Can international coalition programs succeed?

17 June 2015

Etihad Guest has surprised by the announcement that it is no longer in the business of buying other FFPs, but wants to develop into a global coalition program instead. Looking at the lessons learned from PINS, what are their chances to succeed?

It is difficult to read between the lines of the announcement by Etihad, but it can be anything between yet another desperate search for a new strategy and the honest assessment that it doesn’t make any sense to take minority stakes in loss-making airlines just to get hold of their respective (profitable) loyalty programs. As a matter of fact, if Etihad announces not to invest anymore in buying loyalty programs, it means that they won’t buy into any other airlines anymore either, acknowledging the failure of its previous strategy. And this reduces the chances of loss making airlines such as Czech Airlines or Air Malta, which were hoping for an investment by Etihad, to survive.

The ambition to become instead a global coalition program is definitely honourable, but is likely to enter into history as yet another self over estimation of the carrier. Taking out the duplicate memberships between the four programs under Etihad’s control, the total membership between them is likely to be rather around 10 million members than the 14 millions it claims (I am, for instance, member in all four programs!). So for any potential partner interested in the coalition idea, it makes simply more sense to talk to the likes of Lufthansa, Air China or American Airlines, each of them having a multiple of members in their own programs.

A true coalition program is obviously also something else than just adding a range of different day-to-day partners to an existing program. This is about sharing data and profit under a separate entity – what hardly anyone in the market claiming itself a coalition program does.

But these doubts and considerations aside, what would really be the chances of such an idea to succeed at a global level, if compared to one of the more successful coalition model in the market, PINS?

PINS is majority owned by airBaltic and recently changed its name from BalticMiles in order to underline its independent positioning. The declared strategy of the company is to become the leading coalition program operator in North Eastern Europe. After the launch in Latvia and a quick expansion to neighbouring Lithuania and Estonia, the first two new markets the program was launched as coalition program were Finland and Russia. In both markets, it has done that through a tie-up with local partners and dedicated local teams with local market knowledge. And in both markets it struggles to meet its expectations, contrary to the impressive performance in the Baltic countries.

This lack of success – which might still revert in PINS‘ favour further down to the road – is certainly not be searched with a wrong management approach, but with a combination of local market forces and especially the lack of a strong airline partner, crucial for the redemption offer. While rather small airBaltic as only airline redemption partner might be sufficient for the Baltic countries – it does have a reasonable coverage in Europe and the Mediterranean Sea, but lacks of any long-haul flights -, it doesn’t work anymore outside of these core markets. It is hard to convince customers in markets like Finland or Russia with decent local airlines that they need to accept a connecting flight in Riga and a limited network if they want to redeem their hard earned points for the most aspirational award category, free travel. This might work if members can redeem on a truly global airline like Air France or Lufthansa, but hardly on a budget-style short-haul carrier like airBaltic.

Moving over to Etihad, this is certainly a problem the carrier will not be facing: Although it is widely missing the real big names in the industry, Etihad Guest on its own incorporates an impressive airline partner network of 27 airlines. And especially if the current partners of the Air Berlin program (oneworld), of Alitalia (SkyTeam) and of Jet Airways (25 mostly major airlines, including Star heavyweights) can be brought into the fold, this will be a very strong proposition.

The challenge will be much more to roll out a coalition program concept in international markets, where Etihad will face a combination of adverse factors such as lack of local market knowledge, a weak brand positioning and competitive factors. Interestingly enough, in each of the three most obvious markets for such a strategy – the home countries of the FFPs it holds a majority stake in, i.e. Germany, Italy and India – the well established Payback program has already occupied a big space of the market with its respective local spin-offs, making it extremely difficult for any new market entrant.

So in reality, I simply see no way how Etihad will be able to go beyond words to true actions and let me earn miles at my local French grocery shops, telecom suppliers or bank. I am happy to take a bet that in five years from now, my life will have changed in certain aspects, but Etihad Guest will continue to be completely irrelevant to me personally and hence to hundreds of millions of other frequent flyers/buyers out there as well. If anyone can take a note and remind me, I will be happy to revisit the issue in five years and analyse self-critically what has been achieved and in which areas I was too pessimistic (or too optimistic because basically I nevertheless assume that Etihad/Etihad Guest will still be around by then!)…