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Killing the Goose that Laid the Golden Egg

About twenty-five years ago now, American Airlines introduced the first Frequent Flyer Program, which rewarded airline passengers miles for the “mileage” they had flown on the airline. These miles were convertible into airline tickets. This program spawned many copy cat competitors, including all the major airlines, hotels, car rental agencies, cruise lines and many other non-airline companies who wished to create a loyalty program. In many ways, the loyalty programs that the legacy airlines offered enabled them to keep their most attractive customers from falling for the blandishments of discount airlines, such as Southwest and Jet Blue. That may be coming to an end.

Up until about ten years ago, I would value an airline mile at roughly four cents, given the price of flying back then. Today, some experts in air travel estimate that the current value of an airline mile today is about 1.2 cents – that is, when you can get it. Many people seeking to cash in their awards can not use the tickets. What happened? The airlines have raised their prices on these programs and reduced the availability of the awards. (See the Symptom and Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) They raised their prices by demanding more miles to redeem an economy seat. They also added extra charges for fuel, issuance of award tickets, and so forth. They reduced the seats available to the award programs. Since there are so many miles chasing fewer award seats, the awards are much more difficult to claim.

The airlines themselves redeem the miles at about one cent. Several airlines, including Delta and United, allow passengers to use miles to pay for tickets on their web sites. These programs value the airline miles at one cent per mile. The same web sites offer hotel stays and auto rentals at less than one cent per mile.

The airline programs are becoming uncompetitive. The current programs in the legacy airlines are less generous than those of most of the major hotel companies and cruise lines. The credit card companies, themselves, now offer cash rebate programs that redeem miles at between one and two cents each. The new Schwab Visa card, which we described in our previous blog, rebates 2% on all purchases. Customers who spend a lot of money are likely to notice these more attractive programs. (See the Perspective, “Failure Shifts More Share than Success” on StrategyStreet.com.)

The legacy airlines are in the process of losing one major advantage they had over the discounters. Only 48% of airline program customers are satisfied with the value they get from the Frequent Flyer awards programs. The percentage who claim that the airline award programs sway the way they make ticket purchases is even lower. It is 25% today, down from 31% only two years ago. Yet, the programs major purpose is to win and hold customers who fly a lot and spend a lot. It looks from here like those programs are likely to falter.

Posted 12/22/08

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