Why Every Rewards Program Has The Same Two Components

Nearly every frequent flyer program is really two separate programs bundled together. There’s the reward (points/rebate) component and the recognition (elite) program. They’re separate but related.

Some airlines have even tried separating them out, at least partially. Cathay Pacific has Asia Miles (reward) and Marco Polo Club (elite recognition) but they’re folding elite into Asia Miles. Singapore Airlines does part of its elite recognition through PPS Club, separate from status in the KrisFlyer program.

Member behavior is driven by a mix of recognition and reward. Recognition tends to be a key driver of repeat purchase decisions for flying an airline, while in modern airline frequent flyer programs a majority of miles (reward) are earned for things other than flying.

Both program experiences have been degraded over the past decade,

  • Elite status has in some cases gotten harder to earn with minimum spend requirements for status, though American’s new method of accruing status (almost any account activity counts) reverses this trend.

  • With planes so full there are far fewer upgrades, and airline revenue management has gotten tighter to so saver awards and upgrades have become tougher even when there’s seats available

  • The cost of awards has gone up, up, up – even for saver seats.

Part of this is a function of airline executives thinking that Delta leaders knew what they were doing (‘monkey see, monkey do’) without realizing that their businesses were different. Delta has gotten away with its devaluation in ways that wind up costlier to their competitors, in part because of their strong position in their hubs and in part because of a strong brand built on historical reliability.

Whenever airlines not named Delta have devalued their programs they’ve seen hits to their co-brand credit card charge volume. Delta hasn’t seen those same hits. In other words, program devaluations can hurt a bottom line but airlines have historically released too little of their program’s financial data to make this transparent (and it’s frequently not made transparent to senior leaders at the airline, while senior finance leaders are often the ones calling for devaluation).

These devaluations have had spillover effects on purchasing behavior. A decade ago when I needed to fly I would go to AA.com to find out my options. American Airlines treated me so well as an Executive Platinum that I didn’t consider other airlines. I would take less convenient flight times, more expensive flights, or connections.

With changes over the past decade I no longer do this. I still earn Executive Platinum status, but American gets a much smaller wallet share from me. Instead of giving them all of the business I could, I give them a relatively small portion of my business.

American Airlines’ own data shows that following devaluations of the AAdvantage program elite members moved flying away from the program. AAdvantage itself generated more revenue, because its credit card deals became more lucrative. That earn-burn program grew, while the most engaged members stepped back.

That may even be the right business decision! Flying has frequently been unprofitable for American while net revenue has been driven by selling miles to banks. Maybe they should reward flying less if they’re not making money on it.

Much of my American AAdvantage elite status this year will be earned for things other than flying including online shopping portal purchases and their Hyatt partnership. Non-flying activities are higher margin than flying. Overall American reports a 52% operating margin for the AAdvantage program and this is why activities other than flying go farther than flying in earning elite status now with the introduction of loyalty points.

You should view elite status and mileage accrual separately, too. You may want to earn Delta SkyMiles Medallion status, especially if you’re captive in a Delta market. But that doesn’t mean you want to earn Delta miles for things other than flying unless doing so is crucial for earning status.

A majority of mileage currencies are more valuable than SkyMiles. Earn Delta status, but accrue miles elsewhere (indeed, even if you want Delta miles you can generally earn more of them using American Express Membership Rewards credit cards that have better accelerator earn, and then transfer points from Membership Rewards to Delta).

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