Marketing tools used by airlines to keep and maintain loyal customers.

Programs designed to reward loyal customers for their patronage are not new, having their roots in trading stamps and coupon books issued by grocery stores and gas stations to create brand loyalty and product differentiation.

Prior to the Airline Deregulation Act of 1978 that eliminated the U.S. government’s control over airline operations, the U.S. government established airline fares and routes, and airlines emphasized service and prestige to gain potential customers. However, after the Airline Deregulation Act was passed, airline routes were opened to competition, and airlines could adjust their fares to meet market conditions.

Deregulation caused an immediate and tremendous flurry of activity among start-up carriers. New airlines marketed their seats based solely on price. Consequently, many large carriers began to lose market share among their most profitable customers, frequent business travelers who paid the highest fares.

In response to this loss, American Airlines became the first airline to offer a frequent flier program in 1981. This program, AAdvantage Travel Awards, offered customers “miles,” or points, based on the distances they flew. Customers could trade in accumulated miles for free flights or upgrades on the airline. The program, initially targeted as a promotion to a few top customers, grew rapidly in both popularity and profitability and proved successful in capturing repeat business. Other domestic U.S. airlines quickly followed American Airlines’ example, as did non-U.S. airlines, and soon nearly all airlines had a frequent traveler program or were tied into one.

Two major technological innovations made FTPs possible: the computer reservations system (CRS) and the sophisticated computer technology that allows the CRS system to exist. Early CRSs were used by airlines to track internal airline bookings. Although all major airlines had automated their systems by the 1970’s, travel agents could not access information on all available flights between destinations without great difficulty, because these systems were not linked.

The first CRS used by travel agents that expanded flight availability information from that of a single airline to that of all airlines was American Airline’s Semi-Automated Business Research Environment (SABRE) system, developed in conjunction with IBM in the 1960’s and marketed to travel agenices beginning in 1975. Other airlines developed similar programs that competed with SABRE for acceptance by travel agents. The substantial increase in the number of existing flights made possible by airline deregulation accelerated the acceptance of computer reservation technology.

The airlines’ heavy reliance on computer technology to keep track of seats and fare distributions propelled the evolution of CRS technology. In the early 1980’s, tremendous leaps in computing technology enabled the increasing sophistication of CRSs. Passengers’ travel histories could be tracked with greater detail and easier access than ever before. The most frequent customers could be easily identified, and marketing programs could be geared directly to them.

The increase in air travel fueled expansion in other service industries tied to air travel. Hotel, rental car, and credit card companies and others tied into the CRS programs offered superior service to the frequent customer. The CRS system has become a multidimensional tool that enables travelers to easily plan, price, and book almost any aspect of travel worldwide.

With information about ticket buyers gained through CRS bookings, the airlines could track their most valued customers, those who traveled frequently on high-yield markets. Initially, the airlines were able to search their databases to track bookings and correlate tickets sold with telephone numbers and customers’ names. These became the first members of the airlines’ frequent flier programs. As FTPs became more sophisticated, customers could be identified by means of rating systems that varied between airlines. The airlines define a set of guidelines by which a customer is rated, and the highly valued core customers are tracked to determine how they are generating revenue for the airline.

Ever innovative, American Airlines enlisted hotels and rental car companies as partners in its mileage program, giving additional points to customers who used the associated company’s services. This arrangement enabled customers to accumulate their awards more quickly. By the end of 1981, most major U.S. airlines had frequent flier programs with other service partners. The battle to win the business of the lucrative frequent traveler had begun in earnest. A few airlines, hotels, and rental car companies were unenthusiastic about the mileage awards programs and dismissed them as a short-lived gimmick. However, their quick acceptance by consumers and the fierce competition of those airlines vying for the business traveler’s business soon proved to be disastrous to the bottom line of those airlines that did not participate.

Airlines integrated their FTPs with companies as diverse as credit card companies, telephone companies, hotels, cruise lines, and many types of retailers. Airline marketers continue to pursue different avenues of mileage programs to keep their FTPs dynamic and diverse.

FTPs generate both administration costs and direct costs. Administrative costs include the tracking and marketing of the program to customers. Direct costs are incurred when a customer seeks to redeem the award for travel. These costs include variable passenger expenses, or the incremental costs—such as meals, beverages, fuel, reservations, and handling—of carrying an additional passenger. They also include the additional cost incurred if passengers were to redeem travel on the airlines’ FTP partner. Displacement costs are those incurred by the elimination of a seat from an otherwise fare-paying passenger. These costs are sometimes partially offset by the revenue of a traveling companion. Diversion, or dilution, costs are incurred when the redeeming passenger would have purchased a ticket on the airline, regardless of having an award. Many of these costs are controlled by limiting the number of seats per flight available for reward programs.

Marketing to proven loyal customers is a cost-effective use of a business’s limited marketing dollars. FTP awards have become so widely accepted that they now form a core part of airlines’ products and are expected by customers.

However, airline rewards continue to evolve. Airline officials realize that the number of miles a customer accumulates over time is not the single best indicator of that customer’s value to the company. A customer who infrequently travels long distances may generate more miles on the airline than another customer who travels more frequently on short routes, but the short-haul customer may generate more income to the airline’s bottom line. More frequent, short-haul travelers are more valuable to the airline not only because they buy more tickets but also because the short-haul, business-route tickets they buy tend to have a higher margin of profit for the airline.

As a response, the airline industry has shifted from simply selling seats toward a more customer- or relationship-based marketing strategy, realizing the customer’s value over the long term. Loyal customers are rewarded for their value to the airline, further increasing their satisfaction. The types of awards offered to frequent travelers have also evolved. Initially, awards were granted in the form of free flights or upgrades from a coach seat to a business-class or first-class seat. Research into frequent traveler’s preferences has shown that special recognition, preferred service, and privileges such as exclusive lounges or other perks are highly valued. As technology advances, the ability to track an individual’s purchasing behavior and preferences has enabled airlines to individually market different types of award.

Frequent traveler programs are an integral part of an airline’s strategic marketing. Customers expect rewards, and the airlines compete fiercely for their loyalty. As the travel industry expands and the need for travel services rises, FTPs will continue to evolve to meet the customers’ demands.

• Ellis, John M. “The New Role of Frequent Flier Programs.” In Handbook of Airline Marketing, edited by G. F. Butler and M. R. Keller. Washington, D.C.: Aviation Week Group, 1998. A comprehensive collection of articles written by experts in the field, addressing critical issues and subjects of airline marketing.
• Garvett, Donald S. “Frequent Traveler Programs: Moving Targets.” In Handbook of Airline Marketing, edited by G. F. Butler and M. R. Keller. Washington, D.C.: Aviation Week Group, 1998. A comprehensive collection of articles written by experts in the field, addressing critical issues and subjects of airline marketing.
• Wells, Alexander T. Air Transportation: A Management Perspective. 4th ed. Belmont, Calif.: Wadsworth, 1999. A textbook covering all major topic areas in the air transportation field.
• Zakreski, Eugene. “Beyond Frequent Fliers: Knowing Customers as a Foundation for Airline Growth.” In Handbook of Airline Marketing, edited by G. F. Butler and M. R. Keller. Washington, D.C.: Aviation Week Group, 1998. A comprehensive collection of articles addressing critical issues and subjects of airline marketing written by experts in the field.

Air carriers

Airline Deregulation Act

Airline industry, U.S.

American Airlines

Mergers

Ticketing