Australia’s competition watchdog has expressed concern about airline frequent flyer programmes, flagging the potential for unfair pricing and anti-competitive practices.

“Loyalty schemes have the potential to raise competition concerns,” the Australian Competition and Consumer Commission (ACCC) says in an investigation report on a broad range of loyalty programmes.

“This can occur depending on the extent to which loyalty schemes ‘lock up’ customers and introduce switching costs that increase barriers to entry and expansion for rival firms.”

For airlines, the commission notes that this has already happened in other markets. In Sweden and Norway, local competition authorities determined that Scandinavian Airlines System’s EuroBonus frequent flyer loyalty scheme created obstacles to new entry.

The ACCC acknowledges that Qantas’ Frequent Flyer scheme “might have a significant impact on barriers to entry and expansion for the domestic business traveller segment”, though there isn’t any evidence of this to date, while Virgin Australia has successfully grown its Velocity programme and market position.

These have also made significant contributions to the parent airlines’ overall earnings. Qantas’ programme has approximately 13 million members and reported consecutive earnings growth since 2015, with financial year 2019’s EBIT at A$374 million. Velocity, which recently became fully owned by the airline, has over 10 million members and reported an EBIT of A$122.2 million in the same period.

The commission highlights some emerging trends with loyalty schemes, including increased personalisation and price discrimination. Increasingly sophisticated data collection systems allow loyalty schemes to develop profiles of their customers and create more personalised experiences, but this could lead to “highly targeted price discrimination”.

The ACCC says: “It is likely that the scope for personalised pricing will grow as the volume and quality of data collected by loyalty schemes expands and algorithms become more sophisticated. Loyalty schemes may be able to use the highly detailed profiles of their members’ behaviours and attributes to offer each a different price for a product or service.”

The roll-out of IATA’s New Distribution Capability data standard for airline booking systems will allow airlines to offer personalised fares, also based on personal data obtained from loyalty schemes, the ACCC adds.

“Concerns have been raised that airlines could use personalised pricing to offer higher ticket prices to customers less likely to be deterred by fare increases, such as business travellers or consumers with limited travel dates,” it says. Conversely, some consumers may benefit from increasingly personalised pricing, says the ACCC.

Qantas declines to comment on the issue of price personalisation, but says it will introduce improvements to its scheme next year.

“We know that millions of Australians choose to be Qantas Frequent Flyers because they see real benefits and value from being members, like the five million reward flights which were taken last year,” it says.

“There’s a lot about our frequent flyer programme that our members tell us they love, but there are also areas of the programme that have increasingly come under pressure as a result of rapid expansion which is why we made significant changes to the programme earlier this year like slashing carrier charges, making a million more reward seats available and making it easier to find seats on our website,” Qantas adds.

Virgin Australia says it does not price dynamically based on personal characteristics of its passengers and members. Pricing on any route is driven by a combination of factors, it notes, including demand, how close the date of booking is to date of travel, seasonality, operating costs and third-party costs such as airport pricing and taxes.

“We regularly review our programme and policies to ensure that our members are clearly informed about our programme, including data practices, “ it adds.

The airline says it is always looking at ways to improve Velocity and has taken onboard the ACCC’s recommendations to “enhance our members terms and conditions and privacy policy”.