Why Airlines Can’t Survive Without Loyalty Programs | WSJ Case Study（原声文稿）

Fully booked flights, limited bag space, and a kid kicking the window seat you paid. an extra $100 for.

I am an extreme case of FLC, fear of coach. But that's the reality for the. majority of people flying today.

A stark shift from the days where air travel included complimentary cocktails. and an in -flight piano performance. So what happened?

To understand, we have to go back to a decision made decades ago, when.

deregulation allowed airlines to set their own flights and routes.

What was meant to make the industry more competitive ultimately set off a race to.

increase profits and cement an airline's market share, leading to the world's first. airline loyalty program.

It's hard to see how airlines could survive today without loyalty programs. If.

we just started from scratch without it, I don't know.

Today, airlines make on average only about $13 in profit per passenger, but 2020.

revealed that the loyalty program can hold a higher value than the airline itself.

Here's the case study on how American Airlines created its own form of currency.

changing the way the world flies and creating an entirely new business that has. nothing to do with aviation.

This was back in an environment where airlines weren't full. In the late 1970s.

American Airlines was losing some of its grip on the market.

Deregulation had meant that there were lots of new airlines. Suddenly it's a. little bit of a free -for -all.

Everybody was trying to figure out how can we motivate people to fly more.

New, smaller carriers began winning market share by offering lower prices, and the.

competition forced the traditional carriers to rethink their business model.

They wanted to keep flying the same routes, while maintaining prices, but not.

lose customers to competitors. So our advertising agency said to us.

why don't you guys see if you can come up with some kind of a prize? The company. brought together a small team to...

the visionary who knew that incentives could drive behavior.

The team was inspired by prize stamps, which could be collected at various stores.

and then exchanged for rewards like a watch or a new camera. And American. transitioned that idea to give customers miles.

the first iteration of advantage. I think it did sound like a sort of simple idea at.

the time that if you give people some kind of prize, they might buy tickets.

In the early days, that simply meant a free flight. American Airlines was betting.

that the business the program attracted would be greater than the cost to redeem. the reward.

But to nail that, America needed to set the right benchmark. The company knew that. its average consumer flew about 40 ,000 miles a year.

Setting 50 meant concentrate your travel, fly on us more. The team also implemented.

a specific one -year time limit for the program and developed a way to track their. customers.

They knew this was Tom Jones who flew from Miami to New York. They didn't know if.

this was the same Tom Jones who flew to Paris last month.

Computerized reservation systems were still new and innovative and just getting. off the ground.

To solve this, American linked its reward and reservation system and assigned.

customers a specific number inspired by rental car company Avis.

The goal was to know which customers were the most profitable.

Obviously if I knew what you flew last year, I can design incentives that will. reward you for incremental spend.

After more than a year of planning, American Airlines launched Advantage on. May 1st, 1981.

It seemed like the reaction was almost immediate. United matched within a week. and shortly after, TWA.

Continental, Northwest Orient, Braniff, and Texas International all followed. And.

literally by September, every airline but one had a program.

But the secret weapon American had over its competitors at the time was just that. time. They had a one -year lead.

The other airlines had not done the planning necessary to keep track of the.

miles. While they were figuring in that, we were signing up their customers.

American thought that we might have 500 ,000 people. We signed up in the first.

year on million people. But the influx of competitors threw a wrench in Americans' lead.

When United launched its program without a one -year time limit on the miles. I think. a lot of the airlines thought it was a one -year promotion.

And it might have been a one -year promotion had United not made it open. -ended. American quickly removed its limit as well.

And of course, the consequence of that is that every frequent flyer wants to belong. to every frequent flyer program, and they do.

And that's totally destroyed the initial economics.

Without the time limit, the airlines found themselves once again one -upping each.

other. Over and over and over again. I said we need a gold program.

We need something that recognizes the top 2 percent. This created a system to.

determine levels of incentive. The more miles, the more incentives, like a. complimentary first -class upgrade.

These upgrades were also a way to accustom flyers to the more expensive.

accommodations, so that eventually they would buy that option on their own.

Now the advantage for them is hugely profitable because the value of the prize. is proportional to the amount of business.

Miles became a sort of currency as frequent flyer programs began attracting.

attention and capital from outside the aviation industry, specifically from. banks.

The airlines began selling miles to these banks in exchange for cash. The bank would. then offer these miles to their cardholders as a reward.

But this movement meant that passengers aren't an airline's only customer.

I mean, for the airline, that's great because it means they get revenue from all.

sorts of goods and services that you buy that are totally independent from travel. or travel demand.

So the advantage program has become a business in its own right and a very.

profitable one. But by awarding miles for spending, These programs were no longer. just about frequent flyers.

Instead, it's about money spent. How much did you spend on your ticket becomes more. important than how far you're flying.

So you don't necessarily need to be a road warrior whose boss sends you out on. business travel four days a week to have a shot at this.

You can get there by spending on your credit card. Prompting the debate. Have.

airlines become more like banks that just happen to fly?

I think the airlines disagree with that and the flying is sort of the point. There.

is no program without the airline. But in terms of the role that the programs play. in their finances.

I mean, they have become really prominent and it's hard to ignore.

I mean, today, often in some quarters or some parts of the year, the actual airline. operation doesn't make money, you know.

costs more to fly passengers around than they pay the airline.

What can fill in the gaps is the loyalty program and the co -branded credit card.

that gives airlines a little bit of revenue every time a customer swipes that. credit card.

In 2023, American Airlines brought in $5 .2 billion from its credit card and other. partnerships, and Delta, $6 .6 billion.

But the offerings promised in a loyalty program had become more competitive as the.

audience grows. Now, customers are paying for these accommodations.

By 2022, ancillary revenues, like that made from seat upgrades and baggage fees.

accounted for about 15 % of total airline revenue. When I started.

when you bought a ticket, everything came with it, whether you consumed it or not.

What we've been able to do over time is actually create more products that enable.

customers to pay for what they're going to consume.

And airlines are constantly recalibrating their programs to keep their economic.

edge, whether it's changing the benchmarks for a certain status or increasing the. number of miles it costs for a flight.

Airlines have full control over how much a mile is worth and how much to charge for a.

flight. So you are kind of at their mercy when you're participating grams.

Describing the rewards programs as potentially unfair, deceptive or anti.

-competitive. A lot of people really seem to believe that airlines want to make it. as hard as possible to use the miles.

And every airline executive ever talked to us said that's not true. I want people.

using their miles. I want them to find value when they use their miles.

But I do think there's frustration when airline miles get devalued and then.

suddenly you can't buy the flight that you thought you'd be able to buy because their. miles are worthless.

In response an airline trade group said that loyalty programs are a way for.

airlines to compete for customers. But the programs impact on consumer decisions may. also be dwindling.

Research by McKinsey showed that these programs ability to change flyers behavior.

declined between 2017 and 2021 and again between 2021 and 2023.

So in order for loyalty programs to keep their alert, airlines like American are.

looking to expand the scope of where people can spend and earn miles.

Things that you can buy with cash, we want to make available with miles, and we also.

want to change even the experiences that you can use your miles for.

But like with any change, comes the risk of overcorrection.

We've seen cases at other airlines where they've made big changes and had to sort.

of walk some of them back, and it's kind of a constant iteration.

which means that while you might be able to earn miles almost everywhere, how much.

they can get you is still up for debate. Thanks for watching.

If you want to learn more about how loyalty programs have transformed.

watch our extended interviews with American Airlines VP of Revenue Management.

and Loyalty Scott Chandler and former CEO and Chairman Bob Crandall. Click the link. here to watch on wsj .com.