(Last updated on: 10/12/2020)
Airline ancillary revenue is a core part of any airline’s business model, although it is used to different degrees by different airline types (i.e. budget, charter, scheduled). This additional revenue source has become an important part of ancillary revenue management and comes in different shapes and sizes. As I explained in this post, there are four different categories of airline ancillary revenue. Today I will discuss the third type of airline ancillary revenue: frequent flyer programmes.
For more info on ancillary revenue management and airline management in general I recommend the texts Airline Operations and Management by Cook and Billig and Air Transport Management: An International Perspective by Budd and Ison. You’re more than welcome to cite anything that I have written in this post, but if you’re doing research for an academic piece of work remember that you will need a range of sources in your reference list- I’ve added the links to these two recommended books for you here and here.
What is a frequent flyer programme?
Frequent flyer programmes, or FFPs, are customer loyalty programmes offered by many airlines. These typically allow customers to accumulate (or “earn”) points for flights taken or services bought from the airlines commercial partners. Members can then redeem their accrued points for free air travel tickets or for other products and services.
Frequent flyer programmes can be critical to legacy carriers facing fierce competition from budget airlines. It encourages return business and offers something that many of the competing low cost carriers do not.
In addition, a frequent flyer programme should be viewed as a powerful marketing tool that allows airlines to collect value added information (precise members profiles, consumer habits, etc.) on a population with high spending capabilities.
More and more frequent flyer programmes are becoming a business of their own rather than just “nice to have”. These programs can provide airlines with a source of recurring and low volatility income, which is especially important given the increasingly competitive nature of the aviation industry.
Here is a handy timeline taken from the Centre for Aviation that shows how frequent flyer programmes have grown and evolved over the years.
How do airlines use frequent flyer programmes to make ancillary revenue?
How airlines make money from their frequent flyer programmes as an ancillary revenue product is not always clear cut. Whilst customer loyalty is great, there is limited evidence to prove that frequent flyer programmes do, in fact, make the airline a profit taking into consideration logistic and management fees alongside passenger rewards. This may be the reason that we do not see many budget airlines using frequent flyer programmes.
What is clear, however, is that airlines can use their frequent flyer programmes to drum up business with commercial partners and directly with passengers.
Relationships with commercial partners
Airlines will often sell their frequent flyer points to commercial partners. These partners will then offer the points to their own customers as a sales incentive.
Perhaps one of the best examples of this is the commercial relationship between British Airways and American Express. British Airways sell points to American Express. American Express then entice new and existing customers to use their credit card by offering points as rewards. Just by using the credit card, customers can collect a substantial number of frequent flyer points which can then be redeemed on a flight or other travel products and services. You find out more about how this works for the consumer over on The Points Guy website.
Whilst credit cards do seem to dominate the frequent flyer ancillary revenue market, these are not the only commercial partners who are interested in doing this type of business. Tesco, for example, have also teamed up with British Airways, offering frequent flyer (known as Avios) points to their customers instead of Tesco Clubcard points. Again, the anticipation is that customers will choose to shop with Tesco as opposed to other supermarket retailers because they wish to collect the frequent flyer points.
You might also be interested in my post- ‘Why do airlines use commission-based ancillary revenue products?’
It is difficult to know exactly what agreement an airline with make with a commercial partner, but it is thought that large sums of money change hands in order to set up such a deal. This can be, therefore, a very lucrative type of ancillary revenue for airlines.
Relationship with passengers
Aside from the obvious relationship in terms of loyalty that is developed through a frequent flyer programme, there is also a monetary relationship. Customers can purchase frequent flyer points directly from the airline. These can be purchased as a gift for a friend or relative or for personal use. Sometimes it may be more cost effective to pay for a flight or other service with points rather than cash, so this would entice the customer to buy points. When customers buy points, it helps to make the airline more money.
Why don’t low cost carriers use frequent flyer programmes?
If frequent flyer programmes can make the airline such a significant profit, it begs the question ‘why don’t low cost carriers follow suit?
Well, it appears there is no straight forward answer to this question. Perhaps it is because budget airlines do not rely on loyalty, but instead of price as the motivating factor for drumming up business? Or perhaps it is because most budget flights are relatively short and therefore would not lend themselves to the collection of points based on a mileage system?
You might also be interested in my post- ‘Why do airlines use a la carte ancillary products?’
What we have seen in recent years, however, is a new type of loyalty scheme offered by some low cost carriers. Rather than taking on the traditional frequent flyer model, where points are collected and redeemed by passengers, they appear to be offering subscription-based services. easyJet, for example, have a scheme called ‘easyJet plus’, which provides the customer with additional services such as fast track through security, an additional cabin bag and speedy boarding for an annual fee of £199 a year.
So, that’s my overview of how airlines use frequent flyer programmes to make ancillary revenue. Do you have any experience with frequent flyer programmes? What are your views? Please leave your comments below!