Airlines, fares, loyalty and the 80% rule


The past few weeks have been rife with discussions about just how incompetent the airlines are. Sure, those conversations seem to happen all the time but the volume increased in light of loyalty program devaluations and, just this past weekend, the failure of United to collect fuel surcharges on tickets by Wideroe. A conservative estimate of that incident based on some very limited research suggests that the impact is in the millions of dollars in missing revenue (I’m betting ~$3mm right now but that’s pending more data) and it is not entirely clear who is going to eat that loss.

Award Redemptions and Chart Changes

On the award chart front a number of stories came out of Alaska Airlines’ Investor Day presentation, specifically the slide showing the award redemption breakdown.

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That’s by segments redeemed so any partner award with a positioning flight to a gateway includes one in each category but the overall effect is the same: 80% (or more) of the awards are focused on “local” traffic. Yes, there are communities devoted to maximizing the value of the points. There are hundreds of thousands of members in those communities and even more lurkers who look on from the sidelines. But there are hundreds of millions of members of the loyalty programs. That’s a huge discrepancy. In some ways it is surprising that the 80% number here isn’t even larger. I’ve had similar discussions with executives at other airlines and the numbers shared are similar. That 80% number for domestic rewards is pretty solid, and a decent number of those are redeemed at rule-buster rates, not the lower 25,000 miles/trip level. Heck, even I recently redeemed 12,500 points for a flight from NYC to Vancouver because the cash fares were much higher than I wanted to pay.

So, what happens when the airlines make changes to the “edge case” awards, the <20% which a few customers redeem? Naturally there is outrage and indignation about the changes within the expert communities. After all, those experts are the ones who know how to earn enough points quickly enough to leverage the value proposition available. The sanity of management is called into question as they certainly are ruining the experience for their best customers, right? Actually not so much. Again, very, very few customers are booking these sorts of awards and they are probably not the best customers for the company if they’ve figured out how to “beat” the system and get such value from the loyalty programs.

Fuel Surcharges and Dumping

And what about fuel dumping? Again, the 80% rule comes into play, though it is probably more like 99%+ at this point. The Wideroe/United situation is interesting because it actually required no action on the part of the customer, other than to book the correct flights on the correct site. It wasn’t a case of “tricking” the system into breaking the fare somehow or skipping segments on the itinerary. Surely the airlines should know that this could happen and avoid it. After all we’re talking about millions of dollars lost because they’ve chosen this fare structure for their tickets.

Again, probably not.

Yes, someone is going to eat the loss on this one. And that sucks for them. But are events like this enough to justify the industry reversing course on the shift to base fare plus fuel surcharge rather than including everything in a single fare component? I doubt it. The numbers simply don’t add up. Maybe Wideroe sold 10,000 of these tickets on behalf of United (and, to a lesser extent, Air Canada). Yes, there are millions of dollars “missing” out there, cash which would have not been lost had the full cost been in the fare component. But compare that to the tens of thousands of seats flown each day where the fuel surcharges are applied correctly and the numbers would seem to still be in favor of the airlines. By breaking the significant fuel surcharge portion of the fare out into a separate fee they prevent it from being included in many corporate discounts. A $1,500 Q fare on United (reasonably high in the economy fare list) from Newark to Munich has $516 in YQ on the ticket and $890 in actual airfare. The rest is real taxes and fees paid to a 3rd party or government. If a corporation has a 30% discount negotiated on the fares then this structure earns United ~$150 extra on each flight. So, yes, that money got lost in this scenario when the business rules were broken but they still are collecting far more money the rest of the time. Events like this past weekend don’t happen very often; regular ticket purchases happen every day. In the big picture the numbers add up nicely in their favor.

I got a call a couple weeks ago from the reporter who filed this story about fuel dumping for The Economist. We spoke for about 20 minutes. I tried to explain to him that the airlines don’t care about the very few edge cases which still exist in that space because the costs to fix them are too high. He didn’t seem to understand how that could possibly be. And, to an extent, I wish I could believe that the airlines cared so much about every potential sale that they would be able to track down those little things. But the reality is that there are so few and the net costs so small that it actually isn’t worth their time. They’re better off focusing on the gaping holes in their systems and dealing with the edge cases as they come up rather than actively seeking them out.

Loss Leaders??

The concept of loss leaders in marketing is a pretty common one in several industries. Buy a new computer for cheap but then add on all the peripherals at the time of purchase and the margins for the manufacturer go back up to a healthy level. Or come in to the grocery store to buy the sale items and walk out with a few extra things in your cart, once again making money for the house. So why not apply the same approach to loyalty programs? Why not put some awesome, aspirational redemption opportunities out there (like a yacht for 21,309,375 points) in hopes that customers will eventually settle for something a bit more realistic but all the while accruing points in that direction? Mostly because they don’t have to. The loyalty programs are profit centers, not cost centers. Yes, they are part of the overall marketing program within the airline but they are more likely to generate positive revenue even without the loss leaders. And when it comes to unloading inventory that can be done pretty easily, even without the points. Just sell the cheap seats and customers will buy them.

Making it right for the 80%

So, yes, the airlines are focused on the low-hanging fruit. They make sure that things are working correctly the vast majority of the time for the vast majority of customers. Just like nearly every other industry.

Don’t get me wrong: I love making fun of them just as much as anyone else does for the seeming incompetence when they mess up. And maybe it isn’t really 80%. Maybe more like 70% or 90%. When discussing it on Huffington Post Live a couple weeks ago the segment was titled “Travel nerds get angry about stuff you never knew to be angry about” and that’s probably quite accurate to the vast majority of passengers. So, yes, the “experts” will be upset. But that’s small potatoes to the airlines in the grand scheme of things. And we’re probably not the customers they really want anyways.

I’m not saying the game is over. We’re far from that point. But it is continuing to change and the airlines are getting smarter about where they let themselves be beaten. So, do you double down and work harder or back off and just take the easy wins? I still haven’t really decided my approach. What’s yours?

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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, and LinkedIn.

4 Comments

  1. While we should always take the “layups,” I see no reason to double down. As the game changes it continues to increase in complexity. The more complex it becomes, the more arbitrage opportunites that will become available.
    While changes recently haven’t been good for our community,
    there are too many holes in the dike and to your point, the airlines don’t care about the small ones, because they need to focus on the big ones. They only have so many fingers to stick in the dike.
    It will be interesting to how the game changes in the future. I look forward to your insightful posts to help us navigate the maze in the future

  2. Really interesting. Low hanging fruit, indeed. The masses just want to fly somewhere–and cheap. FF points may not even matter. Or consumers earn points and never use.

  3. Interesting. However, I’m not sure the tickets sold by Wideroe are a loss for UA. If there wasn’t that price mistake, people wouldn’t have bought those tickets. And we don’t know what the other costs for those seats are. So they could still be making money (or not losing as much as it looks).

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