The future of Elevate as told by Virgin America's S-1 filing

Want to know the future of Virgin America‘s Elevate loyalty program? Today’s S-1 filing with the Securities & Exchange Commission – a pre-cursor to the company going public – includes a few references with some interesting nuggets of data, though nothing incredibly surprising. Still, some bits worth looking at. Here’s one of the excerpts from the filing.

Guest Loyalty Program

We maintain an extensive guest loyalty program called the Elevate^® frequent flyer program. Our guests earn points for purchasing travel that are redeemable for travel rewards throughout our network and the networks of our partners. We were the first U.S. airline to adopt a loyalty program based on the value of ticket purchases. The number of points that guests earn is tied directly to the purchase price of the ticket; likewise, guests may redeem Elevate points for any fare within our inventory, without any blackout dates, because our rewards pricing is variable. In 2012, we enhanced the Elevate program by adding tiered status benefits for our most frequent guests. Elevate members with Gold or Silver status enjoy earning bonus Elevate points on purchases, advance access to purchase upgrade options, complimentary upgrades to Main Cabin Select on a space-available basis, free checked bags and priority check-in boarding and security access. At the end of 2013, we had over 3.0 million Elevate members which represented a 17.9% increase over the end of 2012.

The note about the company being the first to go to a revenue-based model for both earn and burn seems to be, at least in part, an effort to show that Virgin America is at the front of the pack when it comes to innovation in the market. The carrier has, over time, made similar claims about their in-flight experience and other aspects of their operations and they aren’t wrong, per se, but the key is maintaining that lead. Lately their product has often been seen as a bit stale while other airlines have caught up or surpassed them on various aspects of operation.

Another interesting number in that paragraph is the 3mm members in the Elevate program, a significant bump up from the prior year. Virgin America carried 6.3mm passengers in 2013 according to the S-1 so the 3mm members in the program suggests that either a relatively lower number of passengers are members of the program or the ones they have are very loyal. By contrast United carried over 90mm passengers and is reported to have more than 70mm members in its MileagePlus program. The part where the membership rolls are still increasing by significant percentages each year suggests to me that there is still a long way to go for Virgin America to truly build up a strong membership base with the Elevate program, particularly one to which they can market points via third-party partners to drive non-flight revenues.

Speaking of third-party partners, this is part of what the company says about that in its filing:

We maintain partnerships with other companies through our Elevate program. Companies purchase Elevate points from us to reward their own customers. We benefit from the direct sale of Elevate points as well as additional loyalty from guests that earn points through these other channels. Our most significant third-party Elevate relationship is our co-branded consumer credit card issued by Alliance Data Services, or ADS, which replaced our prior co-branded card program in early 2014. The new program provides enhanced features to our Elevate members such as point accumulation, free first checked bag and waived change fees, and various discounts for companion travel and inflight purchases. ADS has provided annual guarantees of Elevate points activity significantly greater than our past activity. As a result, we expect this new relationship to result in significant growth in our Elevate program and an increase in revenue for Elevate points sold through this relationship.

As for how significant the investment is from ADS in the Elevate program, there’s also this paragraph in the filing:

In 2013, we entered into a new co-branded credit card agreement with a new partner, which we refer to as the “New Co-Brand Agreement.” The New Co-Brand Agreement has a seven-year term beginning January 1, 2014, when the new co-branded card was introduced and services to our members began. … Under the New Co-Brand Agreement, our partner is required to provide annual guaranteed advance payments over the contract term. Any unearned advance at the end of the calendar year is carried over to the following year until the contract expires. At the end of the contract, we have no obligation to refund any unearned advances to the partner. As of March 31, 2014, excess advances totaled $27.9 million, which we recorded as air traffic liability.

My take on these paragraphs is mostly that Virgin America is very keen to grow third-party partnerships for the Elevate program and that it feels the prior credit card partnership didn’t do that very well. There are very high expectations for the new card and the number of points which ADS will issue to Elevate members via the card. From a passenger perspective this suggest that either we should expect lots of bonuses related to ongoing activity or sign-up bonuses to attract more cardholders to fulfill those projections. But despite the anticipation that they will be issuing more miles via the banking partner they have not yet actually done so. And it seems that Virgin America gets paid either way, so it is not clear the company cares if the miles get issued by ADS or not. At least that’s how I’m reading it. Unless ADS decides to “unload” all the guaranteed advance payments in a massive push to get the miles distributed and gain new customers it very well may be that the huge bonus promos never show up. That would be sad for those who play the credit card mileage game.

And that’s pretty much it relative to the Elevate program. Not a ton of information there, but definitely some interesting stuff. And there’s a lot more separate from the loyalty side of things in the filing; that’s where the real fun is.