500 Billion Miles To Go

WE MAY BE LIVING in a global village, but you still need to change planes to get there. Airlines are making that an easier task, while bringing a new edge to their loyalty programs.

Over the last two years, several major airlines have formed global marketing alliances. International partnerships like oneworld (six airlines including American Airlines and British Airways), Star Alliance (five carriers including United and Lufthansa), and domestic alliances have widened joint booking and made frequent flyer miles more interchangeable. Program members can earn miles with one airline and redeem them with another. Plus, members get preferred treatment from their favorite airline’s partners.

But open booking and limited mile swaps is about as close as partners have come so far. It’s unlikely that either oneworld or Star Alliance will launch a single worldwide program to replace partners’ own frequent flyer programs. American has discussed the possibility with its oneworld partners, but has no concrete plans yet.

Merging the myriad details of different programs would be a real headache. And airlines are reluctant to pool their valuable databases into a single system. (Who would own the data, and who gets which names if partners split up?) Besides, allowing a passenger to pool miles from several airlines could dilute his loyalty to his primary carrier.

The bigger, quieter evolution in travel promotion is the massive popularity of miles on the ground. Airline miles have become a wildly popular promotional currency – everyone from MCI and online investment services to the neighborhood dry cleaner and gas station is giving them away as premiums. Miles have taken on a life of their own as a second national currency.

American touched off the loyalty marketing revolution when it introduced Aadvantage in 1981, and now it’s leading the way selling miles for pure revenue. At the same time, loyalty cards have become widespread, from four-star hotels to the corner grocer. Competition for loyalty may have increased, but the airlines aren’t suffering from share of mind. They’ve still got the big aspirational perq: free travel.

U.S. airlines made $2 billion last year selling miles to other marketers, according to Randy Peterson, editor of the Inside Flyer newsletter, Colorado Springs. Of the estimated $10 billion worth of miles awarded, 40 percent – about $4 billion worth – were earned on the ground. Infrequent flyers are earning tickets for family vacations. Occasional travelers are choosing credit cards and phone services based on mile giveaways.

Consumers who rack up miles on the ground pick their airline brand early – sometimes years before they ever leave the ground – “sometimes without even realizing it,” just by collecting miles, says marketing consultant Steve Grosvald, principal of Tulsa-based Grosvald & Associates and an airline veteran.

Consumers casually respond to offers, and once the miles start adding up, they don’t want to waste them. Earn enough to fly half the family to Walt Disney World, and chances are you’ll buy the rest of the tickets on that same airline. It’s a golden handcuff of branding.

Miles have become a huge promotion business for the airlines, almost a guaranteed profit center. In 1996, American formed Aadvantage Marketing Programs, turning its frequent flyer program into a separate division of its marketing department- and a separate profit center. President Bruce Chemel won’t discuss the division’s revenues, but says “it’s quite a profitable venture for us.” The company has sold miles to nearly 3,000 businesses (including 300 nonprofit organizations) for short-term promotions, on top of miles sold to the likes of Citibank and MCI for their loyalty programs. Revenue from short-term promos is growing at double digits, but is still a fraction of Aadvantage’s sales.

But there’s a caveat to mileage promotions. “A lot of marketers have bought miles thinking they’d automatically bring in customers,” Peterson says. “Business owners think [a miles offer] is its own promotion vehicle, but they still need to use an appropriate message to make it work.”

American wants to expand the ways Aadvantage members can earn and especially redeem miles. “It’s very easy to give away miles, but we also have to bring value for the firms that pay for the miles, and for the consumers who earn them,” Chemel says. “My goal is to get all our customers to use all the miles they earn. If we reduce breakage [expiration of unused miles] to zero, that says our customers can really use their miles,” which reflects well on the American brand.

Because American sells so many of its miles to other marketers, “we view award seats differently than other carriers. We don’t think of these seats as free. So we make them available, because they’re paid for. Companies [buying miles] pay for them at a pretty good rate, so we think it’s a good deal to fill these seats with [their] customers.”

Overbooked? But the rabid popularity of miles could eventually tick off travelers. If there are too many miles out there, and not enough seats for redemption, miles could become more aggravation than they’re worth. Airlines already charge fees for changing free-ticket itineraries, or reshelving miles in an account. About one-third of frequent flyer awards carry some fee. And since 1998, marketers pay a 7.5 percent tax on the miles they give away (even if they expire).

“It’s the big time bomb,” says Rick Barlow, president of Frequency Marketing Inc., Cincinnati. “Airlines don’t need to worry about a rush of redemption, but they should worry about this addiction to selling miles. They’ve gotten too reliant on the money, and it has perverted the true purpose of frequent flyer programs, turning them into a mass product rather than a reward for top customers. The risk is they’ll squander all the good will they’ve built up with their best customers.”

That could be a long time and a few billion dollars away. Fifty-seven million consumers belong to frequent flyer programs, racking up more than 500 billion miles a year, according to Inside Flyer (see chart, page 34). There are about three trillion miles floating around out there, waiting to be redeemed or to expire (about 1 percent expire each year).

Infrequent travelers are less prickly about restrictions on free seats. They don’t mind layovers and weird hours as long as the ticket is free. True frequent flyers, who have become trained to expect top-level service and preferential treatment, are miffed about sharing a limited number of “free” seats with dilettante flyers. In fact, Barlow says he’s aggravated when he can’t get convenient seats to Las Vegas for himself and his son. (His assistant is the one who really grumbles.)

“You sometimes hear about frequent flyers who feel displaced by infrequent travelers, but it’s not as bad as all that.” Grosvald says. Airlines are sensitive about consumers – especially elite-level program members – thinking there are too many miles and not enough seats, “even if it isn’t really true,” he says. “Sure, there are problems from time to time. But look at the millions of people who have been able to travel with their families at no charge, or the frequent flyers who have given their children wedding flights to Hawaii or Europe. It sure beats trading in books of Green Stamps for a toaster.”

American has added elite membership levels to avoid alienating its top guns. “You need to fly to become a member of our elite tiers,” Chemel explains. “That’s where the American Airlines loyalty piece has remained very much intact. You can’t earn elite status with a Citibank card. We’ve reserved the recognition benefits for those members who deserve it.”

To head off frequent flyer backlash, airlines also could open up more seats for redemption, or start “reverse redemption,” letting consumers cash in miles for other goods and services. That would truly make miles a two-way currency. A few months ago, American and MCI began testing an offer to current MCI customers to redeem miles for phone time. Aadvantage members also can swap miles for hotel stays and rental cars, and more reverse redemption is down the pike.

“My philosophy is that we ought to be willing to do this with anyone who’s willing to distribute miles for us,” Chemel says. “For anyone who purchases miles from us, we’ll consider allowing members to redeem miles with them.”

The problem with reverse redemption is that it’s sometimes more expensive to fulfill than the $18-$34 airlines spend now to put one more body on a plane. And nothing compares with the dream of free travel. Consumers think the average free ticket is worth $500, Peterson says. For $34, “you can never find a trade like that.” Also, free flyers usually bring a companion – incremental income for the airline.

Airlines that don’t make redemption easy will shoot themselves in the foot, because other marketers will stop buying their miles. “If Citibank cardholders can’t redeem their awards, Citibank is going to hear about it. And then I’m going to hear about it,” Chemel points out. “And right now, I don’t hear about it.”

No matter how thin the miles are spread, airlines still know their customers, Grosvald contends. “I know my audience, whether it’s one million or 20 million members,” says the 21-year United Airlines vet. “I can still tell what percentage are active flyers, who’s earning miles on the ground, how often they travel, and then target groups by activity.”

Miles for the masses can succeed if airlines tailor offers to different groups. Aadvantage reserves its Gold and Platinum benefits for true frequent flyers. Other groups are targeted with offers generated by Aadvantage’s massive database, with offers on monthly mileage statements triggered by how many miles a passenger earned and how. American, which manages its database in-house, wants to target inserts as well as it does statements.

“Ultimately this is not about a program of 35 million members,” Chemel says. “It’s about making the program relevant to each individual member. You just have to keep parsing it down and giving smaller and smaller groups of people what they want.”

Forget the global village, then. Welcome to the personal village, population 1. Will that be aisle or window? n