{"id":5181,"date":"2020-11-17T15:46:13","date_gmt":"2020-11-17T14:46:13","guid":{"rendered":"http:\/\/www.globalflight.net\/german\/?p=5181"},"modified":"2020-11-17T15:46:42","modified_gmt":"2020-11-17T14:46:42","slug":"revenue-based-programs-dont-pass-the-covid-test","status":"publish","type":"post","link":"https:\/\/www.globalflight.net\/german\/revenue-based-programs-dont-pass-the-covid-test\/","title":{"rendered":"Revenue-based programs don’t pass the Covid test"},"content":{"rendered":"\n
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17 November 2020<\/span><\/em><\/p>\n\n\n\n

Although only a minority (23%) of Frequent Flyer Programs has opted for a revenue-based model on the accrual side so far, many of them are about to discover the inconveniences of such a system – or even the hidden danger.<\/p>\n\n\n\n\n\n\n\n

In harsh\ntimes like the current ones, you typically see a sharp drop of prices to lure\nthe few remaining customers. Loyalty programs are to work against that tendency\nby offering a decision element beyond price.<\/p>\n\n\n\n

So far for\nthe simplified theory.<\/p>\n\n\n\n

While some\nFrequent Flyer Programs, notably in the low cost space, started on a\nrevenue-basis straight away, others have moved from a distance basis to a\nrevenue basis over the last few years, creating something what many called,\nmaybe in a premature manner, a trend. As a matter of fact, only 23% of programs\nwork today on a full or at least a hybrid revenue basis on the accrual side and\nthat movement has pretty much stalled. Many of these programs having moved to a\nrevenue basis have probably never fully understood what they were doing – just\nfollowing that presumed „trend“ – and they are now waking up to\nreality in not such a pleasant manner.<\/p>\n\n\n\n

There is no\ndoubt that a revenue basis is appropriate for certain airlines, but the\ncurrency is at least as rigid as anything that was around before. So, if prices\ndrop, customers earn less points. And long-haul customers (higher margins) tend\nto be better off with a revenue-based model than short-haul customers.<\/p>\n\n\n\n

There is a\nlogic to that approach in normal market conditions, but if overall fare levels\ndrop across the board as there is tremendous overcapacity and long-haul travel\nis quasi non-existent, you’d better not reduce the loyalty benefits, which are\nstill comparably cheap to airlines. The logic to punish a customer looking for\na bargain doesn’t work anymore if airlines have to create such overall market\nconditions from their side in a battle for survival, which you can only win together\nwith your customers.<\/p>\n\n\n\n

Of course,\nyou can still work with promotions, but to make them meaningful, you often need\nto go to extremes such as Lufthansa offering up to quintuple miles in its Miles\n& More program – raising though some doubts among customers how valuable\nthe core proposition really is.<\/p>\n\n\n\n

The limits\nof a revenue-based model on the accrual side become hence clearly visible. It\nis a model – for some – for sunny days, but probably not for anybody during\nCovid storms.<\/p>\n\n\n\n

The\nsituation might be even worse for programs having moved to a revenue-basis on\nthe redemption side as well, whereby each loyalty points has a clearly defined\nredemption value. While dynamic award pricing pursues the same objective, it\nremains nevertheless more opaque for customers – and does not automatically\ninclude 1-point redemptions.<\/p>\n\n\n\n

Again, that\nseems to be the perfect model in good times as it convinces by its sheer logic.\nOn the balance sheet, it has the same impact whether a customer pays 1 USD in\ncash or whether liabilities are reduced by 1 USD.<\/p>\n\n\n\n

But what is\nhappening now? As soon as some news emerges questioning the future of an\nairline – see Virgin Australia or Thai Airways – a run on the bank starts since\ncustomers want, obviously, to redeem their hard-earned points before it is too\nlate. With a traditional redemption approach, you can contain such behaviour to\ncertain degree through controlling the inventory offered for redemption.<\/p>\n\n\n\n

But a true revenue-based\nredemption, as practised by Norwegian, lets you use each point at a predetermined\ncash value – and like cash, i.e. without any capacity control. So, what would you\ndo if, in front of the current news about the state of Norwegian, you had still\nsome Norwegian points left and, moreover, the program didn’t offer any\nalternative redemptions? You’d try to burn them on a Norwegian trip as quickly\nand as long as you still can, meaning you’d deprive Norwegian of the so much\nneeded cash. In tough times, cash remains though king as you don’t pay your staff\nand suppliers out of reduced financial liabilities. Making a simplified\ncalculation that 50% of Norwegian customers are loyalty members (and all earn\nat the lowest 2% level) and excluding any points accrued with partners, Norwegian\nsits on liabilities of almost 50 million USD from the year 2019 alone. It\nbecomes the perfect vicious circle.<\/p>\n\n\n\n

As we start\nto see the light at the end of the tunnel, it obviously doesn’t make any sense\nnow to touch on the currency chosen for your program. But there might be some\ninteresting lessons to be learnt here for anybody in the industry since the one\nthing that we should all be aware of is that there will be a next storm in the\nindustry. Until then, you should work on making your loyalty program the most\nflexible tool possible for all thinkable and unthinkable scenarios – whereby\nthe choice of the currency you base it upon is a decision with a major impact.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

17 November 2020 Although only a minority (23%) of Frequent Flyer Programs has opted for a revenue-based model on the accrual side so far, many of them are about to discover the inconveniences of such a system – or even the hidden danger.<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_links_to":"","_links_to_target":""},"categories":[37],"tags":[],"_links":{"self":[{"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/posts\/5181"}],"collection":[{"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/comments?post=5181"}],"version-history":[{"count":1,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/posts\/5181\/revisions"}],"predecessor-version":[{"id":5182,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/posts\/5181\/revisions\/5182"}],"wp:attachment":[{"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/media?parent=5181"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/categories?post=5181"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.globalflight.net\/german\/wp-json\/wp\/v2\/tags?post=5181"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}