Staying loyal

But even before frequent flyer programs, in the US there were inducements for passenger loyalty such as cigarette coupons and S&H Green Stamp trading stamps (which could be redeemed for merchandise from S&H stores or its famous catalogue).

Computerisation created the necessary systems infrastructure for frequent flyer programs to flourish, and American Airlines was able to use its Sabre computer reservations system to identify its 150,000 best customers, who became the first members of its AAdvantage scheme.

To cater for its members’ total travel needs, American added Hertz and the Hyatt hotel chain to the program, but within days of its launch United Airlines introduced its own program, Mileage Plus, with Delta Airlines and TWA not far behind.

According to Frequentflyer. com, while hotels were initially partners with the airlines, they quickly realised the power of the loyalty programs and launched their own.

However, some were far too generous, with Holiday Inn’s Priority Club program promising two tickets to Europe and one week’s hotel stay in Paris and a rental car for a week after 75 hotel stays.

That experience has peppered frequent flyer programs since their inception, with airlines striving to get the settings right, while many consumers regarded frequent flyer points as a right, not a reward.

And not all airlines were early converts to frequent flyer programs. One notable exception was Southwest, which reluctantly and eventually joined the fray in 1987 with Rapid Rewards, the same year Qantas launched its program.

Southwest founder Herb Kelleher explained the change of heart at the time thus: “We didn’t want a frequent flyer program. But it came to my attention that frequent flyer programs were siphoning business travel away from us. We did it defensively, and I think if we had not done that we would have been terribly disadvantaged. ” Another example of the power of frequent flyer programs was the experience of Hertz. Although a charter member of AAdvantage, by 1990 it was participating in several programs, but felt the costs were too high and backed out of all of their frequent flyer program relationships. But its marketshare dropped immediately without the frequent flyer program tie-ins, forcing it to rejoin.

Right or reward?

The power of the frequent flyer program was evident with the demise of Ansett, when 2. 7 million members lost 67 billion points. Ten years later when the word Ansett is mentioned, most people will quickly recall the number of points they lost. And when Tesna tried to relaunch Ansett in early 2002, the bid collapsed shortly after the backers revealed that Ansett Global Rewards frequent flyer program members would lose their points under Tesna’s customer loyalty program.

While Tesna offered a better rewards program, the deal never gained traction as former Ansett frequent flyer program members felt that they were secured creditors.

In fact disgruntled former frequent flyer program members, represented by the Global Rewards Action Group and Diners Club, vowed to pursue Ansett administrators, seeking a bigger share of Ansett’s assets for their lost points.

The tussle over whether the points are a right or reward has simmered for years.

In 2000 the ACCC investigated frequent flyer programs, with then chairman Allan Fels saying that the consumer watchdog had “received an increased stream of complaints regarding the frequent flyer programs being offered by the major airlines. ” Fels added: “As a result of these complaints it is seeking to assess whether frequent flyer programs raise any issues under sections 52 and 53(c) of the Trade Practices Act 1974. Section 52 prohibits misleading and deceptive conduct and section 53(c) prohibits representations concerning performance characteristics, uses or benefits that services do not have.

“In particular, the ACCC is seeking to assess whether there is adequate disclosure of the terms and conditions relating to frequent flyer programs.

“The most common complaint is that having built up points under a frequent flyer scheme it is actually difficult to receive the benefits because of seat unavailability. ” The ACCCs major concern was that the “promotion of frequent flyer programs focused on the trips, gifts or special deals a member can obtain, with little mention of the restrictions imposed by the terms and conditions of these schemes. ” During the investigation, Qantas announced a raft of changes to make its program clearer to the flying public and those changes ironically took effect on September 15 2001 – the day after Ansett collapsed.

Those changes included the lifting of expiry deadlines, new international upgrade redemptions, and a guaranteed minimum 1000 point earn rate for any booking.

Fels commented at the time that the changes streamlined the structure of the Qantas Frequent Flyer program, but he warned that the program continued to carry restrictions on the accrual and redemption of points.

“It is important that advertised rewards are available, and that the restrictions imposed on the redemption of those rewards are made clear to consumers. Qantas has taken positive steps to improve such disclosure,” Fels said.

But those changes proved inadequate and the ACCC again investigated the Qantas program, along with others, in 2004. As a result Qantas made further changes and increased access to award flights, and provided more transparency and certainty of travel for frequent flyers.

However, ACCC chairman Graeme Samuel (who had by then succeeded Fels), noted that despite consumer complaints there was insufficient evidence to establish a breach of the Trade Practices Act 1974.

Samuels praised Qantas for “introducing an online search function, allowing members to more readily determine preferred award seat availability. ” “Complaints received by the ACCC have been from consumers unable to redeem their points for award flights to a destination of their choice on dates and at times of their reasonable choosing, who may not have been aware that availability of award seating is limited,” Samuels said at the time.

“The ACCC does not comment upon the value of loyalty programs, or the rewards offered under these schemes. However, the ACCC is concerned to ensure loyalty schemes are operated transparently so consumers are not misled as to the benefits to which they are entitled and any limitations on those benefits,” he added.

Fast forward

The Qantas and Virgin frequent flyer programs of 2011 bear little resemblance to those of just five years ago, and have developed into major revenue streams.

Simon Hickey, chief executive officer of the Qantas Frequent Flyer program, says one of the great strengths of the airline’s program is its wide variety of ‘earn-andburn’ options.

There are now over 490 partners in the program, including 250 restaurants, where points can be earned, while members can burn points by ‘classic’, ‘any seat’ and ‘points plus pay’ redemptions of flights, flight upgrades, and buying goods – from electric toothbrushes to iPods and watches and jewellry – through the online frequent flyer store.

Hickey tells Australian Aviation that “nearly 20 per cent of redemptions are the new points plus pay option, while the online store is proving very popular with 10 per cent of redemptions. ” In 2008 Qantas added the ‘any seat’ reward and restructured the credit card reward structure for direct earn in 2009.

Then in 2009, Woolworths became a partner, and more recently Caltex Fuel came onboard. Over three million members are now earning points at Woolies, as well as Big W, BWS, Dick Smith and Tandy.

“It is important that advertised rewards are available, and that the restrictions imposed on the redemption of those rewards are made clear to consumers. ”

Qantas reported that after the Woolworths Group launch, in the 2010 financial year 17 per cent of the new members had flown 876,000 sectors with approximately 60 per cent of passengers new to the airline.

The 22 year old program now has 7. 8 million members – up 45 per cent in the past three years. Qantas believes that its program has the world’s biggest take-up per capita, which Hickey attributes to the “wide variety of partners and options to spend. ” Meanwhile, Virgin Blue’s Velocity Rewards was launched in 2005 and from the outset stripped away the red tape, making any seat available on any flight including, holiday periods.

Interestingly, according to media reports, Virgin Blue is plotting a closer alliance with the Coles FlyBuy program as part of the airline’s midyear relaunch.

Under the scheme, members of Virgin Blue’s Velocity Reward frequent flyer program would receive points for spending at all participating FlyBuy outlets, which includes Coles and Bi-Lo supermarkets, Target, Kmart and Liqourland, as well as Budget car rentals and Best Western Hotels.

While Virgin has over 2. 4 million Velocity members, Coles boasts 10 million FlyBuy cardholders.

Australian Business Traveller reports that Virgin Blue has committed to overhauling Velocity Rewards, with CEO John Borghetti going so far as to call it the “launch of a new loyalty program”, which could even see the Velocity brand ditched entirely.

A new program would redress the competitive imbalance that Hickey believes gives Qantas an edge, such as a minimum 1000 points for every flight, no matter the distance or fare.

What is Loyalty?

The big test for the Qantas Frequent Flyer program will be the relaunch of the Virgin Blue program, which also coincides with that airline’s push into the business class market.

Qantas has enjoyed a virtual monopoly on both business and corporate travel since the demise of Ansett, with some estimates suggesting that Virgin’s share is only about 10 per cent.

The introduction of domestic business class, upgraded lounges, alliances with Air New Zealand and Etihad and possibly Delta Air Lines, changes the dynamics and introduces a combination of changes that will attract a greater share of the corporate and premium market.

This will be an excellent test of the effectiveness of the two programs, as Qantas’s program has evolved into a major profit centre, but perhaps in part at least because of its unique position as the only airline – until May 26 at least – offering a domestic business class product.

The importance of frequent flyer schemes is illustrated by a study by Dr Christine Mathies of the University of New South Wales and Siegfried Gudergan from the University of Technology, Sydney. Their paper, “Do Loyalty Program Membership and Status Levels Affect Service Customers’ Choices?” found that members of frequent flyer programs “have a significantly higher brand preference for their respective airline or hotel group than nonmembers, and those close to a change in status level have an even stronger brand preference compared to those who are not, which is also reflected in their willingness to pay. ” The study said that “empirical findings illustrates the ability of frequent traveller programs to affect purchase choices if the customer fears that earned status benefits are about to be lost. ” Citing a series of studies and papers, the authors state that “loyalty programs, such as frequent flyer programs and hotel loyalty programs, aim to increase sales by encouraging higher purchase frequency and purchase volume, and are successful where participants of programs show indeed higher repeat purchase behaviour than nonparticipants. ” That is a critical point for Virgin Blue as it contemplates its assault on the business market and a relaunched frequent flyer program. In today’s more competitive environment, management can’t afford to just focus its marketing efforts merely on gaining new customers, but retaining existing ones. The cost to gain a new customer can be five times more expensive than to retain one.

That, of course, is great news for Qantas and lousy news for Virgin Blue.

Citing other papers, the report states that the benefits of retaining customers has a direct impact on company profitability.

“The costs associated with taking care of loyal customers decline over time, while at the same time, sales from loyal buyers increase as a consequence of their loyal patronage behaviour. ” It adds that “loyal customers will also present partnership actions such as spreading a positive word of mouth to their friends and relatives. ” However, despite the rapid growth of loyalty programs, the paper claims that many questions arise about the effectiveness of the programs to truly enhance customer loyalty.

According to the paper, while it requires a huge amount of money to run the programs, facts indicate that many organisations have failed to increase customer loyalty through the implementation of the programs.

The financial success of the Qantas Frequent Flyer program does suggest it is successful in generating customer loyalty.

But its profitability – for 2010 financial year it earned an underlying EBIT of $328 million, and underlying EBIT of $189 million in the first half of the current financial year – shows how important the flyer scheme is to the airline as a revenue generator and profit centre in their own right, as the scheme’s partners buy the points from Qantas which their customers earn when buying that company’s goods or services.

For the 2010 financial year, Qantas reported that classic award airline partners increased by three to 27; 43 airlines and over 100 destinations were added to the ‘any seat’ awards category; that 3. 4 million seats were redeemed on flight awards; and that 350,000 products were redeemed in the Qantas Frequent Flyer store.

Qantas also detailed the changing profile of redemptions, with ‘Classic’ redemptions slipping to 77 per cent of all points redemptions, from the prior year’s 80 per cent, with ‘any seat’ redemptions lifting to 11 per cent from nine per cent.

Store redemptions rose one per cent to 12 per cent.

Short term – long term

Back in 1995 a study published in the Harvard Business Review, “Do rewards really create loyalty?” suggested that in practice, loyalty programs are widely misunderstood and often misapplied, with many companies treating them as short term promotional tools for their customers. This, the report said, resulted in customers becoming loyal to the programs rather than to the company.

Hickey comments that it may well have been the case in the past, but today the Qantas program is focused on long term loyalty.

There are clearly two factors that are critical for loyalty to grow. The first is customers’ emotional attachment toward one certain product or service, and the second is customers’ repeat purchase.

And the first global report undertaken of frequent flyer programs, compiled by Sydney based research company IdeaWorks, has found that frequent flyer program seat availability is becoming an irritant – not a loyalty magnet.

Sponsored by travel industry software supplier ezRez, the “Guide to Loyalty Marketing” report issued last year reported on the difficulty in gaining frequent flyer award seats, showing that airlines are broadening redemption to other commodities besides seats.

“More airlines are choosing to solve reward availability issues by allowing members to redeem miles, kilometres, credits, and points for hotel accommodations, car rentals, personal services, travel insurance, activities, vacation packages and merchandise,” said ezRez Software SVP, sales and marketing, John Swanciger.

“These methods provide more opportunities for members to spend frequent flyer currency. ” The study found that reward seat shortages are the top complaint among passengers worldwide, and this has been exacerbated by the sharp cutbacks in capacity in the last year, as high load factors mean there are fewer redemption seats available.

“Frequent flyer programs may sound the same,” said the report, “but they are not.

Some frequent flyer programs make good on their promise, to customers and the sponsoring airline. Others create as much trouble as they do benefit – for customers and for the airline. ” However, the report added that despite the complaints, loyalty programs remain a crucial tool for airlines to pamper frequent flyers and top spenders. Even so, managing member expectations has become a bigger challenge for award programs.

While a passenger may define the success of a program on seat availability, the airline may not, imposing black-out dates and now, with limited capacity, often give up on loyalty in favour of a fare-paying passenger. But, said the IdeaWorks study, that is the wrong way to go.

“When seats are lacking, consumers grumble in protest to friends, coworkers, and members of the media,” said the study.

“Perhaps just behind a la carte fees, reward seat shortages have become the number one complaint among savvy travellers worldwide.

“When seats are plentiful, the love is returned many times over as consumers brag about their good fortune and heap praise for the gift of travel received from a favoured airline. ” IdeaWorks made 6160 booking queries at the websites of 22 frequent flyer programs during February and March 2010.

Travel dates spanned June through October 2010, and 10 long haul routes and 10 city pairs under 2500 miles were checked to assess reward seat availability.

It found that Southwest’s Rapid Rewards program had the highest availability, at 99. 3 per cent. Virgin Blue’s Velocity program was highly rated, ranked fourth with a 90 per cent availability, while the Qantas Frequent Flyer program was tenth, with a 72. 9 per cent availability.

“The top-ranked programs seem to apply a balanced approach to serving all constituents . . . the airline, members, partners, and investors,” said the study. “These programs have learned how to create loyalty while generating cash, by providing an adequate supply of seats at the levels offering best reward value. This is helped by controlling liability through aggressive expiration policies. The revenue part comes naturally when members become enthused (and not frustrated) by program participation.

“Make no mistake, top-ranked programs make a conscious decision to provide more reward seats – even at the potential short term cost of foregoing revenue from the sale of the very same seat to a fare-paying customer,” the report added.

“Frequent flyer programs have an abundant choice of methods to reward members for their loyalty. In addition, pay-with-point options give points an almost cash-like quality. ” The flipside is that hell hath no fury like a scorned frequent flyer, and the report warned about upsetting premium frequent flyers who will not quickly switch back.

And they understand the speed and power of social media, often better than the airline.

Australian travellers can look forward to some significant enhancements of the Qantas and Virgin frequent flyer programs, thought to be announced after Australian Aviation goes to press. Qantas was due to make announcements in the second week of April, while Virgin was thought to be relaunching its program by early May.

With all the enhancements made to the programs so far and with the improvements mooted, it is likely that Australians will enjoy the world’s most rewarding frequent flyer programs as Qantas and Virgin and their hundreds of partners enter a titanic struggle to be the plastic of choice.