June 22, 2004

Frequent Fliers and Loyalty

Targeting - The Achilles' heel of frequent flyer programmes

By Philip Charlton (Managing Director, Trident Loyalty Systems)
Published by AirlineNewsdesk.com in February 2004.

Targeting profitable customers for inclusion in an airline's loyalty programme is a problem that has been around as long as there have been frequent flyer programmes. But TLS has unveiled a unique solution to wasted acquisition costs...

In 1981, American Airlines launched the industry's first frequent flyer programme (FFP) with 283,000 members. The objective of AAdvantage was to "allow American Airlines to recognise and reward its best customers for their loyalty to the airline". Today, webflyer.com estimates that 49 airlines boast a combined frequent flyer membership total of 283 million.

Given that business travellers constitute the archetypal frequent flyer, the following is significant:

A top business traveller will average 21 flights away from home per year (OAG).

94% of business travellers belong to at least one frequent flyer programme and 60% belong to three or more programmes (OAG).

80% of business travellers state that loyalty programmes influence their travel decisions (Accenture).

20% of loyalty programme members generate 80% of an airline's profit (McKinsey).

9% of travellers buy 50% of an airline's premium seats (Accenture).

2% to 4% of loyalty programme members generate 33% of an airline's profit (McKinsey).

Therefore, it can be concluded that the Pareto 80:20 rule applies, and that business travellers are attracted to and influenced by frequent flyer programmes. It can also be concluded that, given the profit contribution of these flyers, it is vital for airlines to continuously recruit new frequent business travellers into their loyalty programmes.

Achilles' heel
However, new member recruitment is the Achilles' heel of airline loyalty programmes. After all, the output of any FFP Customer Relationship Management (CRM) initiative, no matter what its sophistication or expense, is inextricably linked to its input - the calibre of membership. In other words, an airline loyalty programme is only as good as the members recruited into it. The following research highlights the outcome of inadequate prospect targeting:

The average activation rate of new FFP members over 12 months is 40% - 50% (TLS).

The average activity rate of an entire FFP per year is 27% - 28% (webflyer.com)

The average FFP membership base churns by 15% - 25% per annum (McKinsey).

The problem is clear. Not all loyalty programme members are created equal. In fact, 50% - 60% of new recruits do not even fly the airline whose programme they join. These members erode airline profit because they voraciously consume acquisition budgets and incur servicing costs but generate no revenues. Therefore, they should not have been targeted and recruited in the first place. John Wanamaker's lament rings true: "Half the money I spend on advertising is wasted; the trouble is, I don't know which half."

This huge wastage occurs because marketing departments only have two recruitment methods at their disposal. Paper media (direct mail, inserts, direct response press, etc.) and corporate web sites. Unfortunately, neither of these channels has the ability to selectively target and cost effectively recruit the 20% of travellers who account for 80% of an airline's profits. Unable to isolate and pull the needle from the haystack, the normal approach has been to harvest the entire haystack. This has resulted in high levels of inactivity and churn and, consequently, expense.

Better targeting
Given the industry's cost cutting imperatives, airlines need to adopt a more targeted and cost effective approach to member enrolment. Consider the following:

It costs 10 times more to acquire new members than to keep existing ones (Bain & Co.).

5% - 20% of an airline's loyalty programme costs can be saved through better prospect targeting (McKinsey).

Lack of evidence suggests that FFP management do not have monthly reports detailing acquisition costs per active member by campaign type (TLS).

Increasing customer retention by 5% can increase profits by 25% to 95% (Bain & Co.).

It is worth noting that retention is a by-product of recruitment. It follows, therefore, that if the wheat can be separated from the chaff before entry into the FFP, churn will decrease. Subsequently, acquisition and servicing budgets will fall by eliminating inactive members.

The cost savings can then be invested in developing premium tier benefits to grow an airline's share of wallet. McKinsey has quantified the annual bottom line impact of implementing these CRM principles to be between US$100 million and US$250 million for a large carrier.

Innovative strategy
Trident Loyalty Systems (TLS) has conceived an innovative strategy and enabling technology that precision-targets and enrols only active flyers into an airline's loyalty database.

Quick to implement and easy to manage, TLS says the degree of targeting offered by the system is unsurpassed. It enables FFP management to segment, target, and enrol flyers depending on ticket type (i.e. premium, full-fare economy, or discounted economy).

The solution offers more than fifty different benefits. For example, by communicating with passengers at the right time, in the right place, with the right offer, and even in the right language, the system is able to:

Save approximately 40% of an airline's acquisition cost per active member.
Generate incremental advertising revenue and in-flight merchandise sales.
Issue a personalised and magnetically encoded membership card, and deliver a welcome pack to new members within 2 - 3 minutes of starting the enrolment process.
Recruit and fulfil new members as well as providing retention services to existing members.

TLS acknowledges that airline executives prioritise projects on multiple criteria, two of which are likely to include budget allocation and return on investment. In consideration of these factors, Trident Loyalty Systems:

installs and maintains the enterprise solution at its expense;
offers a performance related guarantee whereby transaction fees are only paid after results. And if no results are obtained, no fees will be due;
does not charge consultancy fees, thereby demonstrating its confidence in, and commitment to, a successful project;
forecasts a return on investment within 6 months of deployment.

The TLS solution requires minimal management time to execute because it dovetails into legacy systems and exploits existing assets to significantly improve operational efficiencies.

To discuss this new strategy further, please e-mail Philip Charlton by clicking here, quoting your name, your job title, your airline's name, and your company switchboard telephone number.

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Copyright 2004 Philip Charlton


About the author...

Philip Charlton is the managing director of UK-based Trident Loyalty Systems. He has applied his loyalty marketing expertise to clients such as Great Universal Stores, Emirates, Hyundai, Eurostar and British Airways during his career at Grey Direct, Carlson Marketing, and OgilvyOne.

The aim of Trident Loyalty Systems is to provide clients with time and cost savings from loyalty programme administration while generating revenue and enhancing member services.

Attracted to the accountability and measurability of direct marketing, Charlton decided to specialise in loyalty programmes and, more specifically, the optimisation of member acquisition. Given that a loyalty programme can only be as good as its members, he designed an acquisition process that only targets high profit potential customers for enrolment.

Charlton has conceived and executed a number of industry firsts. For example, a campaign to precision target an airline's First and Business Class passengers, acquire them into the airlines loyalty programme, and fulfil them with a fully personalised, paper welcome pack within 5 minutes. This campaign was able to target elusive premium cabin passengers with pin-point accuracy, recruit them with a 100% activation rate, and shorten an average fulfilment lead time of 30 days to a matter of minutes.

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Posted by Craig at June 22, 2004 09:46 PM