Abstract
Frequent Flyer Programs (FFPs) were invented to encourage customer loyalty by rewarding loyalists with free travel later for paid travel now. There is a persistent question in the literature and at most airlines whether the formula continues to be economically remunerative. Within airlines, FFPs are particularly controversial in the opinion of most Revenue Management (RM) departments, which dislike allocating ‘free’ reward seats. In this article, we propose and actualize a methodology for analyzing short-term FFP economics, and, perhaps for the first time, prove that FFPs do result in enhanced short-term revenue, and calculate by how much. We find that Elite customers choose to pay between 2 and 12 per cent more for similar itineraries, and that that effect is not diminishing over time. These findings include new empirical data that could enhance the FFP profitability model and could logically be incorporated into RM optimization models to allocate free seats more appropriately among frequent flyer categories.
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Notes
The author started his career in the Pricing Department of American Airlines, sitting in a cubicle adjacent to the one in which AAdvantage, the first FFP, was developed. He participated in some early analyses of the potential impact. At the time, he was not a fan – and he was wrong. His career flourished in spite of this error. He retired in 2005 as a Senior Vice President of another major US airline.
One major US airline, Continental, in a public presentation, has stated that their highest Elite status group spends $14 K/year, versus the next higher, $8K/year versus third highest, $4K/year versus non-elite FFP members at less than $1K/year. They cannot isolate whether that is ‘causal’ (more spend because of status) or ‘correlational’ (more status because of spend), but suspect that most of the effect is correlational.
As noted in Brunger (Note 1, p. 86), because of contractual obligations in place at the time, the carrier was legally obliged to offer equivalent fares and availability to all customers through all distribution channels – and did so (I was the Vice President in charge at the time).
The definition was vetted at PROS and AGIFORS Conferences, designed to minimize Type I errors. (Brunger, p. 86)
Because of the large size of the sample, the coefficients continue to be statistically significant at the 99 per cent level, but the effect size is so small that it confounds explanation.
References
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Brunger, W. How should revenue management feel about frequent flyer programs?. J Revenue Pricing Manag 12, 1–7 (2013). https://doi.org/10.1057/rpm.2012.25
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DOI: https://doi.org/10.1057/rpm.2012.25