I spend a lot of time talking about what loyalty programs are up to now, but there’s a long-term question that’s worth asking: five years from now, will any of it matter? Hey, when the frequent flyer program (as we know it today) was invented, a free ticket was 20,000 miles and didn’t have any restrictions. Mileage inflation, caused by the number of miles outstanding, has certainly changed that. So what should we expect to see in the future? Here’s the single most salient point:
Your Value Will be the Size of Your Wallet
When frequent flyer programs were invented, the airlines made the mistake of basing the points you got on how far you flew instead of how much you spent. Back then, the price of your ticket still bore some resemblance to the distance you traveled, rather than how much the airlines could soak you for, which is based on competition. The problem, of course, is that companies deposit dollars in the bank, not seat-miles, so Delta and United changed the way they gave miles, basing it on how much you spent and your elite status.
You are going to see more of this type of behavior (and, from a business point of view, it makes perfect sense to me) in the future. In fact, Delta and United weren’t even the first to do it: the hotel were. Hotels didn’t develop their programs until several years after the airlines did, and they recognized the flaw in the frequent flyer schemes. With American and United now having completed their merger, I would assume that the new AA will follow its brethren shortly.
Five years ago, it was rare for an airline to sell even 20% of its seats in first class, meaning that there were plenty of free upgrades for elite members. The airlines could lower the price of first class to stimulate more traffic, but there was no guarantee that more tickets would sell, since corporations generally forbid passengers from buying first class. Thus, they would just sell the same number of tickets at lower prices.
It was Delta who did the best job of cracking the code that stopped passengers from moving up front. Instead of trying to sell first class tickets, Delta started offering upgrades as an add-on, either during the ticketing process, by email or at the airport. Eventually, they also allowed you to use miles, valued at a penny apiece, to cover the difference between coach and first. Delta wasn’t the first to monetize upgrades, but they’ve been the best at it. A consumer won’t pay $1,000 extra out of their own pocket at ticketing for first class, but they might be willing to respond to an email offering them an upgrade for $200. In its most recent quarter, the percentage of sold first class tickets (including those with paid upgrades) topped 50%. Sorry elite members. That number is rising, and there will come a time when free upgrades are eliminated for all but the highest level elite status members.
But Hello Fees
I can think of a lot of fees that were added over the past several years, but not many that were taken away. Airlines are facing increasing pressure from low-cost carriers and high-cost employees (although lower than a few years ago), combined with pressure from shareholders to generate profits consistently, which they have never done before. They’re stuck between a rock and a hard place (aka, “the middle seat”). You can’t charge a higher fare than your competitor on a particular route, so you have to make it up once they’ve bought the ticket. I’m not surprised that they’re charging more fee. I’m just surprised that it took them this long. With AA looking to match Delta in offering fares to compete with Spirit, they’ll have to make up the difference somewhere. Get ready to start paying for seat assignments.
Worst of All: Awards Based on the Dollar Cost of a Ticket
On most airlines, you currently earn miles based on how much you spend, but there are only a couple, such as Southwest and JetBlue, that charge you miles based on the underlying ticket price. The two generally value miles around 1.5c each, so you know that a $150 ticket will cost you about 10,000 miles. Not a big deal and actually, not a surprise. These programs were created later than their peers, so they had time to learn from others’ mistakes.
But the best deals come when you use your miles for international first/business class. Now, it gets tricky. One of those tickets might cost $10,000 or more. At the very most, a roundtrip ticket in F on American from the US to Hong Kong, for instance, will cost you just over 400,000 miles, or you could end up paying $13,000 in cash, valuing your miles at a little over 3c each. A business class ticket in December cost me 125,000 miles, but would be over $6,000 in cash. That’s 4c per mile.
I’m not sure how airlines will value miles if they move to cost-based program, but I do feel comfortable saying that it will not be 3c per mile. They might not even give you 2c per mile, but even if they did, that London ticket would have cost me 300,000 miles, not 125,000. You can see where this is going. In fact, it has already started. Delta Airlines removed its reward chart from its site, allowing it to vary the cost of rewards without allowing you to detect it, unless you do a lot of work.
It will take a few years until we get to full monetization, but it’s coming.
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