What does paid loyalty mean for airlines?
In aviation, paid loyalty is a controversial topic, but a fairly intuitive one to define. As the name suggests, paid loyalty is the practice of selling perks that are usually only accessible as a reward from a loyalty program. In aviation, this means things like lounge access, miles, fast-track or preferential upgrades and customer service.
Broadly speaking, critics say that paid loyalty diminishes the value of a loyalty program, by making its rewards less exclusive. Supporters argue that it can motivate people to choose the airline and provide additional revenue. But… things in aviation are rarely so simple, and it’s worth diving a bit deeper to understand why.
Airlines, like any business, aim to increase revenue. In an aviation context, this means growing the number of tickets sold and/or boosting the value of each transaction, which, on an individual level, translates to increasing customer lifetime value (CLV).
Customer Lifetime Value, like revenue, can be boosted by increasing transaction value and/or purchase frequency. Frequency, in turn, can be increased by ensuring the passenger chooses the airline more often (market share) and/or flies more often in the first place (frequency). Passenger lifetime value has therefore 3 components: transaction value, travel frequency and market share.
Lifetime value (LTV) = transaction value x travel frequency x market share
Historically, airlines have considered travel frequency as a relatively fixed quantity, using marketing campaigns to address it and saving most of their resources to increase market share and transaction value. To influence them, they have 3 main tools at their disposal:
- Price of the core product (flight tickets)
- The paid extras (ancillaries)
- Gifts and rewards (loyalty programs / FFPs)
A race to the bottom
Price is the easiest to understand of the three. Airlines have long used it to attract additional demand with discounts or to segment users based on their flexibility, day of travel, length of stay etc. Likewise, extras are also very familiar thanks to the widespread use of unbundled products, where airlines, and especially LCCs, redefine what the base product is by stripping off elements that can be sold separately.
This “passion” for ancillaries has lead to a bewildering number of add-ons and created frustrating user interfaces where customers have to dodge extras of all sorts before being allowed to purchase a ticket. As a response, and in an attempt to increase ancillary uptake, some airlines created bundles that made them easier to purchase and somewhat improved user experience.
The result has been a dynamic where base fares are used to capture the user, improving market share, and ancillaries are used to increase transaction value, leading to a boost in revenue. Understandably, this has resulted in a race to the bottom, with airlines even willing to sell at a loss just to capture the user and make money from ancillary revenue.
One tool that full-service carriers use to mitigate shrinking margins are loyalty programs. In a nutshell, these programs give users points/miles in exchange for their purchases and can be used to influence customer behavior by assigning more points to higher value purchases. In return, travelers get rewards such as special treatment, upgrades, or flights.
The system appeals to frequent travelers in two ways. First by allowing them to earn special status within the airline that, based on their level, will give them access to exclusive perks like lounges, priority lanes etc. Second because it allows them to exchange some points for things like upgrades and flights that would otherwise be very expensive to purchase.
The appeal of the status and rewards is such that it allows airlines to monetize their programs by selling miles to third parties, like banks, that use them to shape the behavior of their own customers. The idea of selling loyalty was also taken further by some airlines that realized they could sell miles and even status to their own customers, like in the case of Emirates’ Skywards+ or LATAM’s Club LATAM Pass.
Loyalty subscriptions ?
With these two examples, we enter the so-called “paid loyalty” arena, where loyalty rewards are not just something accessible by travelers who behave as the airline desires but also by passengers who are willing to pay to access. The phenomenon is, of course, not limited to these two airlines, but we chose them because they have brought this one step further, and claim to offer a “subscription” to their paid loyalty offering.
A quick analysis revealed that this was not actually true in the case of Emirates who (despite the name) offers a one-off purchase, but it is true in the case of LATAM and that, as a travel subscription company, got our attention. Looking at these programs, it is hard to say what impact they may have on the normal (unpaid) loyalty program, but it is true that by having people pay to get benefits, the airline is making them feel like they have more skin in the game and more to lose if they don’t fly with the airline.
The challenge is that is it hard to quantify what impact that paid loyalty will have on the rest of the airline’s loyalty program and on the behavior of non-paying members. Critics suggest that offering paid loyalty might reduce the appeal of the program’s perks and therefore reduce the effectiveness and value of the program, but evidence on either side is hard to come by.
In our opinion, one thing is clear, the idea of having people commit money to get something back when they fly is good. However, there are much safer and better ways to achieve the same result, without endangering the loyalty program. Good examples are the three types of travel subscriptions, discount clubs, ancillary clubs and true flight subscriptions, that have only recently become feasible thanks to advances in know-how and IT created by Caravelo.
The idea of giving travelers some “skin in the game”, in the form of a financial commitment to the airline, is a very powerful one and the first ones to realize it were LCCs. These airlines noticed how dedicated some customers were to finding the best offers, and gradually moved from asking users to sign up to a newsletter to get early access to promos to actually charging money to access the lowest fare classes.
This is how “discount clubs” were born, creating a system where users subscribed and paid a regular fees to access special deals, or paid a one-off fee to get access to the deals for a year. Judging by the widespread uptake of these clubs by airlines, and the internal data we see in Caravelo’s customers, Clubs are a resounding success. But they still have a significant limitation.
A discount club acts in a similar way to a loyalty program, making people feel they have something to lose if they don’t fly with the airline and, as a result, they improve market share. The difference is that in this case the user will not lose some points that were given to them for free, but their own money, resulting in a much stronger effect. Unfortunately, this effect is still limited to market share and does not address travel frequency.
The same is true for ancillary clubs that, instead of offering discounts, allow users to get certain ancillaries like bags or seat selection free in all their bookings with the airlines. Ancillary clubs are less common than discount clubs because of the challenges of integrating true subscription systems into airline IT, but are now being built for several airlines by Caravelo, using the same breakthroughs created for true flight subscriptions.
Subscriptions as a whole are a very interesting business proposition because they are characterized by automated, recurring purchases where the user signs up (and chooses their provider) only once, and then automatically purchases the product every week/month/year until they unsubscribe. This creates what is called a “default-retain” system where if no action is taken, the user continues to purchase the product with the same frequency, from the same provider.
Applied to discounts or ancillaries, this acts as the ultimate retention tool, where customers pay a very small but constant fee that keeps them financially committed to the airline. Translated to flights, it means that users will automatically purchase one or more flights every month, regardless of whether they intend to travel or not, and unused tickets will be lost.
To use a practical example, in the case of a one flight per month subscription like the Flight Pass 12 offered by Alaska Airlines, users will have one return flight to use every month. If they don’t use it, the flight is lost (but still paid for) creating an incentive to travel more often and thus increasing travel frequency and ensuring that the passenger will always fly with the airline when they need to travel.
All this is made possible by the recurring nature of subscriptions that ensure monthly payments are small enough to be tolerated by the users, even if they can’t use the flights every month, and are ideal to increase the share of disposable income that is spent on flying. This increases the overall revenue and profitability of the airline but also creates a significantly higher quality revenue stream that is characterized by predictability, and stability, two words rarely heard in an airline context.
Frequent flyers factories
Astute readers will also have noticed that, by making people travel more often, flight subscriptions are effectively converting regular travelers into frequent flyer. This, for airlines with loyalty programs, can be a blessing since it increases the number of people who can collect enough miles to see the program as something important in their lives.
The result is that these passengers will become far more likely to travel with the airline even in flights not covered by their subscription, simply because they want to earn more miles and take advantage of the benefits that their frequent flier status can provide.
For LCCs a similar thing is true, only in this case instead of having travelers that accumulate miles they increase the number of people who will be travelling with them and, therefore, the number of people likely to purchase ancillaries. Some, like Volaris have even included a subscription to the ancillaries into their flight subscription product, boosting their revenue even further.
All this progress has been made possible by one company, Caravelo, thanks to two significant breakthroughs. First, it solved the technological challenges that made it hard to create true subscription products that could be seamlessly integrated with airline IT systems. Second, it developed the business tools and know-how needed to design a profitable subscription, finding the right balance between attractiveness and profitability.
This has led to airlines, like Volaris, launching multiple subscription programs to target different segments of the market. In the future, the availability of these advanced capabilities in a single platform, that covers the full travel subscription spectrum, is likely to lead to hybrid programs that mix elements of flight subscriptions, ancillary subscriptions and clubs.
Some of these programs are already in the works, together with several single-focus clubs and flight subscriptions. If you’d like to get started and ensure your place in the delivery pipeline reach out to us at firstname.lastname@example.org.