McDonough School of Business
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Customer-Friendly Skies

When airline customer loyalty programs change, is backlash justified?
By Jennifer Lubell
Photo by Drake Sorey
When a handful of major airlines recently decided to switch their frequent-flyer loyalty programs from “mileage/segment-based” programs to “spending-based” programs, a heavy backlash ensued. The change meant that rewards would be based on the cost of the ticket, not the distance traveled — a scenario that some experts say will result in fewer benefits and penalize travelers, no matter how many miles they accumulate.

However, So Yeon Chun, an assistant professor at the McDonough School of Business, doesn’t see it that way. Chun’s research on loyalty programs, conducted jointly with Anton Ovchinnikov from the Stephen J.R. Smith School of Business at Queen’s University, represents an interaction between revenue, pricing, and consumer behavior. Their extensive study of customer loyalty programs in the airline industry over the last few years suggests consumers may end up with more options from these changes, and that the end result won’t be as disadvantageous as people think.

Before the change, members were awarded different levels of status (and exclusive benefits) based on how many miles they collected. As a result, many flyers were incentivized to maximize their miles in order to maintain their status levels (or reach the next tier) with a particular airline.

Those who fly long-haul, but are price-sensitive, might find more value flying with firms who operate mileage-based programs.”
—So Yeon Chun, Assistant Professor of Operations and Information Management

As an example, in 2014, before United changed from a mileage-based to a ­spending-based program, Chun bought an indirect flight from Washington, D.C., to Paris to give her the 10,000 miles she needed to maintain her status as a frequent flyer. Although it involved traveling through Texas to get to the City of Light, the flights enabled Chun to accrue the miles she needed to qualify for certain status-based rewards and benefits from the program. Had she purchased a direct flight, she wouldn’t have accumulated as many miles. This strategy is what’s known as a “mileage run,” an unnecessary or inconvenient airline trip taken solely to gain maximum frequent-flyer miles or status.

This year, Chun realized she needed to change her strategy about achieving premium status in her travels. At the same time, she wondered if the negative reactions to the spending approach had any basis in fact.

“I thought about the program from the firm’s and customer’s perspective, and thought that it might not be true,” she says of the criticism.

The decision by United Airlines and Delta Airlines to change their respective loyalty program structures from mileage-based toward spending-based programs signaled a major shift. For the firms making these changes, the benefit is that spending-based programs reward consumers based on the dollars spent, which contributes to revenue. As Chun’s research has highlighted, this also brings about changes in consumer strategic behavior.

“For example, some of the consumers who used to do a mileage run might now choose to purchase high-priced tickets and fly less,” she says. “In that way, firms can make more money because if consumers pay more and fly less, the firms can reduce costs.” Some consumers also benefit since they could save their time. Moreover, Chun’s research shows that a switch to a spending-based program could lead to a win-win situation where the firm’s profit will increase, yet no consumer will be worse off. This win-win situation can be achieved when the firm coordinates its revenue management (pricing) and loyalty program functions.

Chun expects that as firms become more strategic about their loyalty program operations, consumers in turn will become savvier about earning and redeeming frequent-flyer miles or loyalty points under these changes.

The competitive landscape may evolve to the point that some firms end up offering spending-based programs while others continue to offer mileage-based programs. The result is consumers will “self-select” the programs that work best for them.

“Those who fly long-haul, but are price-sensitive, might find more value flying with firms who operate mileage-based programs,” Chun says, “while those who book short-haul trips and pay high fares would be better off with firms that operate spending-based programs.” Although Chun’s current work does not specifically address such self-selection behaviors in the long run, she says, “it is a very interesting future research question that our work identified.”

Published in Georgetown Business magazine, Fall 2015