Sky's the Limit: How Airlines Leverage Loyalty Revenue Streams to Elevate Profitability

When COVID struck, the airline industry had to make a sudden and abrupt forced landing. Practically the only revenue the airlines made during peak lockdown was through online purchases made by Airline Loyalty Programme members in the confines of their homes. This, thankfully, resulted in points being churned and a few airlines making some margins and cash flows. Many of us would have read about United's brainwave, and how they leveraged Loyalty programme miles to secure funding for the airline during the crisis. Everyone sat up and realised that this could be a significant asset for them as well.

Airline Loyalty Programmes have evolved significantly since their inception way back in the 1970’s, and are much more than just a scheme to reward frequent flyers. They are now a sophisticated blend of marketing, customer service, data analytics, and profitable strategic partnerships. Airlines now leverage this mix to enhance customer loyalty and drive significant revenue growth. They have become an integral Line of Business, just like passenger revenues, cargo revenues, and ancillary revenues. Best of all, it comes at a very healthy margin and helps free up cash flows.

In this article, I delve into the mechanics, monetisation strategies, and benefits of airline loyalty programs, both to customers, and to the airline. I highlight how these programs have become an indispensable part of any airline's business model. Since airlines typically make profits in single digit percentages, anything that adds lift is a most welcome bonus.

Read on...

?The Mechanics of Airline Loyalty programmes

Airline loyalty programmes are often seen as the desirable and golden keys to exclusive travel benefits and personalisation. They are carefully crafted to foster a sense of belonging and appreciation among customers. They tend to be aspirational because, for some benign, unexplainable reason, every member aspires for a free flight or an upgrade, baggage tags that allow them to flaunt their status, or at the very least, priority checking and lounge access. These programmes operate on a foundational structure of points (or miles) and tiers, each designed to reward customers for their loyalty in different ways. Points are typically earned based on the distance flown or the amount spent on tickets. Tier status is achieved through reaching specific milestones, offering escalating benefits, rewards and privileges.

?The integration of partnerships with hotels, car rental agencies, and particularly credit card companies, has significantly broadened the appeal and utility of these programmes. For example, the partnership between airline X and hotel chain Y allows travellers to earn airline miles for their hotel stays and vice versa, creating a seamless travel experience that encourages loyalty to both brands. In short, it’s the ability to penetrate wallet share to drive increased earn and redemption opportunities for members while also improving the overall customer experience.

?In this age of technology, AI, hyper personalisation, and consumer privacy, data collection becomes a cornerstone for any organisation and is second nature to loyalty programmes. They enable airlines to gather detailed insights into customer behaviour, preferences, and spending patterns. This information is the lifeblood of personalised marketing strategies, allowing airlines to tailor offers and communications to individual customers, significantly enhancing the effectiveness of their marketing efforts, which in turn drives profitability.

Monetization of Customer Loyalty and Data

The strategic monetisation of customer loyalty and data is where the sophistication of airline loyalty programmes truly shines. Airlines have mastered the art and have created revenue streams from seemingly nowhere. Significant free cash flows arise also as an outcome. Well managed programmes are also profitable in percentages that are easily double digits. Just Google and you will easily get hundreds of articles about the profitability of all the airline programmes in the US of A, the Qantas programme, the Avios programme, Asia Miles and the list is endless.

1. Customer Lifetime Value (CLV)

The foremost objective of any loyalty programme must be to maximise customer lifetime value (CLV) by incentivising repeat business and fostering a deep sense of stickiness. For instance, by analysing a customer's travel patterns, an airline can offer targeted earning related offers that encourage the customer to choose not only the airline but also the route, the class of travel, the airport, etc.,?all of which are promoted for future travel. In very simple instances, it could be offering double miles for flights to destinations that the customer frequently visits, offering bonus miles for flights that are going empty (red eye flights) or providing complimentary/discounted upgrades on routes where the customer often flies economy.

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2. Data-Driven Revenue

The immense treasure trove of data collected is a very powerful tool for generating revenue. Of course, beauty lies in the hands of the beholder. So, Airlines that use this data to serve up personalised or hyper personalised, relevant offers tailor-made for individual customers are the ones who will succeed in driving revenue - incremental, at a higher frequency, and with enhanced yields. This might, (as a simple example) involve sending personalised emails with special offers for an upcoming holiday to a destination that the customer has previously shown interest in or offering discounts on upgrades based on the customer's history and during the booking journey online.

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3. Partnership and Affiliate Revenue

Partnerships with credit card companies, hotels, and other service providers are a significant source of revenue. The goal here is to be able to penetrate as much as the Airline programme can into a consumers wallet. The first and foremost way to do it is thru a credit card. Then it normally expands to all spends in the travel eco system like hotels, transfers, airports, travel insurance, etc. The airline benefits from the sign-up bonuses and a percentage of the spending on the card, while customers earn miles for every dollar spent, creating a win-win situation. The partners want to come on board because, typically, an Airline customer is one who travels and hence spends a lot. Partners can acquire high-net-worth, wealthy, well-travelled, international spending (in most cases) customers at a very reasonable cost (which they pay the airline, which in turn allows them access to their customer database).

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4. Credit Card Partnerships

The relationship between airlines and credit card companies is phenomenally lucrative. These partnerships often involve offering co-branded credit cards that come with a host of benefits, including a significant number of bonus miles upon signing up, additional miles earned for purchases made with the card, and other travel-related perks. This not only generates direct revenue through card fees and spending but also ties the customer more closely to the airline through the accumulation of miles. Banks typically earn a truck load of money when customers spend on the card and it’s not only thru interchange fees. They have a multitude of revenue streams, which includes card fees, late payment fees, revolve interest, EMI - related revenues and so on. All of this, when thrust on a significant captive customer database, will enhance their profitability very significantly.

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5. Selling Points and Miles

Airlines also generate revenue by selling points and miles directly to consumers or through partnerships. Customers tend to buy when they are close to an award threshold, where they end up purchasing the additional miles required for their aspirational reward flight or upgrade. This in turn provides very profitable revenue and enhanced cash flows to the airline.

6. Interest on Free Cash Flow

Partners pay Airlines for the miles issued to members. In turn, Airline programmes issued miles to members but retain the cash received. Over time, members will redeem, but the free cash received accumulates to significant amounts, which in turn earns interest. This can be very significant, esp. knowing that Treasury departments are brilliant at generating interest on free cash flows.

Benefits for Customers

The lure of airline loyalty programmes for customers lies in the tangible and intangible benefits they offer, enhancing the overall travel experience and providing significant value.

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1. Enhanced Travel Experience

Priority boarding, access to exclusive lounges, baggage allowance, recognition, and service enhancements on ground as well as on board, amongst many others, are just a few examples of how loyalty programmes enhance the travel experience for frequent flyers. These benefits, often reserved for higher-tier members, make travelling more enjoyable, less stressful and something to gloat about.

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2. Savings and Value

The ability to redeem points or miles for free flights, upgrades, and other services provides substantial financial value to customers. This aspect of loyalty programmes is particularly appealing, as it offers a way to offset the cost of travel through loyalty to a particular airline. Also, a free flight seems to be the greatest aspirational reward ever created. I know so many customers who will take that wasted additional flight to earn enough miles to be able to take another free flight, which is paid for by miles. Its truly mind boggling and amazing to see this happen day after day across programmes in every country and continent.

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3. Exclusive Offers and Perks

Membership in a loyalty programme often comes with access to exclusive offers and perks, such as special promotions, events, and deals, from the Airline as well as from partners. These offers not only enhance the value of the programme but also create a sense of exclusivity and appreciation among members.

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4. Personalised Experiences

Airlines utilise the data collected through loyalty programmes to tailor the travel experience to individual preferences. This might include offering specific seat preferences, meal choices, or even suggesting flights and destinations based on travel history. The personalisation has now started to expand beyond travel to include partners and the wider eco system. These tailored promotions and offers, make each interaction with the airline unique and valued.

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Benefits for Airlines

So, while everyone talks about customers all the time, Airlines are, at the end of the day, not here to do social service. They are set up as businesses to generate revenue and drive profitability. Loyalty programmes create significant benefits for Airlines and, in most cases, enhance a tight bottom line and cash flow by contributing to both their top and bottom lines.

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1. Attract & Retain Customers

In an industry as competitive as aviation, attracting new and retaining existing customers is paramount. Loyalty programmes play a crucial role in this, creating a compelling reason for customers to choose and to continue to choose the same airline. The tiered structure of these programmes encourages not just repeat business but also an emotional attachment to the airline, which is much harder for competitors to break. All things being equal, the idea is that a customer will fly the airline because they see benefit in being a programme member, and all things being unequal, they will still fly the airline driven by the stickiness, programme benefits, and offerings.

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2. Increased Spending

There are more than enough cases where it has been demonstrated that customers enrolled in loyalty programmes are more likely to spend more with the airline, motivated by the benefits of reaching higher tiers and the lure of rewards. This includes not only purchasing flights, upgrades but also choosing airline-affiliated services and products, as well as co brands and partners that earn them additional points or miles. Loyalty members are also more likely to buy into upsells and crosssells, especially when the differential can be paid for using their hard earned miles.

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3. Brand Ambassadors

Loyal customers often become informal ambassadors for the airline, sharing their positive experiences and the benefits of the loyalty programme with friends, family, and in today’s world of social media. This word-of-mouth marketing is invaluable, as it comes with a level of trust and authenticity that traditional advertising can never ever dream of matching.

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4. Valuable Data Insights

Customers enrol in programmes, and that gives the airline the unfettered (not in all cases, but mostly) right to collect data. The data collected through loyalty programmes provides airlines with invaluable insights into customer behaviour, preferences, and trends. This information enables airlines to optimise their route planning, service offerings, and marketing strategies, ensuring they meet customer needs and stay ahead of the competition. They also use data insights from partners to engage and enhance their eco system offering while leveraging this knowledge to enhance revenue and profitability

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Challenges and Considerations

While the benefits are clear, managing a successful loyalty programme is not without its challenges.

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• Ensuring data privacy and security is paramount in an age where consumers are increasingly aware of and concerned about how their information is used. Airlines must navigate these concerns transparently, ensuring customers feel their data is protected.
• Maintaining the perceived value of loyalty programmes is another challenge. As more customers achieve higher tiers and accumulate points, there's a risk of diluting the value of rewards and benefits. Airlines must carefully manage their programmes to ensure they remain attractive and rewarding for all members, without compromising the exclusivity that makes higher tiers desirable.
• Keeping customers engaged over time is critical. With numerous loyalty programmes vying for attention, programmes must continuously innovate and add value to retain their members' loyalty. This could involve introducing new benefits, partnering with additional services, or leveraging technology to enhance the customer experience further.

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Airline loyalty programmes have become a pivotal element of the aviation industry's strategy, offering a sophisticated blend of customer engagement, data analytics, and revenue generation. These programmes create a mutually beneficial relationship between airlines and their customers, providing valuable benefits and personalised experiences while driving customer loyalty and increased revenue for airlines.

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As the industry continues to evolve, with advancements in technology and changing customer expectations, loyalty programmes will need to adapt to stay relevant. The future of these programmes lies in their ability to offer more personalised, flexible, and rewarding experiences, leveraging data and technology to meet the needs of a diverse and global customer base. In navigating the challenges and seizing the opportunities ahead, airlines can ensure their loyalty programmes continue to soar, benefiting both their customers and their bottom line.

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So, if you're aiming to accumulate enough points for that dream vacation, just remember: in the world of airline loyalty programmes, even when the sky's the limit, you still might get stuck in the middle seat!