Is there life after Air Miles?
An opinion piece by editor Annich McIntosh on whether it is possible, necessary or sensible for the hospitality business to move on from the current, universally employed miles and nights loyalty reward structure.
It was a brilliant idea originally to offer people miles that they could save up for free trips abroad.
But that was in the days when air travel was expensive and unusual. EasyJet hadn’t been invented and holidays were more likely to be in Bognor and Skegness than Bologna and Siena.
Today, it is often much easier to pay for a cheap flight than redeem airmiles, what with blockout periods making it impossible to travel during any school holiday.
So why has the hospitality industry stuck so rigidly to this model, and isn’t it time someone broke the mould and moved on?
Hilton Hotels and Intercontinental’s Priority Club Rewards both partner with over 40 airlines to provide accommodation as the second part of the traditional flight plus free nights loyalty reward package, and most of the others do likewise.
Now while this clearly works for them in terms of tying in frequent business travellers, when did anyone last ask whether it differentiated them sufficiently from the competition to be a real incentive to join?
Lets look at the data.
The frequent traveller market is worth between US$40bn and US$50bn a year, of which between US$22bn and US$27bn is not associated with loyalty scheme membership. That equates to between seven and ten nights per guest, and is clearly a large pool to go after.
It is estimated that growth in loyalty schemes within the hospitality sector has risen by 35% between 2000 and 2006, but of the 1.32 billion consumers in the US alone taking part in loyalty memberships, only 40% are active.
Recent studies, such as that by LoyLogic show that members of frequent flyer programmes want flexible miles plus cash benefits, and more lifestyle rewards, but few believe that loyalty schemes are responding to this.
In fact LoyLogic found dthat only 30% of participants feel that the value of their miles has increased over the past three years. As a consequence, 40% of the frequent flyers are considering switching from their airline co-branded credit card to a credit card programme, and every fifth voter has already done so. If this is a true reflection of consumer views, then the hospitality industry should be worried.
Another find was that 50% of frequent flyers consider non-flight rewards a valid alternative to flight rewards, and one in six considers them more important.
US consultant Colloquy reports that there is a substantial gap between the expectations of loyalty programme members and the extent to which programme operators fulfilled those expectations. While 61.7% of the programme participants surveyed rated special treatment and soft benefits as “extremely important”, only 15% reported receiving such treatment.
It seems there is a shift in consumer expectations when it comes to what they expect from a hospitality loyalty scheme. The trend is away from actual miles or rooms, and towards less tangible benefits such as recognition, and a more personalised experience.
Adam Burke, senior VP, customer loyalty, Hilton Hotels said: “Maybe half a dozen years ago, that emphasis began to shift. Earning currency remained important, but earning recognition and a more personalised experience entered the picture – particularly as consumers shared preference and transaction information with us. Customers expected and demanded more and more, and we systematically responded with more and more.
So far no-one has risked throwing out the miles and free nights as rewards, but many schemes are offering additional benefits. For HiltonHhonors, this includes experiences, such as skydiving, services such as maid service for a day, and treatments at the spa.
Other groups are widening their Club offerings, to include more networking and socialising opportunities and there is a widening of high value consumer goods from the big fashion houses in the exclusive end of the market.
Best of breed
Starwoods, the group that includes Sheraton, Four Points, Le Meridien and W Hotels, has won the prestigious Freddie Awards ‘Frequent Guest Programme six times since 1999. These awards are voted for by business travellers, and provide an important hallmark for how T&E schemes are really rated. This comparison (to download pdf click here) has been compiled by Starwood itself, so must be treated with caution, but it shows the closeness with which the schemes mirror each other, even when the obvious differences in redemption are highlighted.
Adam Burke of HiltonHhonors believes the answer is in making a scheme more personalised, providing more choice, and above all in keeping it simple. The Starwood provided comparison between itself and Marriott Rewards, HiltonHhonors, Hyatt God Passport and Priority Club Rewards which shows how complicated it is for the humble business traveller to decide which offers the best value.
For the hospitality group, to provide a personalised service, more choice and a simple scheme is an undertaking that requires a highly complex back office system to link every hotel and venue, to provide a highly interactive web experience, and to ensure that every front office, restaurant desk and terminal is able to see the whole customer record and respond to preferences and special levels of membership.
This is the theory. In practice, most chains fall far short of best practice.
Ask yourself how often you have checked into a hotel where you are a loyalty scheme member, but no-one has asked you if you belong. When was the last time you were able to use your membership to reduce your queueing time? When in fact, was the last time your loyalty membership differentiated the service you received at all?
The challenge, when hotels regularly suffer staff churn of 30% a year is to use systems to provide prompts to staff, so opportunities are not missed to make frequent stayers feel welcome and appreciated.
Membership tiers and points expiry
Most hospitality loyalty schemes, including that of American Express, run on several tiers of membership, thereby differentiating the real high spenders from those lower down the pecking order.
This makes it possible to see at a glance exactly how valuable a particular customer is, but how do these customers feel when they can’t maintain their high spend? How soon should they be knocked off the prestigious rung? How long should it be before points expire?
Opinions vary on these matters, but read the frequent flyer internet blogs, and it is clear what the consumer thinks. Points should be forever, and there should be some recognition of a customer who has been good and loyal for years, even after he has changed his job or retired. Loyalty it seems, should be two way.
Robin Korn,VP, membership rewards for American Express commented: “We’ve recently introduced a number of innovations based on our customers’ needs and desires. In 2007, we launched three programme tiers to ensure that we could deliver card members what they really want. Our lending customers – the Blue cardholders – are automatically enrolled in our Membership Rewards Express programme tier. Their interests tend toward retail redemptions, so we’ve added attainable retail, merchandise and dining rewards.
“Our Gold Card and Green Charge Card customers are more interested in travel and we focus there for that customer group. That tier offers everything Express does, and adds the ability to transfer points to airline and hotel loyalty programmes, provides enhanced value for Pay With Points, and offers higher-end shopping and dining partners.
“Our recently-launched Membership Rewards First tier benefits customers looking for the best of the best. In addition to all the benefits of the other Membership Rewards tiers, through the First programme we offer Platinum and Centurion Card members rewards from a group of 24 of the high-end luxury brands, such as Tiffany, Chopard and Mikimoto. We even offer a one-year lease on a Lamborghini.
“Another key innovation aims to satisfy the expressed customer interest in making the redemption experience easier. Points Advance allows people to borrow points—with no interest—when they don’t have enough points for a specific redemption.”
Finally, because of the need for simplicity, Amex has launched some innovative technologies to make the customer experience easier. For example, one of their big innovations involved technology to reduce the amount of time customers spend redeeming for travel rewards.
“Now they can go onsite and through our Flight Finderfeature redeem their points for partners’ rewards inventory in one step. In the past, that redemption required multiple calls. This innovation improves the customer experience while reducing the operational cost to our partners and to us, “ said Korn.
So choice is growing in importance as a reward, but the general package of miles and free rooms remains a vital component. This is clearly because the hospitality industry is very much aware of who their best customers are.
According to consultant Paul Brown, writing in the McKinsey Quarterly: “Hotels get nearly half of their revenues from the small segment of travellers who spend about a month each year on the road: frequent visitors make up only 10 percent of all hotel guests but account for 44 percent of hotel nights. In the early 1980s, hotel chains began to recognize the value of such customers by introducing loyalty programs patterned on the airlines’ frequent-flier model. These programs have succeeded in maintaining the loyalty of people who travel moderately often (spending 6 to 22 nights a year in hotels) but are not as effective as they might be with other segments, our research suggests.
“In general, frequent travelers belong to more than one program, spend less than half of their nights on the road in their favorite chains, and spread the rest around to other establishments. Light travellers—those who stay in hotels only a few times a year—have yet to build up points in any one loyalty programme, so the advantages of always staying with the same chain are low.”
Hotels can court both groups in at least two ways: by learning more about them and by adapting loyalty programmes to suit their tastes and needs. With so much revenue floating, and not assocated with a loyalty scheme, perhaps there is a call for the hospitality business to talk more to coalition loyalty schemes in order to bring on board those travellers who could never save enough points from one hotel chain to make joining worthwhile, unless this was just one partner in a group loyalty scheme.
With over half the revenue of a hotel chain coming from infrequent travelers, often with no affinity to any particular chain or loyalty scheme, are hotels wrong to concentrate on the 10% who bring in the 44% of the revenue? Shouldn’t they be doing more to reward the less frequent traveller?
Data from the major hotel chain loyalty schemes shows they are firmly focused on those who travel the most, virtually ignoring those who travel more infrequently.
Kimpton hotels and restaurants, for example, rewards with a free night for every 15 visits or 45 nights. Visit 50 times or stay 150 nights and you will receive a personalized gift from the chairman valued at US$2,500. Intercontinental’s Priority Club rewards will give you a free hotel stay for between 10,000 and 30,000 points. Ten points are earned for every US$1 spend on rooms. Soft benefits such as free newspapers, access to the club lounge, free room upgrades and priority check in are awarded as your points rise. As they partner with 44 airlines plus a number of other partners including Hertz, iDine, NetBank and USA Today, the points can rack up – as long as you are in that important 10% band of really frequent travellers.
Fall outside of it, and you might as well spread your custom around. You will never earn enough points to make hospitality membership really count for anything.
New study identifies ten keys to frequent flyer loyalty
A new study by Carlson Marketing and Peppers & Rogers Group suggests four key factors for strengthening a customer’s relationship with an airline – and another six that are well worth bearing in mind.
The four main factors that govern the strength of a passenger’s relationship with an airline are:
1. One-to-one communications
2. A positive customer experience from ticket purchase to in-flight care, to luggage handling
3. Keeping the brand promise in all marketing communications and employee behaviour
4. Executing the frequent flyer programme well
And, the report asserts, when an airline builds stronger customer relationships, several important business outcomes naturally follow:
* The likelihood to recommend the airline to friends and colleagues increases
* The intention to fly with the airline more often increases
* The total number of airlines flown (i.e. the customer’s “consideration set”) decreases
* Consequently, the airline’s “share-of-wallet” increases
According to Evert de Boer, director of loyalty for the Asia Pacific region at Carlson Marketing, “With a strong relationship, the focus of the customer on his or her primary airline is sharpened, thereby potentially reducing the risk of migration to a competitor.”
The FFP’s true impact on loyalty
The quality of a frequent flyer programme strongly impacts customer relationships. The research identified three factors that directly influence the programme’s quality:
1. How well the attributes of the programme (e.g. ease of redeeming for award travel) are executed
2. How well the programme encourages and supports customer engagement activities (e.g. updating a personal profile on the programme’s web site)
3. How well the programme’s communications are tailored to be both relevant and personally customised
Ten insights into FFP relationships
Among the many insights offered by the report:
1. Relationship strength varies widely among airlines
The customers of the large, legacy carriers generally have lower levels of relationship strength compared to customers of smaller, younger carriers.
2. Airlines have different mixes of “champions” and “critics”
For most airlines, customers with high relationship strength (the “champions”) outnumber those with lower relationship strength (the “critics”). Compared to critics, champions said they take a greater percentage of both business and leisure trips on their primary airline. Nearly 29% of champions said they would be likely to increase the number of trips they take on their primary airline during the coming year, compared to only 8% of critics.
3. Stronger relationships fuel word-of-mouth marketing
Customers with high levels of relationship strength are more likely (9.2 out of 10) than those with low levels of relationship strength (4.5) to recommend their primary airline to a friend or colleague.
4. Integrity matters, both for relationships and business results
Customers who said they intended to fly the same amount or more on any airline during the coming year, and who gave their primary airline high marks for integrity (a key measure of the trust component of relationship strength), intended to increase travel with their primary airline at a rate some 2.7 times higher than those who gave low marks for integrity.
5. Understanding customers’ needs drives business results
Customers who agreed that their primary airline understands their needs reported booking a significantly greater percentage of their flights with their primary airline than those who disagreed (64% of flights compared to 57%). These individuals were also twice as willing to forego offers from other airlines because of the benefits and privileges they receive from their primary airline’s frequent flyer programme, and showed a significantly higher intention to increase their share of wallet with their primary airline during the coming year.
6. Frequent flyer programmes do impact purchase decisions
The privileges of frequent flyer programme membership were cited by many customers as one of the most significant factors (after pricing and flight schedules) when choosing an airline for either leisure or business travel. The better the loyalty programme, the more the status (i.e. an Elite tier) and the greater the travel frequency, the more the FFP affects the decision regarding which airline to use.
7. Engagement in the FFP drives relationships and better results
Frequent flyer programme members who had engaged with their primary airline’s programme in any way during the previous 12 months gave significantly higher ratings for the programme’s quality, and exhibited a much higher relationship commitment, a greater willingness to forego offers from other airlines, and a higher likelihood of increasing travel with their primary airline during the next 12 months. In addition, those redeeming miles for at least one domestic ticket in the previous 12 months showed a 20% higher willingness to forego offers from other airlines because of their frequent flyer programme membership.
8. People matter in members’ perception of the FFP
Strong correlations were found between customers’ opinions of the friendliness and competence of airline personnel and their ratings of not only the quality of the frequent flyer programme (r=0.45) but also of the overall performance of the airline (r=0.77) and their intention to increase travel with the primary airline in the coming 12 months (r=0.16).
9. FFP elite status fosters greater commitment
Greater commitment, however, does not necessarily mean greater trust or greater alignment, the report warns. Customers who had elite status within their primary airline’s frequent flyer programme showed significantly greater levels of commitment to that airline than those in the base tier and those who were not FFP members at all. Paradoxically, the non-elite and non-programme members showed significantly higher levels of both trust and commitment to their preferred airline than did the elite members.
10. No factor in isolation will drive stronger relationships
No one factor alone is responsible for building the stronger customer relationships required to deliver the business results that airlines need today. Airlines must not only design and deliver a high quality frequent flyer programme, but must also ensure that the customer communications are relevant and timely, that customer interactions with airline staff are friendly, and that the brand is seen as having fair prices and to be supporting charitable and environmental causes.
The full research report, which is part of the ‘Relationship Builder’ series of sector-by-sector loyalty studies, has been made available for free download from the Carlson Loyalty website at www.carlsonmarketing.com (free registration required).