Interview Part 2

Interview Part 2

Rand Groves is not a name many of you will be familair with, but as a consultant he has been involved in the introduction of several important milestones for loyalty programs. Here we chat with him about the start of earning miles for your long distance telephone service. Rand ([email protected]) is president of The Groves Marketing Group, a Princeton, NJ, based marketing programs development company.

Inside Flyer: Rand, you’re credited with thinking up the first partnership involving a frequent flyer program and a telephone company — how did that idea come about?
Groves: As an outside resource, the airline (Northwest) invited me to put ideas in front of them. I tried to create unique programs, opportunities that would both enhance loyalty and generate new revenue streams for the airline. My company had just finished negotiating the airline’s first affinity credit card agreement so we were looking for the next big idea, hopefully something that was new and different.

You have to keep in mind, we’re talking about the mid-1980’s, so this is all pre-cellular/wireless. Pagers were starting to surface but most frequent business travelers still used a calling card and a public phone for business communications on the road.

I was returning to New York from a business trip one day, and as I was deplaning at LaGuardia, I watched two middle-aged businessmen in front of me running from the gate area, across the concourse, to a bank of public telephones. Only one phone was available and the two got into an argument over who was going to use thephone first, a classic "New York moment." That’s when the light bulb went on in my head for a partnership with a long distance company. It became obvious at that moment to me.

Was MCI your first telephone partner choice?
Groves: No. When I spoke to the airline about the idea, we agreed we should approach all three of the major telephone companies (AT&T, MCI and Sprint). Since this was all new ground, it made sense to determine the level-of-interest from all of them.

AT&T was the 800-pound gorilla, so I think everyone thought it would be great if we could get them. You know the old saying, "Nobody’s ever been fired for recommending IBM." From a pure fair-market-share perspective, AT&T made the most sense for the airline’s frequent flyer membership base.

As a new concept and with airlines still pretty much devoted to travel partners, what was the resistance like?
Groves: Northwest was great. No resistance at all. At that time, the marketing programs group was very entrepreneurial, and they loved the concept. We had no idea whether or not any telephone company would be interested, but everyone thought the idea had merit and would be a great enhancement to WorldPerks.

On the other side of the equation, the merger, back then, between Northwest and Republic Airlines did not go as smoothly as everyone would have liked and created some challenges. All three telephone companies voiced initial concerns about the airline’s customer service levels and what that would mean to the partnership.

IF: How long did it take you to put together the idea and get your first meeting? Then how long did the negotiating take?
Groves: The airline affinity credit card model is similar to the telephone affinity program model in many ways, so putting everything into presentation form was not a difficult process. And frankly, most companies were, and still are, interested in program proposals from airlines. There’s a lot of sexiness to travel, especially free travel, so they were interested in what we had to say. That along with some contacts we had inside the telephone companies made the process of setting up meetings fairly easy.

AT&T had systems and software problems at the time. They liked the concept, but were billing long distance through the local phone companies (RBOC’s). This meant they lost the trail of the customer and wouldn’t be able to credit a frequent flyer’s account with the amount of miles due the customer from the customer’s long distance or calling card bill amount. It took about five weeks to reach this dead end with AT&T who then dropped out of the competition.

Sprint expressed interest initially, but they were going through a major organizational restructuring. We had trouble getting them to focus on the concept.

MCI was, in many ways, the perfect partner. They had recently acquired a company that had developed the software to make a program such as the one we were proposing a fairly simple task. They were also in a very aggressive customer acquisition mode, and they were trying to build their brand through partnerships with blue-chip companies. I’ve been doing this for almost 20 years, and I still believe "timing is everything."

If I recall, it took about three months from the first meeting to signing a letter of intent between the parties.

Was the concept a hit from its first day or did it take awhile for the concept of this partnership to gain acceptance?
Groves: Both parties agreed to support the program from the start with high levels of advertising, promotion and direct mail. This helped create awareness right away so the program was successful from the very beginning. Both sides also entered the partnership with a healthy entrepreneurial "let’s-get-the-job-done" attitude. This cannot be discounted. Typically, the execution of joint marketing programs like this one are fraught with corporate turf battles.

It seems that the industry has settled on a five-mile-per-dollar-spent earning formula — was that your first pitch or did you have other ideas?
Groves: To be perfectly honest about it, the first discussion started at one mile per dollar spent for the base plan, with higher mileage awards for the top customers of both the airline and the telephone company. Industry competition brought it up to five miles per dollar, which frankly, I don’t agree with. I’d rather award 10 or 15 miles per dollar spent to top-tier members while giving one mile to lower-tier members.

From your meetings in those days — what do you remember as the most important part of the whole program?
Groves: The airline supported me 100 perrcent, so I could walk into the telephone company meetings with conviction and express a desire and an ability to do a deal within a fairly short period of time. Without this support, another airline would have launched the program first or maybe the telephone company would have tried to do it with another airline first. Being first to market was important. As a result of several mergers, the airline industry was changing rapidly, and I was trying to help Northwest carve out its new position as a marketing leader.

Any anecdotes of things that might have been?
Groves: Yes, I wish I had been an independent broker of the deal instead of a representative of the airline. I would have made a lot more money.

Mike Isom and Stephen Usery combine to make the marketing decisions for the US Airways Dividend Miles program, feeding off the experience each has — Mike with Continental OnePass and Stephen with Northwest Airlines. If there are any two frequent flyer executives that have worked harder since 9/11, we’ve yet to find them. They’re facing the daunting task of pacifying members who fear losing it all and creating new value for members in an alliance-minded world. We caught up with these two at their Washington D.C. area headquarters as they prepare to steward one of the most important changes to the airline — a new allaince partner or partners.

IF: You’ve had a lot of ups and downs with proposed alliances haven’t you?
Usery: That’s true, we’re had a lot of ups and downs over the years on the alliance front with US Airways. In the post-United merger world, talks had just been restarted when 9/11 happened. We picked the talks back up early this year. We have now negotiated definitive documents with two potential alliance partners.

We are now at the point where the decision is ours to make. We have a very good deal negotiated with each of the potential partners. Each would be an entree into a substantial global alliance. We anticipate that within two to four weeks the public announcement will come. Our Board is meeting tomorrow. A decision could come as early as tomorrow or the next couple of weeks with an announcement to follow shortly thereafter.

The good news is that you have choices and that you’re not stuck with just one or none as most people would surmise. This despite the mention in the press from Continental that they broke off alliance and other talks with you which included a frequent flyer relationship.
Usery: That’s right. We’ve had the opportunity to figure out which of them offers the most value to our customers and which one fits best with the Dividend Miles program — the future for US Airways.

Alliance talks aren’t just about Dividend Miles, they’re about what’s good for the airline overall, true?
Usery: Yes, the stack of documents associated with an alliance is incredible. As we go through an alliance deal we look at every aspect of it. All of it’s been under way and it’s been very active over the past several months.
US Airways got burned once. It got burned by being out negotiated by BA. And shame on the management of US Airways at the time. I don’t blame BA, it was a bad deal but it could have been a good deal. Clearly we as current stewards of US Airways don’t want to repeat the mistakes of the past. We want to make sure we make a good deal now and will be a good deal 10 years from now.

Your terms with American were a bit different than with most of the other alliances or frequent flyer relationships that are elsewhere in the world. Is that a model that you are comfortable with?
Isom: I think it will end up more traditional, because when we’re stepping into a world we know will involve global alliance participation you’re stepping into an existing framework and you’ve got to match that framework.

With an alliance we would like to have a fully reciprocal program that covers elite benefits also.

That’s a good comment because elite benefits haven’t always been that important with some of the other alliances. One of the main alliance priorities is elite benefits?
Isom: Yes, once we announce an alliance there’s still a lot of work to be done to bring about all of those benefits.

Your alliance partner has to include Hawaii as a reward redemption. Is that a mandate?
Isom: We hear it all the time, everyone wants Hawaii.

Since 9/11 and the fallout with United, any big shifts with behavior from your members? Where do you view Dividend Miles today?
Usery: It’s been pretty much business as usual. There has been change in behavior, which is consistent in the overall flyer habits. We really haven’t had any run on the bank activity. We’ve seen a slightly increased level of award redemption, but nothing that is alarming to us. I think it’s a tribute to the support we have from our frequent flyer base, they’re with us, they’re behind us. I really think it’s a strong part of our brand and our personality and the loyalty of our member base.

You know on the Hawaii thing, we have added so much capacity to the Caribbean over the past year, that has become a great replacement redemption outlet for Hawaii so we’ve seen the would be Hawaii traffic move over to the Caribbean. We’ll have Hawaii back in the portfolio soon.

Is there anything else you’re adding to Dividend Miles?
Isom: We have been working on automation on electronic upgrades, online award bookings, and the ability to be waitlisted for an upgrade. We are looking at having those in place before the end of the year. We added Space Adventures (the award that defies gravity). The golf program, people sign up online and we send them out monthly reports on golf resorts. We’ve included golf schools; we’re looking to expand that to include equipment so you’ll be able to get deals on equipment. You saw the debit card roll out. That’s going better then we anticipated. We’re looking at trying to get into some of the off-line retail. We’re still looking to have miles with financial services programs.

I imagine from time to time you feel like you have handcuffs on.
Usery: The handcuffs were on during the period when we were waiting for the United merger to either be approved or not. So many things we had teed up and were planning to start that were put on hold because they wouldn’t have made any sense in a merger world. Our program lost about a year.

Do you guys think that where frequent flyer programs are today are truly what the customer is looking for and where they should be today?
Usery: No, they’re not where they should be today and I know that a number of airlines in one way or another have begun the process of better customer service, customer profile, customer value.

Just sheer accumulation of miles itself is not a good measure of the value of a customer to an airline, and certainly doesn’t tell you anything about the individual wants, needs and desires. So I think every airline is searching for a way to better segment frequent flyer base and to better target services and value added to different market services. The online world has really enhanced our ability to do that.

But we’re not there yet, and either are the other airlines. I have been working on this in the banking industry since the mid 1980’s. When I joined the airline business in the early 1990’s it was one of the first things that I was working on.

Who’s likely to break out from that if not you guys?
Isom: I think everybody is working on it. I think it could be any of us. It’s being able to get all of the customer touch points so that you provide the right service and information to your customer at all times.

Something we all think about — how do you take the currency of frequent flyer miles and points and allow for broader earn and redemption opportunities.

Colleen Barrett is the current President and COO for Southwest Airlines and is not a mini-Herb Kelleher. She’s her own person — a busy lady continuing the legacy of making money in a money losing airline industry. She’s born and bred in customer service, which is why in this interview in Dallas we hear her talk about the customer. We get the sense that in this interview she’s also President of the Rapid Rewards Fan Club.

Inside Flyer: A big part of the success with Rapid Rewards seems to be your customer service. True?
Barrett: I think that the reason that our program has been so successful, just like our customer service package has been successful, is because we have kept it very simple. We make it almost painless for someone to benefit by being a member. Even though, admittedly, we still have a ways to go in terms of systems improvement and we are working on all than, but I can’t image anything simpler that just getting your award when you earn it and not having to go through a 72-page brochure.

Systems? What are you looking to improve?
Barrett: On July 2 when you make a reservation you will put your Rapid Rewards account number as part of your reservation so it goes into the PNR (passenger name record). Then you will no longer have to have your card swiped when you check in, it will be systematic.

Is that booking online?
Barrett: It’s either way, online or calling reservations

Where’s it going for you? You adopted a different currency — credits instead of miles, and you hear the sound of a different drum on almost everything. Where’s the future for Rapid Rewards?
Barrett: I do subscribe to the theory that if it’s not broken, don’t fix it. However, even though we don’t think it needs fixing, we are always looking for ways to enhance it. We have lots of services that we hope to be able to add to. I know Susan is always looking for additional partners. We will hopefully offer, for example, we hope to have a Rapid Rewards member call or go online and give their name or number and automatically have a template pop up, like a profile. It will make the process very quick.

As a low-cost carrier, you give away more awards per capita, per member base than any other program in the entire world. How can you do that?
Barrett: I think that it’s the right thing to do for our customers. We have never been out to milk our customers, and we have never raised fares, just to raise fares. I would give up a lot before I would give up the ability to allow these awards to be used on any flight, except for about six blackout dates in the year. You have to be able to give seats in order to use the ticket and if the seat is there we’re not really losing anything by giving it to you. It is a great way to build loyalty. In many cases, even the people that live on us, they let those award certificates build in a drawer and they will use them for a family vacation.

What’s your comment on the compliment you received recently when Jet Blue publicly announced that they have copied their program from you.
Barrett: I’ll just take any compliment that I can get.

There was talk of cutting back but that doesn’t seem the case.
Barrett: I think the public made it clear that they’re not ready to pay a decent price for a seat. So I can’t image any carrier backing off too much right now. I don’t think that an FFP in itself causes a customer to chose one airline over another, but I do think that a reduction in value of what you have in an FFP could cause you to lose from one carrier to another.

If you look at what people have gone through to fly, getting through security and such, it is truly amazing to me that I can hold focus groups with Rapid Reward members expecting to get a lot of negative and to have those customers praise our people knowing everything that has been thrown their way. I’ve always known how important relationship building is and, to me, Rapid Rewards is nothing if not a relationship building program.

If you really work at things and if you’re truthful with people and you tell them what you’re trying to do and you try to get there most people will accept that.

Denise Martineau is the Director of Frequent Flyer Programs for the Star Alliance. While most alliances don’t have anyone directly hired for managing frequent flyer program benefit integration, Star Alliance does and Denise handles the role quite well, having honed her skills while a member of the Air Canada Aeroplan staff. We caught up with Denise in Frankfurt where the Star Alliance frequent flyer offices are located.

Inside Flyer: Star Alliance has made the program a continuity of benefits across the airlines’ network — that is unique.
Martineau: One of the keys we call value drivers for the Alliance is the loyalty customer, that’s really what we’re focusing our customer efforts on. So while you have different areas of cooperation on travel, the loyalty customer and catering to the frequent international traveler is where our focus is.

The key to that seems to be the international traveler.
Martineau: Yes, the way we describe it is that, what we’re trying to do, we’re not an Ansett, with a clear example of how that can be misconstrued. That poor market was let down, there was nothing we could do legally to address that situation. We were barred; we couldn’t go in and even do promotions. But the idea is that the airline still operates and for the most part is the first line of communication with their own customer. What Star is the bridge for the international traveler to provide the products and services the need when they travel the alliance worldwide

It seems Star Alliance faces many challenges internationally.
Martineau: If you’re talking about restrictions from a bilateral basis, there are some. SAS just introduced that they have limitations. There is no mileage accrual on at least three routes, they cannot award miles and that does affect Star Alliance. But for the most part there are not that many limitations across the alliances for mileage accrual. In fact, of all the alliances, we’re the only ones that gives miles for every flight.

Where are you at with any new changes?
Martineau: Star Alliance Awards. From a customer’s point of view, before you used to have to select from award charts to do a number of segments across the Alliance. That was not in the customer’s best interest. So now you’ve got one ticket that takes you to wherever you want to go on any combination of airlines that you possibly need to get there. Plus, you have an opportunity for the around the world, which we didn’t have in the programs (not in most of them). In most programs you’ve got one chart to be able to make your selections for your travel needs. It’s easier to plan your trip.

Behind all that is something we call ‘redemption availability and sell’. That’s a very technical term, we call it RAS for short. What it is; the airlines can look at inventory and book immediately. So the customer doesn’t have to wait on the line while the agent is sending messages back and forth. Plus, if it’s not available, they can look at other airlines so they can pick and choose. So you have options and it does not take long for bookings with Star.

Is there a launch date for this?
Martineau: The RAS has been in place since last May. But in terms of the charts being combined into one, United and British Midland will be introducing theirs in August.

The new airlines we’re going to have over the next six to nine months there’re going to have it (RAS) right when they join.

We’re set for growth.

I have a question about your latest promotion, the 55,000-mile partner promotion, how did that go?
Martineau: Sometimes it takes a lot of head banging and sometimes it just comes together beautifully. It came together rather well because we looked at different options and then United came up with the idea and everybody bought into it and introduced it as much a possible. It’s been getting a lot of good press for us. There was a concern that there would be a certain amount of difference in the programs, but for the most part most customers are only concerned about what pertains to them and their selected frequent flyer program, so for the most part it’s very well accepted.

Would you say that Alliance-style promotions are something that we’ll see in the future?
Martineau: We look at what we need to do in given markets. Ansett was a primary example of an initiative that we tried to pull together because the market demanded it. Those customers were abandoned. There wasn’t a whole lot we could do to buy out their accounts. But we tried.

So you are seen as a competitive airline and not an Alliance
Martineau: The way I look at it is if you can’t do any bonuses, what does that say about the Alliance? We did a promotion in the spring in Switzerland, Belgium, The Netherlands and France. We did that collectively where we had a Web site where you log on and register. We’ve done a few promotions last year so of all the alliances we’re the only ones that are active.

It doesn’t come easy, I know you work at it.
Martineau: t doesn’t come easy, the fact that we’re going to have 17 airlines around the table makes it that much more of a challenge. I think the airlines are very supportive of Star.

Is there anything else you want to talk about?
Martineau: We have the largest network. From the perspective of the international flyer we can pretty much get you anywhere and earn miles. We are expanding the frequent flyer section on our Web site. (Star Alliance Web site)

Will that be in the fall?
Martineau: Hopefully before the fall — by the end of the summer.

How many total frequent flyer members do you guess are in the Star Alliance?
Martineau: 65 million (guess).

How about the number of miles?
Martineau: I really don’t know. But it’s got to be in the trillions.

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