What Risks Do Airlines Face In The Shift Away From Mileage Award Charts?

by 
David Kaplan
Tuesday, July 9, 2019
 • 
4
 min read

Mileage award charts are swiftly being phased out in favor of dynamic pricing.

Ever since Delta decided to withdraw publicly available mileage award charts from its SkyMiles frequent flier program in Feb. 2015, more airlines have been evaluating similar actions, opting, instead, for dynamic pricing strategies.

At the time, travel and tourism insiders bemoaned Delta’s decision, saying that it intentionally stripped away transparency. But the ability to adjust prices according to real-time demand is a force that’s already altered all kinds of transactions: from automating the buying and selling of advertising, to determining the cost of a ride-hailing service at moments of peak demand.

On one side, airlines’ loyalty members have expressed frustration that doing away with  fixed pricing for earned miles has reduced their ability to plan trips using those miles — rewards they’ve accrued with set goals in mind. The carriers generally counter that dynamic pricing actually benefits those travelers, since they’ll be charged at a lower rate for flights with less demand because such a model reduces airlines’ liability when it comes to capitalizing on sudden air travel spikes or the need to drive more bookings during slower periods.

At a time when consumers can choose whether or not to accept a “surge-priced” Uber ride, why should the cost of a flight be any different?

Surge-Pricing For Miles

The answer to that question is more airlines are continuing to follow Delta’s lead toward a more revenue-based frequent flier program.

In May, Lufthansa Group became the first European carrier to embrace dynamic pricing for its loyalty program. The group’s Miles & More frequent flier program covers Lufthansa, Swiss, Austrian Airlines, Brussels Airlines, Eurowings and others. Lufthansa’s announcement came the same month that United Airlines said it, too, would cease posting its award charts online.

More major airline brands have sought to prepare their frequent fliers for the change as well. In May, the Flying Blue loyalty program, which includes Air France, KLM, Hop, and Transavia, adopted a revenue-based points regimen. That same month, British Airways said it, too, will be moving towards dynamic pricing too. American Airlines rejected its fixed award charts for frequent fliers with demand-based “Web Specials” in October, contending in a statement to The Points Guy that it had received “positive customer feedback.”

But as with any solution, airlines making these changes face potential risks.

Killing The Co-Branded Goose

For most travelers, the point of signing up for an airline credit card is to collect frequent flyer miles. The idea is that, just by doing their shopping on their airline-branded credit card, they’ll be able to redeem spending that earned them 100,000 points for a business class booking to Europe that might normally cost $4,000 to $6,000.

But what if that trip that used to be worth 100,000 miles in points suddenly costs 500,000?

Despite the benefits of achieving a greater balance between supply and demand on specific flights, the move to dynamic pricing of rewards carries the risk of killing one of the industry’s cherished golden gooses: i.e., carriers’ co-branded relationship with credit card issuers that service rewards programs.

In essence, if travelers consider airline loyalty programs as diminishing in value, then there's less of a temptation for them to sign up and make purchases on airlines’ co-branded cards. And that could negatively impact the airline's profitability, offsetting the benefits that dynamic pricing was supposed to achieve.

With ancillary revenue becoming an essential part of airlines’ revenue streams, the dollars airlines receive from deals that tie credit card spending to frequent flier miles is one of the main legs that ancillaries strategies rest on.

In its annual report on ancillaries, travel market analyst IdeaWorks estimated that commission fees from credit cards’ support of frequent flier miles amounted to $15.6 billion for major airlines in 2018. In all, total ancillary revenue for major airlines was projected to be $26.9 billion.

Given that Delta has been the bellwether in airlines’ turn away from fixed frequent flier miles, it’s worth taking a singular look at how that carrier has been fairing. The outlook: so far, so good.

In April, Delta updated its alliance with American Express on its SkyMiles program. In a press release, Delta said at the time that it expects its benefit from the relationship to double to nearly $7 billion annually by 2023 – up from $3.4 billion in 2018, “strengthening Delta’s increasingly diversified revenue stream.”

For its part, Amex expected “attractive growth economics” over the term of the agreement.

“Delta, to some extent, has been able to get away with it, because that airline runs a very good operation, and has already positioned itself as one of the most premium of the major U.S. domestic airlines,” one aviation analyst who focuses on loyalty/rewards told Kambr Media on background. “Whether United and American can pull that off, I'm skeptical, but it will be very interesting to see where they go.”

Race To The Bottom?

In devising new dynamic models for loyalty programs, major airlines have to consider travelers who formerly judged a carrier by comparing its rewards to those of their rivals. But as major airlines do away with fixed awards charts, airlines have to worry that their most frequent customers will pick a flight like “everyone else”: by the lowest fare they can find through online travel agencies and booking engines. If that happens to be the consequence, airlines will have to court fliers in other ways, say, by fighting harder to be recognized as the go-to for a better inflight experience than competitors. This takes time, branding, ad dollars, etc. All to re-build the loyalty they’d already achieved with their rewards programs.

The biggest possible danger for airlines is that when people feel their points are so devalued, fliers are simply going to say, “I don't really want to play this game anymore. I'm going to cancel my American Airlines card or cancel my United Airlines card.”

Could be interesting to highlight the business model between credit cards and airlines partnerships.

How Dynamic Pricing Can Still Keep Frequent Fliers Loyal

The gravitational pull that’s sending major airlines toward dynamic pricing of frequent flier miles doesn’t necessarily have to result in models that will hurt business with their best customers – or drive down the value of airlines’ partnerships with credit card issuers.

Dynamic award pricing is good for customers, contends Judson Rollins, an airline industry consultant, because it helps clarify the value of miles relative to cash for any given itinerary. “The best practice for redemptions is found at airlines like Air New Zealand, where loyalty program members earn virtual ‘dollars that can be redeemed on a 1-1 basis against any airfare,” Rollins says. “This maximizes loyalty value transparency, which increases members' "stickiness" to the loyalty program and willingness to direct their spending to the airline's program partners.

How dynamic pricing affects customers' credit card preferences depends on how generously they are rewarded for their spending, he adds.

“It makes it easier for a customer to compare value between airline-affiliated and non-airline credit card reward schemes,” Rollins says. “An airline's most loyal customers, especially those whose business travel is tied to that specific carrier, will still be quite likely to concentrate their spending on the airline's credit cards.”

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