The coronavirus pandemic has left nearly a third of the world’s commercial jets grounded, but air-miles gurus say this may be the best time for loyalty members to spend or rack up their points.
Even with people stuck at home, carriers have been pumping out offers to collect miles more cheaply or redeem them at steep discounts. British Airways just had a promotion offering flights for 50% of the miles usually required. Many have extended the validity of elite member status, lowered qualifying requirements to move up a tier or done away with points expiry as countries restrict entry or make travel less appealing with mandatory quarantines.
The reason: airlines desperately need money to survive the coronavirus crisis and loyalty programs are a major source of revenue, so they are making fresh overtures to their members and trying to bring new ones on board.
Here's how loyalty programs work. While the details differ from airline to airline, the programs typically revolve around a lucrative trade in points. Plans generate revenue by selling points to credit-card operators, hotels or shops. Frequent flyers collect them on purchases, and use them to buy flights or other goods. Airlines make a profit because they sell the points for more than it costs to redeem them.
These programs have become a vital crutch for carriers so starved of funds they’re converting grounded jets into restaurants, selling drinks trolleys and putting on sightseeing flights to nowhere. The very best plans have armies of followers itching for reward flights and upgrades, and they can generate hundreds of millions of dollars a year for airlines.
Some airlines are making more income from loyalty than flying, a handy lifeline when global air travel has been sliced in half. Qantas Airways’s membership division was the airline’s biggest source of earnings in the year ended June. The Australian carrier expects the unit to make as much as A$600 million ($430 million) in profit by June 2024, almost double the current figure.
“Modern full-service carriers are data-driven companies based around loyalty programs that happen to fly around some planes,” said Rico Merkert, professor of transport and supply-chain management at the University of Sydney’s business school.
Singapore Airlines, Cathay Pacific Airways, Qantas and the major U.S. carriers are among the dozen or so airlines with the most valuable air-miles programs, thanks to their strong brands and links with credit cards, according to OAG Aviation Worldwide.
“The loyalty model remains robust,” said Mayur Patel, OAG’s regional sales director for Japan and Asia Pacific.
Frequent fliers are getting swamped with emails pedaling heavily discounted reward flights, hotel stays, consumer goods and wine. The goal is to ensure the accumulation of points remains worthwhile even when travel currently isn’t.
One challenge for carriers is that points can become a liability on the balance sheet when revenue from issuing them isn’t recognized until rewards are redeemed or expire, OAG’s Patel said. That aspect is encouraging airlines to offer more deals to clear the backlog, especially with so many flying at reduced capacity.
“There will probably be some very attractive offers for customers to burn miles in the recovery phase when it is possible to travel,” John Grant, an analyst also at OAG, said.
Grant said carriers can try to increase income from redemption flights by getting passengers to pay for things such as advanced seat assignments or suitcase allowances.
Appetite to amass miles is a gauge of confidence in aviation, because points have no value unless members see a chance sometime soon to redeem them.
There is some risk for loyalty members and credit-card companies in accruing mountains of miles because they can be exposed if an airline collapses, said Steve Saxon, a partner at McKinsey & Co. in Shanghai. Recent airline restructurings, however, have preserved points balances considering the value of the “relationship is too high to alienate customers,” he said.
With sufficient scale, loyalty programs become earnings juggernauts, because the larger the membership, the greater the incentive for corporations to buy points.
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