IN FOCUS: Are airlines positioned to make customer loyalty pay?

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Loyalty programmes have been part of the airline world for more than 30 years but there remains a feeling that, even after three decades, many airlines have still to tap their full potential.

"I think for many carriers it is a latent opportunity," says Scot Hornick, partner at management consultants Oliver Wyman. He notes that senior management time has understandably been drawn in recent years to big picture issues such as mergers, re-fleeting and even just survival.

"The CEO's mind has not been focused on it [loyalty programmes], so I think there is a lot of latent potential out there. It is only the larger carriers, with dominant shares in big markets, that have really got their game together," he says. "Even then they are just beginning to get close to what they could achieve. For most carriers their loyalty programme is an under-leveraged asset."

Ravindra Bhagwanani, managing director at customer loyalty specialist Global Flight, echoes this thought. "The top 30 airlines have definitely understood its importance and that is reflected in their internal organisation. But there are over 200 frequent-flyer programmes (FFP) and many airlines that don't understand the potential," he says.

NOT AT THE TOP TABLE

Iain Webster, senior loyalty consultant at ICLP believes loyalty does not sit high enough in airlines' organisational structure. "It is surprising it has taken CEOs that long to see the potential. It's too low down the organisation food-chain," he says.

"There are a lot of frustrated loyalty marketeers out there as the loyalty organisation is still in the wrong place. The opportunity is every bit as big as cargo, but very often they [loyalty heads] report into the VP of sales and marketing. They should report into the CEO if it is as big as cargo. What is more important than understanding your customer base?"

The value and prime mission of loyalty programmes differs depending on the airline and its approach. Some have traditionally put the priority on using it as a revenue generator, trying to maximise miles sold, or for sales promotion. Others prioritise it as a central tool in customer relationship management (CRM).

Likewise, the organisational approach differs. Loyalty teams for some remain small and sit within the wider marketing function. Others have turned into separate profit centres but none has yet followed the path set by in 2005 when Air Canada's frequent flyer programme Aeroplan was spun off in an IPO.

Bhagwanani says, unless an airline is close to bankrupt and needs cash, he does not see any airline spinning off its FFP unit and forgive future revenue potentials. "Air Canada must have more than one regret when looking at the profits Aeroplan generates now," he says. "It is definitely wiser to keep these profits in-house as the figures over at Qantas show: More than 50% of the group's profit in 2010/11 came from the FFP unit."

Qantas separated its FFP into an autonomous business in 2007 allowing it to develop independently, but still owns the unit. Simon Hickey, chief executive of Qantas Loyalty, believes its structure has been key to its reinvention. "To me it has been fundamental that we are separate. That allows us to invest in our business and in analytics.

"We had to look at how to make changes to drive value for members and how to create a business behind it," Hickey adds. "If you are running an airline it is quite difficult to assess the range of ways to create value from a loyalty programme because they are quite different businesses."

Since 2007 it has grown from a unit of 20 people in the airline marketing team to more than 200 staff. Hickey believes the organisational structure, under which the Loyalty business reports directly to group chief executive Alan Joyce, has been a key to its success. "If we had been sitting in the middle of the marketing department, I might report into the marketing manager, reporting into the head of commercial, then into the CEO," he says. But the structure has empowered the loyalty part of the business to grow. "We've been able to change everything about the programme."

One of the reasons for the shift in approach was a reaction to changing market dynamics as low-cost carriers began to influence consumer habits. Hickey says: "The market was shifting, so we had to decide: 'do we become a small niche programme that works for premium high flyers or do we become a member-engaged programme?'

Part of the strategy adopted by Qantas was to move to a coalition approach with new partners, notably including key Australian retailer Woolworths. This has helped expand the reach of the programme, its ability to offer different rewards and brought new flyers to Qantas. It has since more than doubled its membership to over 8 million.

The ability to offer different types of rewards for members across the spectrum, particular those that do not earn enough to spend miles on flights is an area ready for innovation. Qantas for example has been able to package up airline miles in quarterly vouchers for Woolworths.

Webster believes engaging more occasional travellers is a key area of opportunity for airlines. "A lot of them have done a very good job at the top end. It is the guys in the middle and at the top of the bottom where we think there is a rich seam. It is a question of how do you engage them when they never get to the top? You have to find a play for them. And that is to find more ways to build up credits and more things to do with them," he says.

He notes that as 30% of customers typically belong to the loyalty programme and provide 70% of revenues, that means 70% of residual customers are only generating 30% of the revenues. This provides a large untapped pool to work on.

TERMS OF ENGAGEMENT

Engaging members who accrue only a small amount of miles has become even more pertinent as fares have lowered, particularly on short-haul routes. Lower prices means less miles to earn, but also has an impact on members' willingness to spend them on flights.

"The larger problem is not earning miles, but burning them," says Webster, a problem exacerbated by the increasingly large portion of airfare that is made up of government taxes and fuel surcharges. This, combined with stiff competition, means the actual fare element on which miles can be used is often relatively small. "The fare element of the total price is so cheap, there is no economic sense in redeeming them on short-haul flights," he says, noting passengers would still face a significant chunk to pay in other charges. "That's a problem, particularly in the UK with fuel surcharges and APD. So we have been looking at other ways to earn and burn."

Hickey believes it is important to understand human behaviour in developing ways to engage with its members. "By putting the right rewards in front of people, they tend to look at how they can increase their earning behaviour," he says, adding: "when we brought on Woolworths, the first adopters were the high flyers who saw it as an opportunity to acquire points."

One impact of the new approach at Qantas was to diversify the programme membership. Hickey notes the demographic of the Qantas scheme has shifted from 60:40 male:female to a roughly even split.

Similarly, it has also increased penetration among a younger audience. "It's good for them to grow with the programme. And for loyalty programmes, that is a very hard segment to engage with," says Hickey. "I can do different things with different people. You start designing various programme elements around different segments."

EXPENSIVE FRILL

While loyalty programmes have historically been seen as part of the armoury of network carriers, low-cost carriers have continued to side-step this world. In October, AirAsia became the latest low-cost carrier to launch a frequent-flyer programme, its Big programme.

"The old business model of low-cost carriers held that loyalty was an expensive frill they could do without. They are now beginning to view it as a useful tool they can monetise," says Oliver Wyman's Hornick. "It is hard to see a low-cost carrier that has really cracked that area yet, but they are working on it."

Bhagwanani adds: "Some low-cost carriers are still seeing it more as an ancillary revenue. They don't need a complicated solution. They can have a simple programme, but what is important is they use it as a CRM tool."

"If you have a competitive disadvantage on the product side, one of the few things you can have is an FFP. But you should be smarter with the FFP," he says. "That is something, with the exception of some carriers like Southwest Airlines, I don't see yet. The first step is to have a programme. The second step is exploiting the potential."

Some carriers have taken steps to be creative in this field. Webster highlights German hybrid carrier Air Berlin's MyFlight initiative, in which programme members nominate a specific route to collect double miles, as one bright example. Indeed, Webster believes innovation is key for airlines in this field. "Too many are depressingly the same, with three tiers, usually named after different colours or metals," he says.

One such innovation is Estonian Air's new social media loyalty initiative, which gives passengers the chance to earn credits for something beyond the typical norm of a transaction. Launched last year in co-operation with social media specialists SimpliFlying, AirScore gives passengers an opportunity to earn miles by promoting the airline. "Social media is a very cost-effective tool to promote our brand across borders," says Estonian Air chief executive Tero Taskila.

Bhagwanani believes CRM is the crucial element to airline loyalty programmes. "A couple of years ago everyone looked at FFPs as an ancillary revenue and the sale of points. But airlines are definitely starting to see it is not just about that, but as also about CRM."

He believes airlines can learn from other industries which have developed innovative CRM solution from their loyalty programmes, despite the disadvantage of having far less dynamic products than the airline sector.

"The first thing is they should start by using the database in an intelligent way," he says. "It starts with airlines looking at the passenger data intelligently so they understand who your customers are."