Why spend is a good qualifier for airline status


The rumor mill is running strong these past 24 hours with Lucky pointing out a possible new scheme for elite status on United Airlines. Yes, it is a rumor, but the framework is pretty well defined so let’s take it for a spin and see just how crazy it is.

The basic qualification requirements would shift from a simple metric – how often/far you fly – to a rather more complicated one. It would still include miles/segments flown (EQMs) but on top of that there would be a count of flights taken on United metal. Most recently Air Canada announced that they would require a certain number of segments as part of their qualifying requirement and several other programs have similar requirements. This is not a particularly controversial change to the program and the number of segments required is pretty low.

And there would be a spend metric.

Yes, after years of wondering when a program would finally start to consider spend as part of their elite qualification it seems that United is going to be first to give it a try. And I actually think it is a smart idea. The spend thresholds are not trivial: 8 cents/mile is the number being rumored. Personally I probably would not qualify at the top level given that number as I do not think I spend $8,000 in airfare on United in any given year. But I’m also not so sure I’m the customer that the airline should be rewarding.

By every rational metric spend should have always been included in calculating the value of a customer to a carrier. Many airlines have done little things here and there to approximate such value (e.g. more points for higher fares) but until recently no one has gone 100% in that direction. And United is not proposing a 100% shift in that direction either, but spend will play a significant role in the qualification process.

When talking about spend rates to requalify for status or to earn points there are a lot of thresholds tossed around. Three or four years ago it would not be uncommon to find deals in the 2.5cpm range without too much trouble. These days those same deals are in the 3.5-4.5cpm range. And there are certainly some people (self included) out there flying on them and accruing a ton of award miles and elite status, too. And the airlines treat those customers the same as the business traveler who is buying full fare tickets and who is actually profitable. That is hardly a rational way for a business to behave.

Just looking at the average numbers, the cost to fly a seat on United last quarter was $0.1423. That’s averaged across all the available seats, not just the occupied ones. If you include the 84.1% load factor (n.b. all numbers from the Q2 2011 10-Q filing) then the cost of operating a filled seat was about $0.1692. It costs nearly 17 cents per mile to operate the seat on average and they’re willing to consider you a loyal customer if you’re paying just under half of that over the course of a year. Maybe I was wrong. Maybe the plan is completely irrational because the threshold is still too low.

When JetBlue announced their revamp to the TrueBlue program 18 months ago spend was almost entirely what the focus was on. Virgin America‘s Elevate has a similar structure. The new Rapid Rewards program from Southwest is similarly focused on spend, though still with some variation in the minutiae. Of these, only Southwest currently has an "elite" program and they permit qualifying via spend. So does the Hilton HHonors hotel program. It isn’t like this sort of policy is ground-breaking.

What is revolutionary about it is that the company might just finally be willing to step up and cast off the hangers on. The leeches. The folks who are not profitable to their operations. In other words, Me.

I know that I’m not a profitable customer to United. I realize benefits far in excess of the value I bring to the company. And if this policy becomes real then I’ll be looking at the numbers and deciding if I can meet them or if I’ll be finding another program from which to leech. Certainly the folks at United will not be sorry to see me and my STLKNG fare habit that gets upgrades 80%+ of the time disappear. And anyone who has a similar purchase pattern and believes the company will miss their departure is delusional.

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, LinkedIn and .

29 Comments

  1. The biggest problem with rumored changes aren’t the minimum spend requirements for status.

    It’s the transactional nature of prioritizing upgrades, etc. trumping status.

    If we take a certain minimum spend as necessary to achieve status, then at least treat members who achieve it consistently regardless of the fare they happen to be flying on any given day.

    Continental already has full fare trumping status of course. And so does Delta. Continental also sells upgrades on day of departure, even to elites, before processing elite upgrades. Anyone with $100 bucks isn’t more important to someone giving the airline 100,000 miles of travel and a minimum of spend, the bulk of their travel wallet share.

  2. Does UACO have the technology to accurately track revenue? I know CO has been doing this for a while and admittedly I’m not familiar with that system, but I wonder how they will account for StarAlliance partner revenue, customer service vouchers, VDB vouchers, etc. If they will give credit for “revenue” from vouchers, there will still be some room for leeching!

    1. Yes, Gene, the technology is there. As you note, Continental has been doing this for a while and the Continental platform is the technology that will be used for the new carrier so keeping that functional won’t be too hard. The only bit I’m not certain of is *A partner revenue and my guess is that the ATI partners have a means to share those numbers and then the other stuff just won’t count.

      Historically the vouchers have counted, I believe, but I’m not positive as I haven’t tracked my spend so closely.

  3. Well, I suppose I’m glad someone else doesn’t completely hate the idea of a minimum spend for status. 🙂

    For the upgrade priority, I have no problem with a silver on a full fare getting priority over a platinum on a deep-discount fare. Loyalty exists in two phases that run in parallel: long-term (annual status) and short-term (current ticket). Rewarding only one and not the other is bad for the customer and bad for the company. Rewarding a combination of the two is a win for everyone.

    Would I be happy if a silver on an S fare was ahead of a diamond on a G fare? Absolutely not. But prioritizing Y/B fares for elites above all the other fare classes is a good balance of rewarding both types of loyalty. It makes it more likely that the high yield customer gets better benefits but without completely destroying the program for lower yield but long-term loyal customers. I have absolutely no problem with that at all.

  4. How are you GS? You mentioned in a blog post a while back that you only spend $2,800 a year on travel yet you also posted a picture of your boarding pass that clearly stated you were a Global. I find it convenient that recently your posts on FT regarding the matter have pointed towards spend being a good qualifier for airline status, and here we go with the blog post. Are you being paid by UA/CO with GS status so you can be an apologist?

    I just don’t get you. You stay in hostels yet you are a GS. There is something fishy about your story.

    1. Yes, I am Global Services. No, I did not spend tens of thousands of dollars to get there. Nor did I receive it as a compensation from UA for my blog posts. Suffice it to say that it is possible to acquire said status other than through just spend. And I do not expect to keep it past January 2013 when my current iteration of status expires. (ETA: Just to clarify, no one at UAHQ had anything to do with my getting the status either. The folks I know there were quite surprised when they found out.)

      Quite frankly, I’m not sure how my suggesting that customers who cause the company to lose money are bad for the business is so controversial that you’d suggest I’m a shill based on that. I believe that loyalty is a two way street and that the airlines should be doing a better job of rewarding the customers who are profitable – the best type of loyalty there is. I say this knowing that personally I will likely lose as I’m not a particularly profitable customer to any airline. But that doesn’t mean it is a bad policy.

      Do you believe that only miles flown should be the qualification basis for earning status? If so are you willing to suggest that Class of Service bonuses should disappear? After all, the passenger is flying the same number of miles.

      @Carl: Regarding lower elites upgrading on Y/B fares, do you honestly believe that a customer who flies 25K EQMs is not showing some sort of loyalty that should be rewarded? No, it is not as much loyalty as someone who flies 100K EQMs, but if that 25K customer does it all on Y fares and the 100K customer is on W fares then the 25K customer is worth more to the company.

  5. I don’t mind having spend as a criterion for each elite level so long as they announce it well in advance, give us a decent tracking tool, and make the criteria clear as to JV flights, ticket stock required, purchasing restrictions, etc. If they announce it this fall it should cover travel in 2012 to determine 2013 elite level.

    Heck if you fly one or 2 international trips in C or Z class, you will hit the spend – but you still have to fly a bunch of miles or need more like 5 trips in Z or 3 in C.

    I am significantly more opposed to letting low or no status flyers on YB fares or using miles and co-pay to upgrade ahead of higher elites. That’s why there are F, A, C, Z fares – let the no status or low status flyer buy those fares if they want to pay to upgrade, otherwise the unsold seats should go to the elites who are showing long-term value to the airline, even if the mix of flying includes some cheap fares, with the spend requirement they’ve already determined that we provide real revenue to the airline.

  6. I don’t disagree that using spend as a qualifier for elite status is reasonable. As Gary points out, the real problem is the transactional nature of prioritizing upgrades and trumping status. It’s possible to construct a scenario that sounds reasonable: I’m a 100K flyer on a deeply discounted ticket and a 75K flyer ahead of me has paid four times as much for a full-fare Y ticket… shouldn’t that person get the upgrade? Maybe. But once you go down that path, it’s a slippery, slippery slope.

    1. What’s so slippery, Frank? Could it mean a full-on shift to fare as the basis for the upgrades? Sure. Doesn’t seem likely, though, because it doesn’t make business sense. Remember that the airlines are running businesses, not charities for our travel habits.

      Again, I’d love that it would be the fun guy on the cheapest fares getting all the best benefits because that would be me. But that’s not going to happen because it is bad business. Better aligning the benefits to give the better customers – high yield, not necessarily high mileage – better benefits is a smart move. The company can better service high-value customers. Those who are and who have discretion in their travel will move their business to where they are treated better. A few high-yield customers will quickly make up for the lost yields of scores of mileage runners.

  7. Good article – refreshing to see someone look out beyond their own narrow interests. I’d be both a winner and loser from this but think that it makes much more sense to the new UACO in terms of incenting the type of flyers that make them money so is a good thing from a business perspective.

    Looking at my own selfish interests, I would not be affected by the spend threshold, except insofar as I benefit indirectly as it creates fewer 1Ks, as I consistently cross it with ease (usual spend $20-30k per year). But I would lose out somewhat from the upgrade priority as a 1K who travels a lot on late-booked fares than are often around the E-M range which currently do very nicely on upgrade prioritization. Yet I agree that there are a bunch of Premiers and Prem Execs that are more profitable to UA than many 1Ks and it makes all the sense in the world for them to get better upgrade priority when travelling on the type of ticket that makes them so profitable.

  8. @Seth

    Candidly, it’s getting old reading comments on boards like, “the airlines are running businesses, not charities for our travel habits”. That’s a straw man. I’m not saying that. No one is saying that (of whom I’m aware).

    Like Adam S above, I wouldn’t be directly affected by the spend threshold. No problem there. But if UA decides to prioritize upgrades based on spending rather than my status, then what, precisely, is my incentive to remain a 100K/year flyer? If it’s upgrades I want, my strategy should probably switch to attaining 25K/year status at three or four airlines with similar transactional policies, then buying high-fare coach tickets on each. So then I’m buying higher-fare tickets but flying 1/4 as much on UA. If the spreadsheets tell UA that’s the right thing to do from a business standpoint, good on ’em. But I doubt the numbers really work like that. And business isn’t purely numbers; it’s about relationships.

    My son is in the US Navy and bought an iPad a few weeks ago. After getting back to base, he discovered it wouldn’t be as useful to him as he had hoped due to various restrictions on tablet usage there. He couldn’t get back to the Apple Store within two weeks on account of duty obligations, but went in shortly afterwards. He wasn’t in the return window, and he didn’t even have the packaging with him. But Apple happily took back the iPad, no questions asked. On a one-off transactional basis, was that the right thing to do? No. They would have been well within their rights to decline the return and it undoubtedly cost them hundreds of dollars to take it back. But on a long-term relationship basis, was it the right thing to do? Yes. They kept a customer who will return in the future to buy more iPhones, iPads, and MacBook Pros.

    At some point you have to set aside the spreadsheets and ask yourself, as a businessperson, what the right thing to do is from a long-term customer relationship standpoint. The hypothetical UA policy as described would absolutely not be in keeping with such a philosophy. It would treat even highly loyal flyers as transactions to be maximized one-by-one. And if those flyers have alternatives that are better (an open question in the US airline industry), some of them will avail themselves of those alternatives. UA needs to think carefully about that.

    1. Yeah, Frank, I guess reading reality is tiring. Sorry.

      Given that there have been no real details released otherwise, I’m inclined to believe that the PMCO policy of Y/B fares getting priority in upgrades is going to stick around. I’ve always felt it was a smart policy and a useful balance of both short-term and long-term loyalty. Show me an argument with real facts that suggests it isn’t and I’ll listen. But if the only objection is “I don’t like it because I might not get as many upgrades when I am on a cheaper fare” then I’m not so convinced.

      Your Apple Store policy analogy is a pretty simplistic red herring. Should the company encourage long-term loyalty through both policy and out-of policy exceptions? Absolutely. So what part of giving upgrades first to the highest yield customers and then to the folks who fly the most miles doesn’t accomplish that?

      Does giving the person who has already shown some loyalty – 25K EQMs isn’t just an annual trip to grandma’s house in Florida – a benefit when they are also paying a lot of money for the travel somehow not reward loyalty? I think that is smart business. It rewards the loyalty and encourages further loyalty. Over time that passenger gets status faster, too, even further engendering loyalty. In the meantime a regular mid-fare 1K gets upgrades most of the time but probably not as often as the person paying full price.

      As for your plan to make base elite status and then buy Y fares across multiple carriers, look at the numbers and let me know how that works out for you. Here’s a hint: It won’t.

      The right thing for an airline to do from a long-term customer relationship standpoint is to continue to attract the higher yield passengers. Loyalty as expressed simply though a number of miles flown is a horribly naive view of the airline business model. Yes, it is how the system has operated for the past 15+ years. That doesn’t make it right, either for the passenger or the company. I’m personally going to lose if this rumored change becomes real (though UA has already responded stating that at least parts of it are incorrect, but without any additional details). That doesn’t mean that I cannot put on my rational thinking hat and understand why the change was made, why it is actually going to be good for many customers and why it is absolutely good for the company.

  9. Seth, where have I or anyone else suggested that “the airlines are running… charities for our travel habits”? When did I say that I view loyalty “simply through a number of miles flown”? You’re throwing out straw men, citing arguments that no one is making, and you’re calling people who disagree with you “naive” or “delusional”.

    My Apple Store example isn’t a red herring at all. It’s an example of a business in a different industry that seeks to encourage customer loyalty and repeat business for its high-margin products. Airlines should seek to encourage customer loyalty and repeat business for their high-margin services. If UA believes, as you seem to, that the best way to do this is to prioritize upgrades based on fare classes to a far greater degree than they do now, I’m actually with you: I think they should do it. But I don’t think it will work out the way they want it to. I think what they’ll end up with is a much-reduced upper-tier elite population and a larger group of lower-tier elites who buy higher-fare tickets but fly much less often. And I think this will come back to bite them. I don’t have financial spreadsheet models to support this assertion; it’s just a hunch. But then I’m guessing you don’t have spreadsheets to support your assertions, either, and are similarly basing your opinions on hunches. Fine, but don’t then insult people’s intelligence or experience for disagreeing with you.

    You wrote, “what part of giving upgrades first to the highest yield customers and then to the folks who fly the most miles doesn’t accomplish that?” Because, as I keep saying, it treats each flight by each frequent flyer as a one-off transaction. It says, “you’re only as valuable to me today as the amount you’re willing to pay to fly today”.

    There are a variety of things UA can do to maximize its transactional revenue. It can implement the changes contemplated here. It can go much farther, say, by prioritizing all upgrades based on the dollar value of the fare paid. It can throw all of its elites into a single bucket and upgrade the n who paid the highest fares. It can stop giving out upgrades entirely and sell seats to the highest bidders at check-in. It can upgrade only elites on full-fare tickets and sell the remainder of F seats at check-in. Which of these ideas would you support? Which of them do you think would be likely to improve UA’s long-term finances?

    1. Sorry, Frank. You said that long-term loyalty – in this case defined by status which means miles flown – should be the ultimate trump. I disagree. If that’s not what you mean then give me a rational reason that Y/B fares from any elite are worth less than a 1K on a discount fare on that one flight. Again, I’m not suggesting that the silver on a W should be able to upgrade ahead of a platinum on a K fare, but that same silver on a Y/B fare should be IMO. It makes business sense for the carrier and it isn’t really all that awful for either the silver or the 1K elite.

      There is an incredibly large pool of customers where their value to the company IS a transactional experience. They are the folks who have a mix of personal and leisure travel or a high dose of leisure travel. Yes, those customers spend a decent amount of money on UA (or wherever they have loyalty) but not enough that they should be prioritized over the high-yield customers every time. The customer who buys 2x ORD-LHR in C for work each year and then buys a domestic Y fare on UA is worth more to the company than the customer who buys 20x JFK-SFO in W. Should it be that way? II see no reason why not. Yes, the 20x W fare passenger has flown more miles. But they haven’t spent as much money and they’ve significantly increased the costs to the carrier as well. The 2x ORD-LHR customer is a higher value customer.

      Any upgrade scheme is transactional. There has to be some set of circumstances. The current system uses status then fare bucket then time of purchase. The theoretical new system (which actually isn’t really all that new since CO has been using it for years) is certainly a bit more complex in terms of how status and fare are evaluated, but that doesn’t make it any more transactional. The factors at play are still status, fare bucket and time of purchase. The difference is that the full fare customers who are also elites are prioritized. If you ignore that it is only elites – customers who have already shown long-term loyalty then the scheme is a bad one. If you recognize that anyone who is elite has shown at least some long-term loyalty then it isn’t so foolish.

      As to the other options you’ve proposed for upgrade schemes, yes, they could go farther like that. But only one of those (all elites in the same bucket and then upgrade the N highest fares) actually rewards both long-term and short-term loyalty. And that’s basically what the PMCO scheme is anyways.

      By striking a balance between rewarding both long-term and short-term loyalty the airline wins. The customers who should win do, too. And then the other customers, those who have spent the time and some lesser amount of money are rewarded. An airline doesn’t make money just because you spend time with them. Basing rewards off that concept is a misaligned operational approach that fails to actually recognize the behavioral patterns they’re trying to encourage.

      I’m willing to bet that the number of elites who would be affected by a switch to such an approach is a relatively small population. They may be loud and raise a ruckus on FlyerTalk or MilePoint, but that doesn’t make them the customers that the airlines want to woo.

  10. I think your analysis is spot on.

    The complaints from some posters above about harder upgrades, etc. are somewhat disingenuous.

    First of all, once such a system is implemented, there will be a thinning of the ranks in the ranks and therefore less competition for upgrades. Even the new restriction on Economy Plus seat assignments for Silver Elite to day-of-travel may not be a serious issue if there are fewer elites trying to get one of those seats.

    Furthermore, the assertion that a Diamond Elite traveling on a discounted fare will be routinely trumped by a full fare nobody for upgrades is silly. Most fliers paying full fare will be Elites already. Do people really think there are that many nobodies flying around on full fare Economy?

    Frankly, the entire loyalty program concept should be reevaluated. The single-minded notion that elite perks are a reward for your loyalty ignores the reality that those benefits are also a real cost that ultimately gets passed on to other passengers. When you are upgraded to first class on a cheap (or even mistake-) fare, other passengers are footing the bill for your services and amenities. I doubt they would look kindly on your enjoyment of elite perks at their expense.

  11. Well, if they do, please let me know. I just wish they would bring back the Qantas awards.

    Cova

  12. I actually think that this is a trail balloon. I think that corporate travel managers are going to have some heartburn about this one. It’s one thing to limit earning by fare bucket but another one to just state the fact that if you spend X with us you get status. They do this and presto, few sigma projects later and companies start hammering people with Y only on overseas trips, and no booking under 14 days on any routine trips. The P&L of the fortune 5 company I work for already requires Y only overseas for anyone under a full VP, and if you book any trip less than 14 days out you end up on a list that goes to the CEO (and no senior manager wants one of their people on that list). And our P&L had revenue of $18B last year.

    1. Buy me a beer one day in an airport lounge and I’ll tell you the whole story, Alex. Suffice it to say, it isn’t nearly as sexy or conspiratorial as you’re probably expecting. I do know that I wasn’t the only person who got it the way that I did. At least 50 or so folks in NYC did.

  13. a option (yes, I own the USD Mint and USD trademarks, key domains and processes etc)

    United can rename Miles to USD (like Choices).
    USD United Service Dollars.
    USD United Status Dollars.
    USD buy any seat or upgrade the same as Cash.

    Choices and miles buy any seat, room, or car rental now.
    USD deliver a clear 1:1 value, with 2:1 and higher options.

    USD offer you personalized deals for seats, upgrades, packages,
    ie: free or half price upgrades, 2 for 1, special prices, deals for you.

    USD Free Pass Card for Personal Access to Sales, Services, Status.

    Status is from all Spending and Segments … your combined activity.

    Miles convert to USD at 1 to __ cents based on elite status, spending.

    Earn USD at 10% of spending +bonuses for service class, elite status …

    a option to consider … rename miles to USD to reward the customers.

  14. Very good post, however, I strongly think that this is not going to help the airline’s bottom line or its image/brand… What they need to do is drive RASM up by controlling capacity and when the airfares start going up that is when the cheapo elites will start disappearing.

    The cost of filling a seat that otherwise will go out empty is VERY marginal*, so having a cheapo elite buy the seat for only $100 on a transcontinental flight will still either make the flight more profitable OR reduce the loss… So, the airlines DO prefer cheapo passengers over an empty seat and this program works against that. I am sure the % of cheapo elites in the MP program is VERY small as well.

    So, right-size the capacity and the airfares will continue to creep upwards to a point where mileage runs do not make sense unless you are only one trip short of the next status level, those cheap elites will fade away. Let it happen naturally, and trying to “force” it to happen does not do much good IMO.

    *Fuel is the biggest cost of transporting a passenger nowadays, and my uncle is a private pilot who flies the bombardier CL600 challenger jet for a businessman. For fuel, they put in 5% of the payload weight to compute how much fuel… So, lets assume they are having an additional guest onboard increasing the payload by 200 pounds [body weight + luggage] will require 20 pounds more fuel or 3.5 gallons. At IAH for private aviation the fuel is around $6.50 [the airlines don’t pay that much] per gallon which means they will add $22.75 worth of fuel. Now we all know how inefficient those little birds are, I am sure the $22.75 figure is a bit lower on the boeings/airbuses plus the airlines pay less than $6.50 per gallon.

    1. Yes, Kyle, I do. I’ve not been particularly shy about that. But thanks for pointing out the obvious.

      @Rick: A straight value barter like that is what a number of programs, starting with Virgin America and JetBlue and most recently Southwest, have done. The same people who are complaining that they are losing “value” with a simple change like the one rumored would be positively devastated by a straight value premise. It is certainly easier to understand and easier to operate. But it also removes much of the opportunity for arbitrage. And that arbitrage is what makes the game so much fun. But good luck with getting someone to adopt a plan so you can cash in on selling your domain name. 😉

      @Golfingboy: I agree that the cost in any one-time transaction of filling a seat is marginal. It is when a customer behaves in such a way over time in a repetitive pattern that the costs associated with the transaction build up to the point that they are quite likely money-losing. That’s the sort of behavior the airlines would rather not have to pay out on.

  15. So if your GS story isn’t that sexy or conspiratorial, why not share?

    I think this is the 2nd time I’ve ever read this blog and wonder whay anyone bothers, what with the condescending and rude tone by the writer.

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