Prepaid flights and subscriptions – what’s the difference?

Flight Subscriptions and Prepaid Flights are often confused. In this article, we’ll clarify the difference between them, what it might mean for your customers and when they should be used.

Prepaid flights

Prepaid flights go by many names, vouchers, flight passes, bundles, travel passes etc. and in some cases the same word, like “pass”, is applied to a variety of different models. To bring some clarity, we’ll start with a simple definition: Prepaid Flights are a common type of bulk-discount offers where customers buy a large number of flights in advance at a discounted price.

Bulk discounts are a familiar concept, often encountered in the form of “buy X, get 1 free” deals or as volume-based discounts in business negotiations. Their goal is simple, increase the value of an individual purchase by offering a discount that is proportional to the amount being purchased.

In the airline world this translates into offers where customers can buy 5, 10 or more flights at once and pay fares that are below market average. In these offers, the purchase is separate from the choice of travel dates, leading to the name “prepaid flights”.

When to use prepaid flights

Historically, prepaid flights have been useful for airlines in two situations: when there is a need to raise cash quickly, and when targeting certain niche audiences. A good example of the first was seen during the pandemic, when travel demand was at an historic low and restrictions limited the number of flights that could operate.

In this context, carriers, like Viva Air, resorted to prepaid flights by selling blocks of 5 or 8 flights at a discount, to keep revenue flowing. This allowed users to benefit from cheaper flights in the future and, in the short term, boosted the airline’s cash flow, allowing it to weather the storm.

A similar logic was used in the 1980s, when the effects of deregulation wrecked havoc in American Airlines’ finances and led it to create a Lifetime AAirpass, that gave customers unlimited travel in first-class. The idea worked, helping the airline to raise cash, but was later criticized for the high long-term cost.

Another situation in which the bulk-discount / prepaid flight model works well is when airlines target niches that have the following characteristics: limited competition, high travel frequency and relatively low prices.

Here, prepaid flights can be attractive for frequent fliers who know they will travel anyway, know the airline is the only / the best option and are therefore comfortable making an upfront investment to save money in the long run.

Outside these applications, despite numerous attempts, the prepaid model has limited success, remaining a niche product that was unable to appeal to a wide audience.

Challenges of prepaid models

This limited effectiveness is part of the reason why Prepaid Flights are now considered an obsolete model, that has been superseded by new technologies like True Flight Subscriptions.

To understand why, we’ll start by looking at one of its main features, the advance payment. On paper, it seems like a great idea, the airline gets money early, and users get cheaper flights. The challenge is that to get the discount, customers have to purchase a large number of flights at once, creating a financial barrier to entry that only the most motivated customers will overcome.

These customers will likely be the ones who have the most to gain from the discount, because they would have purchased those flights regardless at a higher price, be it from the airline itself or from a competitor. In the latter case, the program could help to improve its market share, but at a severe cost on margins and targeting only a customer pool.

Widening the pool, requires lowering prices further, to make the upfront payment worthwhile for the customer, but also endangering the airline’s margins. This is why the model typically works well on routes where flights are relatively short and inexpensive, and where individual travel frequency is high.

The complexity of the aviation industry also doesn’t help, causing some of the prepaid solutions to turn into administrative nightmares or creating poor customer experiences. As a result, many airlines including the likes of British Airways, Kenya Airways and Singapore Airlines have all tried and abandoned prepaid flight models.

Alternative models

The good news is that many of these problems can be solved. Technological improvements are now allowing airlines to move away from prepaid flights and into True Subscriptions, following a pattern that started in the entertainment industry and was rapidly followed by other industries like retail and software.

In travel, this transformation was initially held back by the complexities of travel distribution and is now becoming a reality thanks to specialized companies like Caravelo, who were able to successfully adapt the True Subscription model to aviation.

With this in mind, the next question is obvious: What’s a flight subscription? True Flight Subscriptions are an evolution of the old prepaid model, where users pay a recurring fee to get access to a set number of flights.

The key to their success is the concept of recurrence. Recurrence means that users sign up, and then pay a subscription fee every month that gives them access to flights. With each payment cycle, the number of available flights is reset, and unused flights are lost.

This matters because it turns what was a one-off purchase into a default-retain system where, if the customer does not take action, the purchase of flights will continue indefinitely without the airline having to invest resources in re-acquiring the customer.

Default-retain systems are the opposite of the traditional, default-loss, system used by airlines where after each purchase customers have to first be convinced to travel again and then persuaded to buy from the airline instead of a competitor.

When to use Flight subscriptions

Being a default-retain system flight subscriptions are ideal for airlines that want to increase their market share, boost revenue or increase customer lifetime value. They are not, however, well suited to airlines who have a monopoly on their routes or benefit from state aids or other heavily regulated scenarios that eliminate competition.

To understand why, it’s worth diving a bit deeper in the mechanics of flight subscriptions and the recurring cycles that characterize them. From a user’s perspective, the process will look something like this: they will sign up, often attracted by a lower than average fare and then, every month, will receive a charge in their account and an allowance of flights.

This will have two consequences, first, when needing to travel, the user will not search and compare flights because the purchase happened before the idea/need to travel arose. As a result they will be completely immune from any offer, promo, loyalty program or other discount that competitors could make and will travel with the airline by default, increasing market share.

The same will be true in months when the need for travel doesn’t arise. In these months the subscriber will still have a flight available that can be either not used, resulting in extra revenue for the airline, or turn into an unplanned trip, increasing demand.

In both cases, the airline will benefit, effectively increasing sales and boosting revenue. This revenue will also be of a higher quality, compared to traditional revenue, with higher predictability and stability. To learn more about these benefits and the different types of subscriptions that are in the market, we recommend reaching out to our team at info@caravelo.com and reading our taxonomy of travel subscription that will give you a more complete picture of can be done with subscriptions in our industry.

Finally, to summarize the differences between a subscription and prepaid flights, we’ll use a rather colorful quote from our Marketing Director that drives home the point:

“Imagine it’s the pandemic, and a supermarket has a bulk discount on toilet paper, buy 70 rolls and get 20% off. You’d buy it, of course, and it would last a year, but you wouldn’t say that you have subscribed to toilet paper. It’s the same with prepaid flights or anything else, buying something in bulk at a discount before you need to use it is a good idea (if you can afford it) but it’s different from subscribing to it.”