And if the party were soon over?
13 May 2016
The airline loyalty industry is still heavily relying on credit cards to make their business highly profitable. But is this truly a sustainable strategy? Some tend to oversee the clear warning signs on the horizon.
At our recent Loyalty@Freddie Awards conference in Las Vegas, I had an interesting chat with an European loyalty manager, telling me that he was kind of preparing for a post-credit card world for airline loyalty programs. This kind of thinking, however, seems still to be very far off the minds of other loyalty managers.
What is at stake? Today, credit card partnerships represent by far the most important partnership category for FFPs (and their members). Some programs even manage to give out more miles through credit cards than through their own flights. This adds some level of perversity to the loyalty concept on one side, but – in the case of the biggest programs – literally billions of dollars to the bottom line each year on the other side. Being in such a healthy financial situation, these programs can easily wipe away any potentially critical questions from higher management about their raison d’être. It is common knowledge in the airline industry that customers are much more loyal to the currency than to the brand. But what is shocking about that statement is that some players seem even to be proud of that… This also sees some programs investing heavily in the development of a currency brand, such as Avios.
Obviously, these programs have no intention to cut off their arm by questioning where their programs have gone. Asking such questions would basically not only lead to cut off one arm, but in many cases one leg, one heart, one brain and one soul as well.
However, while nobody expects FFP to commit foolish suicides, some programs might soon look like such incomplete creatures. The changes going on in the European market resulting from the capping of the interchange banking fees are certainly only the first signs of global changes to come over the next few years. While these are early limited signs not affecting everybody, it is clear that the winds in the market have turned and pressures on margins will only increase, undermining the economics of many FFPs. Ignoring this is nothing else than a lack of a management’s responsibility to prepare for the future.
In case you’ve missed the signs, a couple of interesting things have happened in the European market over the past few months: British Airways has halted its co-branded credit card in Germany and halved the accrual rate for its card in Sweden. Lufthansa was forced to cut by two the earning rate of its main co-branded credit card in Germany – what will likely result in a revenue loss in a 3-digit million Euro figure for the Miles & More program. Air France KLM and British Airways are kind of lucky for the time being as they offer co-branded American Express products in their home markets, which are not (yet) affected by the regulatory changes.
And unlike 40 years ago when first world markets started to become tougher places for the tobacco industry and producers have turned successfully to developing countries, this is not an option for the airline loyalty industry either. For geographical reasons (the penetration of Delta’s program in Angola is somewhat limited), but especially since these markets are expected to skip largely the credit card step and take the lead in mobile payment solutions, bypassing completely the traditional credit card market like that.
So what should airlines do? On one hand, they should party as long as they can and cash in. It might even take some more years until they will really see any financial decline. But don’t get fooled: While American Express and Diners Club indeed have a competitive advantage over other card issuers at this point, this is not a stable strategy to build on.
On the other hand, they should quickly get to speed and make their programs what they are supposed to be – programs creating loyalty towards the brand. If you take away the credit card component from your FFP proposition tomorrow, how many (active) members would you lose? Even an answer of 5% would be worrying to me – but I am afraid that the answer is rather in the range of 30 to 40% for many programs.
My interlocutor in Las Vegas has exactly that vision to prepare for the era after in good time. The appropriate strategy will look different for each program, but will most likely include common components for everybody from trying to compensate parts of the loss with new kinds of partnerships and using the funds, which are still flowing so nicely nowadays, to invest more into ramping up CRM knowledge and practices.
Maybe Frequent Flyer Programs will one day soon become like any other loyalty program, transforming from a cash cow into a data machine. The idea must be horrifying for many of today’s FFP Managers as a data machine requires a completely different handling from how you would exploit a cash cow. In order to avoid any unpleasant surprises, it might be best to prepare for an upcoming nightmare. Like the one that makes you wake up in the middle of the night, screaming out loud and trembling all over.
