Where Do Airlines Get Money for Frequent Flyer Programs?
Frequent flyer programs are a vital part of the airline industry, serving as a powerful tool for customer retention and revenue management. These programs are similar to loyalty programs offered by other industries, such as discount cards at grocery stores. The primary purpose of these programs is to encourage customers to choose a specific airline, even if they experience some inconveniences, by offering the hope of free flights in the future.
Encouraging Repeat Business Through Frequent Flyer Programs
Airlines benefit greatly from frequent flyer programs because they incentivize customers to fly with their airline repeatedly, even in the face of negative experiences. For example, consider the scenario where a customer purchases nine paid seats and flies for free once through the miles accumulated. This is far more favorable for an airline than if the customer chooses ten different airlines for their ten flights.
Additionally, customers might even be willing to pay a little more or accept a less convenient schedule to accumulate frequent flyer miles. This means that even if a flight is delayed or has a layover, the customer will accept it if it means earning more miles, as seen in the case of preferring a Delta flight over a United flight.
The Economics of Frequent Flyer Programs
Most frequent flyer miles can only be applied to seats that would otherwise fly empty, which makes these programs cost-effective for airlines. This strategy ensures that the miles are only used on flights that would have been unprofitable otherwise. As a result, airlines can offer these programs without incurring significant financial losses.
Business travelers are another key group that frequent flyer programs target. These individuals often accumulate a large number of miles and are often allowed to use their points for personal travel. Since business travelers typically spend much more per seat on average, encouraging them to fly in business class is a winning strategy for airlines, even if they give away a coach seat for the tenth flight.
Strategies to Maximize Value from Frequent Flyer Programs
Airlines have evolved their programs to change the rules based on customer behavior. In the past, miles were awarded based on the distance of the flight. However, savvy customers found ways to maximize their points through spending rather than flying.
To combat this, airlines now award miles based on the amount of money spent, not the distance of the flight. For example, using a frequent flyer credit card, customers can earn 100 points for every dollar spent. This encourages customers to make purchases that earn miles, such as buying construction materials or other goods on a credit card linked to the airline's program.
A personal strategy that was popular in years past involved using a frequent flyer credit card to purchase goods and services, like building materials, to maximize point accumulation. For instance, if a person bought $34,000 worth of lumber, they could earn 34,000 frequent flyer points. This strategy was even more effective for those building homes, as they could earn hundreds of thousands of points without having to fly a single flight.
In sum, frequent flyer programs are a complex and dynamic part of the airline industry, designed to encourage repeat business and maximize revenue. By understanding how these programs work, customers can take advantage of them to their benefit, while airlines can continue to offer attractive incentives to retain loyal customers.