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Tuesday, August 04, 2009

Revenue Based Frequent Flyer Programs

Most frequent flyer programs (FFPs) are based on the traditional mileage concept. Each of the 3 main aspects (earning, status and redemption) are based on mileage flown.

United Mileage Plus is an example of a traditional mileage-based FFP.

  • Earn a multiple of distance flown, with minimum mileage, status bonus and class of service bonus.
  • Status is achieved by passing elite qualifying mileage thresholds.
  • Redeem awards at fixed mileage amounts based on the zones flown (loosely proportional to distance).
There are some frequent flyer programs that have switched to a revenue based system. There are also some mileage-revenue hybrid systems in use. So far there isn't a standard way these work as each FFP has taken a slightly different approach. I'll explain more below.

The least different to the traditional programs are what I call enhanced mileage based FFPs, such as bmi Diamond Club. These work just like traditional programs except the earn and burn rates are much higher in premium cabins (eg 300% mileage in first vs 150% in the traditional FFPs), and sometimes also in certain high demand/high fare zones. The earning rates are also be very low or zero on cheap economy booking classes, and sometimes also for cheap business and first class booking classes. Thus there is a greater spread of earning rates and award costs.

Analysis: With the altered earning and redemption scales, the value equation is altered. Those who buy cheap/economy fares and wish to redeem in premium cabins are usually worse off. Elite status can be much easier or much harder to achieve depending on what kind of paid fares you use.

Inherent problem with a revenue basis

While a revenue-based frequent flyer program may appear attractive to beancounters at the airlines (by rewarding proportional to the "worth" of a customer), there is a fundamental inherent problem. FFPs work as a loyalty device in large part because they give rise to an appearance of getting something for nothing. The program rules are deliberately set to muddy the value equation for consumers - ie allow FFPs to appear to give more value than they cost the airlines, overall. A true revenue-based FFP with earning, status and redemption as functions of revenue makes the value equation transparent. This is not good for airlines.

Each FFP that has moved to a revenue or hybrid basis has tackled this problem in slightly different ways.

Revenue with fixed earning & variable award cost

The one I'm most familiar with is Air New Zealand Airpoints. They reversed the way traditional programs work by making earning fixed amounts (based on zones and class of travel) and redemption variable amounts based directly on fares. Both earning and redemption have a greater spread than the traditional FFPs - for example the amount earned in first class is typically is 4 times (or more) the amount in full (ie expensive) economy class. Awards on Air New Zealand cost the same as the fare, and on partner airlines a high fixed amount. The fixed amounts for earning and partner redemptions are loosely based on typical fares. Status is loosely revenue based in line with earning.

Analysis: Spending for awards on their own flights is simple & requires no chart. In common with all revenue based FFPs, you don't know how much you need until you look. The partner awards is complicated and very expensive. Hopefully in time this can be simplified.

Revenue with variable earning and fixed award costs

Virgin Blue started Velocity Rewards after Air New Zealand converted Airpoints from a mileage basis to a revenue one. With Velocity Rewards you earn a multiple of the fare and the award cost is a fixed amount based loosely on the fares available at the time you wish to redeem. Here earning is extremely simple but the cost to redeem is unknown as is just how much your points are worth (compared with Airpoints where you know your balance is good for a fare of the same value). Status is directly related to how much you spend.

Analysis: This program manages to be both transparent (in earning) and non-transparent (in redemption) at the same time. It would be more reassuring, and thus more attractive, if there was a commitment from Velocity Rewards as to the minimum worth of points (ie it will never cost you more than x points per $ fare).

Mileage-based but with additional revenue-based awards

While traditional mileage-based FFPs have long had additional awards available at double the mileage cost, some programs have gone a step further. These hybrids have added variable cost awards to their traditional fixed cost awards. In general the variable cost awards are more expensive (sometimes by a large multiple), but not always.

For example Qantas Frequent Flyer has Classic awards (mileage based) and also Any Seat awards. Any Seat award cost is function of available fares, but they are not restricted to high fares, and so if a sale is on the award cost can be less than for a Classic award. The rate is set so that on non-sale cheap fares the Any Seat award will generally cost a little bit more than a Classic award.

Analysis: The rate for variable cost awards is such that generally poor value. When the mileage cost is relatively low the fares are super low. Good only for those who can accumulate vast sums of miles (eg through business credit card spend).

Singapore Airlines

Singapore Airlines are difficult to categorise because they have the PPS status recognition for business and first class passengers, and also have a traditional mileage based FFP in Kris Flyer. The PPS status has been purely revenue based for a couple of years. Arguably it is even more extreme than any of the other programs because only spend in premium cabins are counted, and then only on Singapore Airlines flights. Kris Flyer looks a little like an enhanced mileage based program in that there are 3 levels of fixed awards depending on availability of certain booking classes. However, earning rates are not similarly "enhanced" with the exception of 300% earning in A380 and 77W Suites (first class).

Round-up of revenue based frequent flyer programs

There are also other FFPs which are revenue based. I've categorized some below:
  • enhanced mileage based - Air France/KLM Flying Blue, bmi Diamond Club, British Airways Executive Club, Lufthansa Miles & More
  • Singapore Airlines - see above
  • fixed earning & variable award - Air New Zealand Airpoints
  • variable earning & fixed award - JetBlue trueBlue (new version), Virgin America eleVAte, Virgin Blue Velocity Rewards
  • mileage based with additional variable awards - Qantas Frequent Flyer

I may have missed other revenue based programs. Please let us know in the comments.

Updated 14 October 2009.

Emirates has announced Skywards will move to a revenue basis from 1 January 2010. For more information check out my post discussing the Skywards changes. The revised program can be categorized as fixed earning and fixed award.

3 comments:

Anonymous said...

United's Global Services?

The Global Traveller said...

United Global Service (UGS) is like Singapore Airlines PPS, with less onerous qualification.

UGS is a status earned through spend on United Airlines flights and is separate to the United Mileage Plus program.

yang said...

How about FFP's with award co-payment options/supplements? It definitely destores the value of every mile earned and it complicates the equation for travellers.