In Search of a Strategy: The Changing Face of Elite Status

In Search of a Strategy: The Changing Face of Elite Status

We live in uncertain times.

Frequent flyer programs today are striving to keep pace with the disadvantages of a changing member base, habit-forming demands of long-time members, fiscal blood sucking of parent airlines, the competitive landscape of low-cost carriers and the scarce commodity of preferred services. They are also working to meet a challenge that is as old as miles themselves: productive customer relationships.

Some critics, including many members, have concluded that these programs, which for more than 20 years have been praised for their outstanding ability to build strong customer relationships, are now so clueless they are lashing out at the very thing they were developed to reward — the elite member. It would seem that with announced changes to benefits, re-qualification methods and award charts as of late, and in particular the way in which these changes have been churned out, there may be some merit to this line of thought. The critics also seem to agree these programs have lost much of their value and members are better off redeeming now rather than later.

How has it gotten to this point? How have a few long-revered programs completely alienated many of their most loyal, and possibly most profitable, customers? Surely this couldn’t have been the intention of those running the programs.

Or was it?

New Look Programs
It was nearly one year ago when Delta SkyMiles went public with a plan to restructure its elite re-qualification criteria (see the Timeline of Elite Changes sidebar on p. 28 for specifics regarding the changes to the program). Just a few months prior to Delta’s announcement, US Airways had proposed a similar plan, which was quickly and summarily rebuffed by Dividend Miles members and the media alike.

We at Inside Flyer magazine were particularly vocal in our disapproval of the US Airways changes because, at the time, the airline was fresh into bankruptcy, and it could ill afford such a risk. Dividend Miles capitulated to the pressure in short time, and rescinded its changes.

Delta, on the other hand, certainly had time to research the US Airways plan and even modified it slightly. Delta was also better prepared to introduce such a plan, as it was in much better financial shape than US Airways at the time.

Despite being on the butt end of even harsher criticism than what was thrown at US Airways, Delta stayed the course, and has maintained the changes.

Continental, being a willing partner with Delta, was the next to throw its hat into the ring and change the look of its elite qualification structure. Seeking the safe haven of a global alliance it hadn’t been able to pull off on its own, and sensing that the long-talked-about “Wings Alliance” might never fly, Continental decided to follow Delta’s lead.

Interestingly, it is actions just like Continental’s that threaten to undermine the concept of “alliances.” Originally, alliances were positioned as customer-friendly and competitive. Now that we see these types of things come full circle, and all the programs seemingly merge into one big conglomerate — it’s becoming easier and easier to argue that alliances are inherently anti-competitive. Honestly, it’s unlikely that OnePass would have stumbled down this path without the urging of Delta for a seamless partnership.

What Was Wrong With the Old Look?
When the executives at US Airways’ announced the initial changes to the Dividend Miles program, they framed them as a response to the growing use of restricted, low-price tickets by business travelers.

“Business travelers are using non-refundable fares as a result of corporate travel polices designed to control costs,” said B. Ben Baldanza, US Airways senior vice president of marketing and planning. “Given our own efforts to reduce costs, we respect the economic pressures on business travelers and believe that these changes strike a fair balance between the needs of the corporate traveler and the economics of the airline business.”

Delta, on the other hand, made no such mention of corporate travel policies when announcing its changes. Truth be told, Delta had probably oversubscribed its allotment of elites over the past few years.

Like many others, Delta extended elite benefits following the disaster of 9/11. In other words, there was no natural culling of members. Combine that with at least two initiatives Delta implemented in 2002: 1) allowing members to upgrade to first class for a fee at the gate, and 2) the launch of several rather open campaigns to attract elite members of other programs who were linked with potentially insolvent airlines, and you end up with an inflated demand on the scarce commodity known as upgrades.

And in the end, that is what this is all about — upgrades.

A recent report by the financial analyst of JP Morgan states, “Low-cost carriers will eventually inherit the earth.”

Today, the only difference between the full-service carriers that are competing in some markets with low-cost carriers is the first-class comfort of an upgrade. After all, who in their right mind would not take 2A on a Delta flight out of Dallas vs. 2A on a Southwest jet?

Over the past several years, the inflated elite levels have hindered the ability of many full-service carriers to highlight this difference. Traditionally, elite-level membership has represented approximately 2-3 percent of total active membership. Today those numbers have risen to 5-6 percent. With a doubling in the percentage of elite members, it’s no wonder some airlines feel a need to pare back.

Strategies Emerge
By definition, strategy is all about managing the future. But in today’s climate, it’s difficult enough to get a clean read on the present, especially in the airline industry. With so much uncertainty, strategy is futile. Right?

Wrong. The present may be murky, the future may be up for grabs, but you can be sure that Delta, Continental and to a lesser degree Northwest (we say to a lesser degree, because we do not believe the WorldPerks program will match the changes instituted by Delta and Continental), all have defined strategies in mind that are driving these changes. And while it may be impossible to uncover specific strategic goals for each program, we can gain insight into some general strategic styles.

Based on the actions of these programs, we can identify four primary strategy types: Doers, Defenders, Thinkers and Reactors.

Doers are entrepreneurial elite programs whose management actively seek new opportunities in building loyalty to the airline through its elite programs, are willing to take risks and develop innovative benefits, and who don’t mind trading off efficiency for growth. American AAdvantage, Alaska Mileage Plan and Northwest WorldPerks fit this description.

Defenders, in contrast, stress efficiency with tightly organized goals focused on the narrow market niche of the premium passenger. They emphasize the functional aspects of these programs and pay close attention to the bottom line. Because defenders abhor risk, they will lag behind other elite programs in innovations, seeking only proven opportunities in their new market niche. Delta SkyMiles and British Airways Executive Club seem to have chosen this strategy.

Thinkers blend elements of both Doer and Defender strategies and so are able to focus on direction and benefits when the industry is stable, or on risk and innovation when the times are turbulent. They are balancing the risks and returns by following other programs (usually Doers) into new ideas and improving on their base benefits to their elites. Although they sometimes move at seeming mach speed from a near dead stop, they do so with foresight. United Mileage Plus and US Airways Dividend Miles seem to fit this strategy.

Reactors, on the other hand, have no clear strategic orientation. As their name implies, they tend to react to elite program trends and as a result, often find themselves in crisis. Their behaviors are unstable and their decisions are oriented toward the short versus the long term. This appears to be the strategy being employed by Continental OnePass.

How Not To Implement a Chosen Strategy
From a practical standpoint, guarding the inventory of upgrades to compete with low-cost carriers is not a bad idea at all. What we do challenge is the manner in which some of these programs have introduced the changes.

When Delta announced its changes, it never looked back. To its credit, Delta felt it had made the tough decision it needed to make and stuck with it despite criticism. But in its actions, and non-actions, Delta exhibited an air of aloofness (see the Delta memo in reaction to the advertising in Inside Edition on p. 18). Delta never delivered a clear message to its members explaining why the airline had embarked on this strategy, other than to say it was more readily aligning the services to those who contribute the most revenue to Delta.

For 22 years, these programs have defined elite status members as “those who fly the most and, hence, are our best customers.” Members with various Silver, Gold and Platinum cards did not invent this concept, but were certainly led to believe this was the way airlines viewed them. When Delta implemented this new strategy, yet failed to communicate the reason for the policy shift to members, it simply ignored the fact that for 22 years it had fed the exact opposite strategy.

And if you think Delta mishandled its communication of a shift in strategy, take a look at the fiasco at Continental. Executives at Continental rated an F in the manner in which they cowardly announced their changes — or failed to announce them, as the case may be.

Led by a CEO announcement of new EliteAccess benefits just the day before, Continental failed to even list a press release of the elite qualifications changes on its corporate Web site. It is very clear Continental was trying not to attract any attention, and this is certainly understandable. But to cower and not address these changes straight up reflects what is wrong with this airline.

Following the principles set forth in the Reactor strategy model, Continental quickly readjusted its changes in response to customer backlash, extending the dates for qualifying miles earned when booking online with the airline.

We believe members of both these programs would have been far more accepting of these changes if executives had stood up, raised their hand and simply told them the changes were a result of a business decision based on the current competitive environment and the necessity of protecting the valuable upgrade.

When the Bruises Heal
Many might think the idea of re-creating frequent flyer programs for only those that pay high fares is a new one. Nothing could be farther from the truth. In fact, roughly six years ago, a major frequent flyer program found in an internal study that its number one flyer in terms of miles ranked outside the top 1,000 flyers in the amount of revenue he paid the airline, while the number one customer in terms of revenue to the airline ranked outside the top 1,000 members of that frequent flyer program.

Still, one of the most overblown myths of this industry is the belief that airlines have long wanted to switch from frequent flyer programs based on miles to something based on dollars paid. The fact is, the industry has been there already in the mid-80s with the introduction of the America West FlightFUND program.

The original FlightFUND program was totally revenue based. The number of FlightFUND dollars earned from flights was determined based on the route and class of service traveled. For example, a flight from Denver to Phoenix would have earned 119 FlightFUND dollars one way with B or Y fares; the same route would earn 96 FlightFUND dollars one way with a K fare; or 71 FlightFUND dollars one way with Q, M, or V fares. Since FlightFUND dollars were earned based on the cost of a ticket, first-class and non-discounted fares earned more than other tickets.

Awards were based on a standard chart of fixed redemption. For instance Albuquerque to Austin cost 1,190 FlightFUND dollars, while Albuquerque to Chicago cost 1,250 FlightFUND dollars. When the airline introduced service to Hawaii in November 1989, awards were available for 3,000 FlightFUND dollars.

In the end, this system proved to be too complicated to maintain, both for the airline and for members.

There is no way the industry could ever turn the clock all the way back to that day, nor would it want to. Today, the biggest assets the airlines own are their databases. Not only do they gain valuable use from these enormous stores of customer information, but they are also able to leverage them in partner deals as well. And the best way to grow these databases is through the use of mileage-based frequent flyer programs.

No, the airlines do not necessarily want to revisit the concept of revenue-based programs. What they do want to do is reward high-revenue customers using a mileage-based program, which would also allow them to build their databases. Unfortunately, in the process of implementing strategies to accomplish this goal, they are neglecting the importance of effective communication, and are, in fact, alienating the very customers their strategies are designed to attract.

The lesson the airlines are learning, the hard way, is that, you can change the face of your frequent flyer program, but you better recognize the importance of the mouth.

To paraphrase a famous book critic’s ambiguous non-recommendation, “We simply cannot praise this strategy by Delta and Continental enough.”

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