A significant aspect of the s FF programs was to reward the individual flyers for directing their corporate travel spending onto the airline offering the FF miles. Because of that, they rewarded for miles traveled, to make it harder for corporate expense departments to claim the benefits for the corporations. Air Canada did not launch its frequent flyer program until when Government of Canada rules finally allowed these programs in Canada.
The program was called Aeroplan. Canadian residents could belong to U. Air Canada Altitude did not begin until about when it identified what had previously been the Elite status categories in Aeroplan to distinguish Air Canada status from Aeroplan status.
For a while Aeroplan was owned by another entity, but has since been reacquired by Air Canada. Up to The classic reason rewards programs came to be is to maintain customer loyalty.
The key to this loyalty is to provide personal service and to make customers feel special. Catering to loyal customers is nothing new. Your local watering hole operates on a similar principle. Once you are a loyal customer, you become a dependable source of revenue, are generally low maintenance, and often take price increases in stride. Airlines operate in a similar fashion by creating an environment where loyal customers spend more. And once loyalty reaches a certain point, airlines actually spend less marketing to a customer who is likely to fly on an airline based on loyalty alone.
Airline employees are trained to provide extra care and pay more attention to higher levels of membership, which definitely gets noticed by the customer and, therefore, they become more loyal. Points and miles also come into play when segmenting customers. This ensures the high-value customers keep spending and encourages other customers to increase spending in order to achieve the higher status.
More recently, rewards programs have become a cash cow for airlines. In fact, frequent flyer programs are worth even more than the airlines themselves. This was speculated for many years, but the actual numbers came out to prove this theory in when the airlines put up their rewards programs as collateral to receive loans from the Coronavirus Aid, Relief, and Economic Security CARES Act. Of course, the value of airlines was depressed due to the pandemic and it has grown in value since then.
The reason for this is that there is a market for points and miles and it is growing. If you have a credit card that earns points and miles, you know that you can often earn around 3 points per dollar spent — and sometimes even up to 10 points per dollar.
And this is why airlines are able to sell their miles to banks for a high margin. This is due to unsold inventory and the airline uses award seats to maximize its capacity. Airlines have become quite sophisticated in predicting which seats will sell and which seats will go empty on any particular flight. This is why the most common airline sales for cash tickets often require mid-week travel or connecting flights.
For award travel, similar metrics apply and the airlines simply remove the availability of award seats on flights which tend to sell to capacity.
There are definitely more complexities involved but, basically, award travel seats are very limited on flights the airlines know will sell — i. This is a rather blunt instrument to raise capital, and often comes at the detriment of yield erosion when the miles leveraged are valued at a discount. Given the size of the underlying programs, and the enormous volume of capital represented by the purchase of miles by partners, there may be better avenues for airlines and their frequent flyer programs to unlock capital.
This could actually be a vehicle for investors to gain exposure to the industry and for the airlines to adopt a more fine-tuned tool to raise capital than to just sell miles or discount them. The airlines are exhibiting a willingness to essentially give up some control and in turn, investors can partake in this new asset class. Wise Marketer: Do you think this will lead to more fungibility with airline miles?
Does higher utility result from this transformation into an asset class? Evert: I think what JP Morgan is getting at relates to the fungibility of miles, but remember that today you can use, for example, Singapore Airline miles with any of the 27 Star Alliance partners.
Would Singapore Airlines benefit from a greater integration with a longer list of partners? They could add 1, partners or more and add utility for the customer. But remember that customers want to redeem miles with Singapore Airlines for flights. Yes, you can redeem at any number of merchants — technologically that is absolutely possible — but the sweet spot of the program is still free flights.
Perceived value is still the most important aspect of reward redemption for the customer. Even today, if a customer were to swap miles for an iPhone, the airline would not get much of a price advantage purchasing that iPhone. That means the value exchange for the customer is going to look almost like cash-back. On the other hand, the value of a flight from New York to Singapore is determined by each passenger. Wise Marketer: What did you learn about what the flying public wants from airlines during ?
Evert: My personal view is that the public wants to be able to trust the airlines and have clarity around requirements.
People want clarity and consistency in the way the airlines communicate about the changes they are making. I completely understand the situation is evolving, but some organization from a governing body might help to give comfort to travelers about what to expect.
The best way forward is for the airlines to establish consistent and coherent guidelines. Travel Rewards Our Rewards Guides.
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