Thursday, December 13, 2012

Are you about to say goodbye to your frequent flyer program?

To those who profit from the miles industry, the answer appears to be a resounding "yes".

Gary Leff of View From the Wing takes a break from his usual blegs for his referral links or pictures of airport terminals to discuss this point today citing a USA Today piece addressing what many feel to be the impending change from "miles based" programs to ones that focus on "dollars spent."  Instead of distance, or number of "legs" flown, the new programs would focus solely on revenue.  In other words, a passenger flying the airline two times to Europe in Business would have an advantage over someone flying 10 times domestically in deeply discounted coach.

Should this happen, it would greatly alter the construction (and worth) of these programs and lead to lower average economy fares over the long haul.

On the surface the above statement appears contradictory, you would think that people would pay more to achieve a higher level of status. Looking at the current trends in loyalty program usage I believe the exact opposite is going to happen.  I'm not sure if a study has been released to the public on this, but judging by anecdotal evidence, frequent fliers (those who are the most loyal to one airline over the other) are generally more price conscious than the casual flyer.  Now, a HUGE caveat here, what I'm about to present is in no way a scientific example, it's one very small data point that (admittedly) dovetails with what I've noticed when in the air. that said, this MilePoint thread shows that around 85% of frequent fliers choose to purchase deeply discounted economy fares when flying.

The reason for this?

Upgrades.

The allure of any frequent flyer program is the ability to receive perks that are typically outside of one's budget.  As a United Gold I receive economy plus seating at booking.  This means that I save a minimum of $29 (the cheapest econ+ upgrade rate I've seen on United) per flight segment.  Because I receive this perk, plus 3 free bags on International flights per person (the wife is also a Gold Premier) I'm more likely to choose United even on flights where upgrades are not available.  I'm also allowed free same-day flight changes should my plans change (say, I wish to take an earlier flight with space available) I'm given a bonus for miles flown, and I'm allowed to use Star Alliance lounges on International itineraries.

All of this and I haven't even gotten to upgrades yet.

In 2012, as a Silver Premier, I received BusinessFirst upgrades on approximately 50% of my domestic flights.  As you know these upgrades are space available and, while I don't expect them, I always view them as a nice bonus for the free drinks and better seats alone.  I'll be honest and admit that the meal service is not a big draw for me.  United's domestic business food is now edible (since they made changes to their menu) but it's hardly something I cannot do without.  I'm still more likely to hop on a plane with a Schlotzsky's in my bag no matter which seating class I've been assigned to.

If you take all of that away, then there's no reason for me to remain loyal to United.  There's no benefit in it because I don't have the travel budget to compete with the contracted rates of the Corporate flyer who's travel is subsidized by their company.  My pittance paid to the airlines is not going to even get my toe in the door, and I'd probably have to spend more time in an aluminum tube at 36,000 feet than I really want to spend to obtain anything resembling what I get today.

Because of this, I'm going to start price shopping without regards to brand loyalty.  I'm going to find a cheap option or I'm not going to fly at all. The money that I have been spending is going to go away, and I expect that most others view things the same way as I do.  What the airlines are going to be left with are the business traveler, the occasional traveler, and the credit-card churning miles hunter who flies in Business and First for relatively free.  Surprisingly, this could be exactly what the airlines want.

I stated above that these changes could lead to lower average fares, and I believe that, for economy.  My belief is that the airlines don't care about economy much, they view them as capacity fillers and would be quite happy running less flights with fuller loads provided they could sell higher percentages of their business and first fares.  It's a "shrink to grow" business model that might accidentally make sense.

Everything that I've written here outlines perceived negative changes to the program....for me. (and possibly for you if you're also a frequent flyer) What I'm not suggesting (as others have) is that these changes are bad for the airlines themselves.  Nor would they be all that bad for the infrequent traveler.  Certainly, service will decline in economy as airlines devote almost all of their focus to the "premier" sections, and fees will increase and be invented that will make up some of the cost savings, but overall I predict profits will increase for the airlines if they do this and that's why I think it's going to happen.  All the industry needs is a first mover, and it appears that Delta might be the one willing to make the leap.

Whoever does it will need to brace for howling from those customers who are losing out, they'll receive a brace of bad press initially, just as they do when new fees come out, but then customers will begrudgingly accept the changes and life will go on.  Once the other airlines see this they'll do the same thing and miles-based loyalty programs will be dumped into the dustbin of business history, the friendly skies will become a little more less friendly unless you're an investor that is, and then you'll probably be more than happy with the improved bottom line.

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