Frequent flyer programs, coupled with rewards credit cards, are very profitable for airlines. For example, Delta’s latest annual report shows last year that the company earned US$5.7 billion from selling credit card miles. Given Delta only made $3.6 billion in profits, this frequent flyer program clearly boosts the bottom line.
Designing the optimal rewards program
Many types of businesses, not just airlines, offer rewards programs. From a company’s perspective, a well-designed loyalty program should cost little or nothing, give customers great value and prevent them from using a competitor.
Frequent flyer programs fit this bill: Giving some passengers the ability to board early or access to a lounge costs airlines almost nothing, but many customers desire it. Plus, the chase for status or free flights locks people into using only one airline.
Much of the appeal of status programs comes from their exclusivity. This leaves airlines with a problem: where to set the bar. A low bar means nearly everyone gains status. But customers get no value being allowed to board first if almost everyone on the plane can also do it, and airport lounges aren’t a haven when travelers can’t find empty seats. At the same time, setting the bar too high results in empty lounges and unhappy customers.
Striking the right balance is tough, since the number of flyers is constantly changing due to economic conditions. When the economy is doing well, people want to travel. This gives airlines an incentive to tighten frequent flyer rules. When the economy is doing poorly, people stay home and airlines relax their rules.