It seems that some folks are still in denial about the fact that some customers are more valuable to an airline than others. Then again, it is not common that the CFO of an airline comes out and says it quite so bluntly. United Airlines CFO John Rainey, speaking at an investor conference last week, seemed to have no trouble speaking his mind with regard to the company’s MileagePlus program and the driving forces behind some of the recent changes:
Additionally, we also changed our Mileage Plus program, some of the benefits that accrued to the members…. [W]e had certain groups in this group were over entitled if you will…we have realigned the benefits…and this is a good change going forward….
The philosophy is similarly represented in one of the slides included in the presentation (see the first full line of text):
In both cases the CFO has essentially made it clear that the company is moving towards a different version of defining customer loyalty than the days of yore. No longer is just flying a lot of miles the measure of a good customer. Now customers must also provide value to the company to be desirable and well rewarded. At least that’s the direction the company wants to be moving in.
But is it the right direction?
Once again, this question pits a number of folks who are low revenue, high volume against the company. The company seems quite willing to write those customers off without too much apprehension or concern. Those customers (of which I’m almost certainly one) are simply no longer desirable to the company, likely for being too expensive to service, or for getting in the way of the benefits offered to other less frequent but more profitable customers. Or the company just hates all its customers and wants to go out of business. But that seems less likely.
It is also somewhat interesting to note that every revision or release of a loyalty program I can think of from the past decade has shifted the balance more towards revenue and away from simply miles flown. There’s probably a reason that has been happening.
Perhaps the greatest challenge at this point will be for the company to actually deliver on the better benefits for those whom they see as valuable customers to keep them around. It will definitely be interesting to watch that unfold.
Also in the same presentation was an interesting slide on the benefits of the PSS integration effort which happened in early March:
Of course, all the benefits listed here are for the company, not necessarily to all customers. Still, there are some aspects of these changes which will probably be beneficial for different groups of customers at different points over the coming years. Yet another thing which will be interesting to watch unfold in the coming years.
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Well, I found the comment offensive. I don’t think it’s professional or appropriate to insult your customers in that manner.
That being said, I wonder what they mean by “greater elite differentiation.”
All I’ve seen post-3/3 is more equalizing among the elites.. “All elites are equal” mentality.
Have they done anything to greater differentiate the elites?
I am not offended by his comments, he just verbalized their actions which seemed pretty transparent in terms of their strategy.
But i concur with Gary’s argument that from a business perspective, loyalty programs drive business at the margins. It will take some persuasion for me to really believe this current strategy actually accomplishes that. Ultimately, i believe it will drive more marginal revenue to their competitors.
I’m curious: low revenue and GS?
Once he isn’t a GS maybe he’ll get the memo that the new airline stinks.
Regarding Global Services, the way i read the UA upgrade confirmation priority, even they are below a Silver who is on a Y/B fare. So I would be curious about how this is working in practice for them as well.
@Carl – GS trumps all. The Y/B fare affects 1Ks and below.
@Michael – From their website, I would think GS would be in #3 group below, assuming a non Y/B/M fare or upgrade instrument:
The following is the order of priority, within five days, on flights that are eligible for Complimentary Premier Upgrades:
1. Premier members on eligible Y- and B-class fares, as well as Premier 1K members on M-class fares: Instant upgrades that weren’t confirmed in advance, sorted by fare class, then Premier status
2. All travelers on waitlisted Global Premier Upgrades, Regional Premier Upgrades, and MileagePlus Upgrade Awards: Sorted by Premier status of the redeeming account, then fare class and time of request
3. All remaining Premier members using Complimentary Premier Upgrades**: Sorted by Premier status, then fare class and award travel***
@Michael R. – This is based on my understanding when I talked with some GSes and how the program works. I am not a GS and I have never seen how GS upgrades work in person, so I can be flat out wrong.
I believe GS need PN space for their CPU to clear inside the window, so they do trump all elites on B fare and 1Ks on M fare once inside 120 hours. However, elites on Y fare clears into JN, which has more inventory since it will almost always match the # of F inventory left, while PN is a little more restrictive.
In that sense, elites on Y fares will trump GS. Remember, Y fares cost more than discounted F fares, so when someone actually pays a full Y ticket it makes sense to give them top priority. Government fare is an entirely different issue and I do agree with many that the instant upgrade scheme for YCA fares should be eliminated.
Bottom line, elites on Y fare books directly into any available F seat, B/M fares are capacity controlled and books into PN, so those trying to upgrade into JN inventory will have priority over those trying to upgrade into PN inventory.
Many GS’s that I’ve talked to have said that they are frequently not getting upgrades FWIW…
I understand moving from miles flown to revenue…After all, how do you reward the person that took one round trip to china more than the person who goes EWR-IAD every week for 3 months…
But, what is the cost vs benefit? Is it worth alienating a vocal few who get more than they may deserve, but are also loyal and share your brand with their peers?
this might be useful: http://ourpax.com/uncategorized/ffps-stop-rewarding-the-wrong-customer-get-the-experience-right/
@Noah – yeah, i like that chart, which basically makes others’ point that a loyalty program should not necessarily nurture high yield captive customers, but low yield self-paying customers who drive revenue at the margins. The equilibrium point is probably somewhere in the middle.
I would also argue that even those passengers that achieve elite status thru bumps and similar type discounts are extremely valuable. It allows the airline to oversell even more seats at even higher margins, and reduces compensation for involuntarily denied boarding and its associated costs.
GS CPUs clear into PN. That keeps them above all the B fares without any issues inside the CPU window. I’m not sure how the company handles those versus the Y/JN fares, but it seems to be working ok in most cases that I’ve seen. Maybe not 100% perfect yet, but I’ve mostly seen things working correctly.
As for the argument that elites who make it are all valuable, even when only earning by VDB vouchers or such because they are adjusting the margins for the other customers, not a chance. If the company wants to raise the margins/yields they can raise the fares. Or they can sell those fares to random customers who are flying only based on price, not loyalty. The idea that those customers should receive the same benefits as those who are spending at the higher yields just doesn’t make rational business sense. Yes, you carry them because you want the revenue, but that doesn’t mean you treat them like your best customers; they simply aren’t such. Compare it to a professional services business. Given limited resources available to deliver to all customers you expend the lion’s share on the customers who pay more over the long term. That means the folks who pay full price time after time. A customer who is always there but who never pays full price is as much a liability as they are a benefit. Yes, it is great to have the incremental revenue. But if that also means that you do not have the ability to take on other, full price customers then you really are screwed in the long term.
Finally, the changes that are being described here are likely the ones already in place. Doing things like prioritizing Y/B fares for all elites over lower fares directly rewards the higher yield customers. Cutting the benefits at the Silver level to only one bag and no E+ at booking makes for pretty significant differentiation between them and the Gold/Platinum/1K levels. Even the changes in the RDM bonus numbers adds significant differentiation in terms of the benefits delivered. Does everyone stand on the same carpet at boarding? Yes. Does that make all elites the same when it comes to the bulk of benefits being delivered? Absolutely not.
As for the suggestion that my current GS status, which will undoubtedly expire at the end of the year, skews my view, I suppose that is possible. But go back and read my position on things like the Y/B-ups from 2 years ago or about how I think upgrades should be prioritized. It hasn’t changed at all. Yes, I’ll milk the benefits as best I can while I’ve got them, but I’m not delusional as to believe they are going to last nor that the changes overall in the past year have been all bad for me. Then again, CPU/EUA/UDU has never been my primary goal or most significant benefit with elite status, so my view might not match someone else’s.
I do like that chart, Noah. I actually wrote about it in describing the different types of airline elite passengers here. It isn’t perfect, but it gets to a big part of the discussion, namely that there really are some customers worth pissing off. Maybe they leave and maybe they don’t, but there are absolutely some customers who are too much trouble to coddle than they are worth. The trick is to not lose too many others who are good for you at the same time. A gamble to be sure, but the company has all the data. I’d like to think they might have a smidgen of an idea what they’re talking about.
I have heard a number of people argue recently that the CEO should just think about the bottom line and that’s all. I call bulls*^%. the better companies have why to they do something beyond making the moat money out of their customers. I buy from companies who are investment more than financially in their product. They live it. UA and CO, back in the day, cared about the customer, about their staff and about the value of being an airline. This seems to be lost. We now seem to be seeing an us (investor/ s. Management) against the rest. Often happens when bean counters take over a product focused company. Don’t see this as being good for the company in the long run.
Thanks for your thoughts Seth and for clarifying the GS procedure. Do you see AA moving toward a Y/B upgrade ahead of EXP? Delta is similar to UA in that it upgrades Y fares for silver/gold/plat medallions ahead of discounted fares for Diamonds. Yet, it does not seem to draw near the scrutiny as UA. Curious to see where the industry is heading.
Seth, despite your comments above about your perspective as Global Services, you still don’t seem to have addressed the issue I’m having trouble understanding: You state that you are a low-revenue, high volume customer…yet you have GS status (which implies to me that you aren’t low revenue at all)…how can you claim you fall into that low rev, high volume group with GS status?
It is easy to claim it, Andrew, because it is true.
The GS program is used as a marketing tool in some cases, even for customers without high spend. It is not common and it is not generally something that a customer can make happen for themselves as opposed to getting lucky and being targeted for the opportunity (which is what happened for me). But it does happen from time to time.
As a Premier Gold I find it surprising that GS aren’t getting upgrades. On my last trip, 5 of 7 upgrades came through.
Short of GS and maybe 1K, I don’t get why there is complaining that people who pay to upgrade are in the front of the line. If you paid for a ticket in coach, you are entitled to nothing better. Allegedly premiers are unable to buy the upgrades to first, which is a problem, but putting paid in front of comped doesn’t seem unreasonable.
Seth, you cite it as low revenue, high volume against the company. What about people who fly a wide variety of fare types, depending on how far in advance they are able to book, how certain they are in their plans, etc? I’d like to be loyal to the airline and treated well each time I fly, and not have each transaction evaluated separately. Hello, Mr. Carl, today you are high revenue and we will go out of our way for you. Tomorrow, Mr Carl, get at the end of the line, you’re a low value customer today. I am not my fare on each flight.
You don’t earn my expensive tickets if you don’t treat me well when I travel on your best available fare.
Also, and I don’t know how UA tracks this, but I get access to no corporate discount program, so while some companies (and the gov’t) may negotiate hefty discounts off of high fare classes, I may pay as much but fly in a lower fare class. I don’t know how they track this, but certainly in prioritization I am disadvantaged against flyers traveling on corporate discount fares.
I would be quite surprised if the folks buying a spread of fare types are those the company is looking to disincent.
As for treating you well on all fares, I’m curious how you think that is playing today versus in the past. My personal experiences were that United historically had a much broader range of service levels a customer might experience, both at the high and low levels, and that the status was only a small part of that. Continental didn’t reach quite as high as often but they also rarely dropped nearly as low for me.
As for the ability to track real value to the company against both real and corporate-discounted fares, I’d be shocked if they don’t have that ability.
I understand United’s strategy and the idea that a high-volume pax isn’t necessarily a high-revenue pax.
That said, I’m not sure if coming out and announcing it so bluntly is a good call. While it may not bother the high-earning pax, the ones that have status due to high-volume flying on discounted Y fares may feel a bit put off.
So while this viewpoint makes sense from a strictly business standpoint, it’s probably not a good idea to alienate a part of your FF base, especially when they still may be feeling a bit raw from the merger itself.
United also apparently thinks that PassPlus Secure customers were over entitled. They reduced every benefit (except the club membership) and raised fares in the newest rollout of the program. If they don’t want these customers they should have just cancelled the program.