Miles&More (Lufthansa) has 36, Flying Blue (Air France-KLM) has 19, Eurobonus, (SAS Scandinavian Airlines) has 5. No surprise, everything is proportional to the size of the airline and its natural catchment area.
So it’s impossible for one program to compete with another on membership numbers, because there’s one structural factor it can’t control: the size of the airline it’s affiliated with.
A battle lost in advance, where the first will always be first and the last always last? It doesn’t have to be.
Loyalty program vainly seeking airline members
If it’s difficult to make a loyalty program grow organically faster than the airline that owns it, then one solution is for the program to become multi-carrier. A major airline needs to have a firm grip on its program, but for a minor airline it’s hard to create and operate a program that offers its members benefits worthy of the name.
Based on the principle that it’s better to have a big, beautiful shared apartment than a small, gloomy studio to yourself, some secondary airlines have adopted a major’s frequent flyer program, leaving it to the major to manage. Flying Blue is not just Air France-KLM’s program, but also Aircalin’s and TAROM’s, and was Kenya Airways’ until June 2023. Miles&More is not just Lufthansa’s program, but also that of LOT, Croatia Airlines and Luxair.
But when you look at the differences in membership numbers, convincing small and medium-sized airlines only allows for marginal growth, so it’s thanks to buyouts that the programs have grown the fastest.
United Mileage Plus is the result of the merger of the United and Continental Airlines programs, while Flying Blue is the result of the merger of the Air France and KLM programs, and Miles&More has grown in line with Lufthansa’s acquisitions (Swiss, Austrian, Brussels Airlines and probably ITA in the future).
But there are limits here too. On the one hand, even though the sector is consolidating, there are only two or three significant takeovers a year at most, and on the other hand, it’s hard to get an airline to abandon its program. A program has an identity and embodies part of the relationship between the airline and its customers. The way it is perceived and the benefits it offers are part of its identity, its brand, and are differentiating factors. When one airline adopts another’s program, it loses some of its autonomy in its relationship with its customers. Don’t think that the switch from Flying Dutchman to Flying Blue has been well received by KLM customers, or that becoming a Miles&More member is as meaningful for a Croatia Airlines customer as if the airline had its own program. And let’s not forget that the airlines lose the opportunity for differentiated, personalized communication with their customers, as if they were outsourcing part of their marketing without being able to control it.
In fact, when IAG was formed, British Airways and Iberia did not merge their frequent flyer programs, but simply operated them with a single currency: avios.
A bit like the famous “one room, two atmospheres”.
So the economic machine was the same, but the marketing and identity of each was preserved.
The single currency, the future of loyalty?
It may have seemed odd that two loyalty programs continued to coexist as British Airways and Iberia merged into IAG, but on closer inspection it was certainly the smarter system.
Each of the two airlines has its own program, which is a channel for customer relations, and the customer base is not the same. Each program has its own benefits, and is the result of its own history, identity and choices. And, above all, each program manages its status in its own way, with its own system of “tier points” and its own thresholds, corresponding to its clientele, its travel habits and its spending profile.
It doesn’t matter, because there’s no financial logic to the allocation of statuses, unlike award miles (avios). And here, on the other hand, if each airline decides on its own allocation scale, there is a single issuer of avios, a single issue price, and each airline determines the best possible scale to make the system profitable, knowing that in any case everything goes into the coffers of a “sister company”, namely IAG Loyalty.
Finance is global, marketing is local, and everyone’s happy.
By way of comparison, think of Croatia Airlines customers who are subject to the Miles&More status allocation rules without any consideration for their specific travel profile, income and expenses… I’m not sure there are many Senators out there, and it’s safe to say that many ITA customers will soon lose their status after joining the Lufthansa program.
Where things get interesting, however, is when Qatar Airways also decides to adopt avios as its currency. The Qatari airline entrusted IAG Loyalty with the management of the financial side, while retaining full control of the statutory and marketing aspects. We wouldn’t have imagined such a prestigious airline abandoning its Privilege Club program to give the impression that it was subservient to another airline, but from the customer’s point of view, the adoption of a single currency shared with other partners is seen as an advantage.
The most we can ask is whether Qatar Airways is losing an opportunity to generate cash by issuing its own currency? But as Qatar is IAG’s 1st shareholder, we think they’re not far from taking money from the right pocket and putting it in the left.
More recently, Finnair announced that it was adopting avios as the currency of its frequent flyer program.
The logic is simple: it’s easier to convince airlines to use a single currency that you manage than to abandon their loyalty programs and join yours. And so you grow the base of customers for whom miles are purchased, which is ultimately the only thing that matters.
The only question we have at this stage is that, given that they are losing a source of revenue in the process, we wonder whether they might eventually become minority shareholders in IAG Loyalty.
The IAG Loyalty initiative seemed quite visionary to us, but we wondered whether it would remain an isolated initiative. That was until Air France-KLM announced it was working on spinning off Flying Blue.
Indeed, IAG Loyalty describes itself as “.IAG’s loyalty center of excellence, providing innovative loyalty products and services to our airlines and business partners, beyond the simple management of Avios currency for which we are best known.“
Issuing currency, managing contracts with partners…exactly the role of the future entity in charge of Flying Blue.
It’s only a short step from there to imagining that Air France-KLM, rather than struggling to increase the number of Flying Blue members, will try to position itself as a currency issuer for other airlines, notably within Skyteam… a step we’re rather tempted to take.
This will mechanically increase the number of customers for whom miles will be sold, and therefore revenue, all the more so since the group will be forging links with airlines in other countries where the co-branded loyalty card business is more profitable than in Franceall without having to convince airlines to abandon their programs or rely on its own organic growth.
And tomorrow the same thing at Lufthansa? Well, why not!
A geographical war
This new approach to loyalty programs is essential for two reasons.
The first, as we saw at COVID, is that an economically sound loyalty program is a fantastic fund-raising tool. For this to happen, it has to be legally and accountably independent of the airline.
The second is that the program’s profitability increases not with the number of members, but with the number of miles it issues!
Naturally, North American loyalty programs benefit from the size of their airlines’ domestic markets, easily exceeding 100 million members. We have seen that European airlines are a long way from achieving this.
On the other hand, by offering other airlines to manage the currency of their loyalty programs, they can hope to narrow the gap with their competitors in terms of program revenues. Reducing it only, given the size of the gap that exists today, but that would already be a big step forward.
It’s not for nothing that the first initiative in this direction came from IAG, and we suspect that Air France-KLM will quickly follow suit. Waiting for Lufthansa?
If they’re having trouble growing their membership, airline loyalty programs can simply offer other airlines the opportunity to issue miles and manage their program’s currency, which is nothing less than the heart of a program’s business model.
By separating the management of status and benefits from that of miles, the operation is made less sensitive for the airlines concerned, who retain control over the part of the program visible to the customer, without damaging their brand or its perceived power.