Loyalty Programs: How can you make them the cure and the vaccine driving an airline’s recovery?
With the year 2020 wrapping up, IATA has forecasted a $118.5 billion loss for the airline industry due to the COVID-19 crisis, which is deeper than its forecast of $84.3 billion in June1. While there is now hope due to the discovery of a vaccine, newer "waves," strains, and clusters continue to wreak havoc, challenging the industry for its very survival in the present shape and form.
At the same time, airline loyalty programs have proven beyond doubt that they have the potential to become the cure and the vaccine propping up airlines with their ability to generate non-travel related revenue, help retain cash, and even use their potential to be used as collaterals. The same programs will be critical to drive and stimulate demand for customers to restart traveling.
Loyalty is a two-way street! Airlines have had to make sudden and multiple changes to their loyalty programs to keep their engagement with customers strong. This has accentuated the need for airlines and loyalty program operators to anticipate their challenges and effectively address them as they prepare for recovery. There are several strategies that airlines can adopt to keep their brands top of mind for loyal customers through this crisis and beyond while keeping their economics continuing to work in the program's favor. Besides maintaining meaningful engagement through non-air activities and demonstrating compassion for their customers' circumstances, programs have also explored new vistas and models of engaging their traditional partners.
What strategy will work when, and what underlying capability will be needed to execute that strategy will be defined by what "phase" of recovery the airline or program is in. At IBS, we envisage recovery to pan out in three phases, each with its own set of challenges for loyalty program operators and priorities as defined by customers' outlook. Different markets and different regions would go through these phases at different points in time depending on several factors, such as the impact they have suffered due to COVID, the discovery and distribution of a vaccine, and passenger confidence in the markets they serve. Here's a closer look at the three recovery phases:
Phase 1: Recovery & The Easing of COVID-19 [3 – 12 months]
Phase 2: Discovery & Post-COVID Emergence [12 – 24 months]
Phase 3: The New Digital Normal [> 24 months]
Phase 1: Recovery & The Easing of COVID-19 (3-12 months)
We see a slow recovery during this first phase, as countries and airlines hear news of successful vaccine development, beginning of distribution, but travel restrictions are still being rampant. Airlines and programs will see very little business travel, and the limited leisure travel will be confined to domestic trips driven by pent up need to visit family and relatives despite strained disposable incomes. During this phase, loyalty program members will look at protecting their tier status and miles balance from expiry. Members will also focus more on online retail accruals as they get comfortable with e-shopping, and many more would try non-air redemptions both to conserve cash and because there is not much to do with the miles anytime soon.
Top Airline & Program Priorities:
The key priority for loyalty program operators in this phase will be to ramp up operations with likely reduced staff size. Program operators could find it tough to rely on manual processes with reduced staff along with the additional pressure on airlines to conserve cash and manage it by balancing redemptions options. False starts will continue to drive booking changes and cancellations. If they work effectively with their loyalty program executives, airline executives could consider converting refunds into a specific type of loyalty points/credits to retain cash.
The first phase of recovery will present many challenges for loyalty program operators as they devise ways to adjust program rules and quickly adapt to changing priorities. Loyalty program operators will need to re-engage with members and demonstrate compassion by extending their tier status and miles expiry. As program operators devise strategies to generate immediate revenue by launching non-air promotions coupled with dedicated programs to switch to non-air activities, they could also consider negotiating better-prepaid models with partners.
There will inevitably be bumps in the road, and the capability of underlying loyalty technology will be tested to its limits. Operators who have taken advantage of cloud-native technology that can reliably manage variations in demand and deploy changes faster would be able to tide through this phase swiftly compared to those still running on legacy/on-premise systems.
Phase 2: Discovery & Post-COVID Emergence (12-24 months)
As the industry enters this phase, regional & domestic leisure travel is likely to pick up owing to a possible increase in disposable incomes. International travel might take longer to return due to reasons such as government regulations, mandatory quarantines, and swiftly-changing policies. Business travel will still be limited and might take longer to recover as compared to leisure travel. Health and safety will remain the key priority for travelers in this phase, and as travel increases, there will be increased demand for flight redemptions.
Top Airline & Program Priorities:
The key priority for program operators in this phase would be to stabilize operations with reduced staff and optimal work distribution. Manual processes, however, could amplify these challenges. Loyalty program operators would highly benefit from technology readiness in this phase to automate redundant processes and launch new program propositions with quick value delivery.
Program operators will need to develop strategies to balance air and non-air accruals to compensate for limited airline earnings and foster new partnership models that add value to customers.
In this phase, loyalty program operators need to review and refine their existing redemption and churn models to face the growing challenge of matching seat availability with flight redemptions. Airlines could also perform status matches, automating them where possible, and launch related promotions to attract elite members from the competition. We forecast a spike in loyalty fraud during this phase, and airlines and program operators that are not equipped with automated fraud detection capabilities could struggle to tide through this phase. Robust and machine-learning-based fraud detection and prevention measures would give program operators confidence to focus on growth, launch new promotions, make changes to propositions without getting stressed out on policy abuse, and account takeovers.
Phase 3: The New Digital Normal (> 24 months)
As the industry enters the third phase, business travel will return spurred by the human need to collaborate. Face-to-face interactions are a critical and irreplaceable ingredient in doing profitable business, and more "Safe" business travel options will come to the forefront. Leisure travel is also likely to pick up as the pandemic eases, serving pent-up demand. In this phase, along with interest in typical air awards, program operators can expect an increased frequency of "low value" non-air redemptions. There will also be increased interest in the online earn and redemption marketplace by program members as they discover value and convenience.
Top Airline & Program Priorities:
Business travel is significant for airlines not only in terms of traffic but also in driving profitability. As airlines look at ways to innovate customer experiences specifically for the business travelers, program operators' critical priority in this phase would be to drive differentiation by identifying and investing in new business models. Technology readiness will be vital for redefining the loyalty program offerings quickly to present more value to customers and capture market share.
In this phase and beyond, program operators will be under pressure to effectively use analytical models to revalue miles/points as member behaviors change. To further increase wallet share from elite flyers/buyers, loyalty programs could consider pricing redemptions dynamically. Hyper-personalization in offering program benefits and recognition will become differentiators compared to the traditional concept of a "tier" with set benefits.
For each of these phases of recovery, challenges pave the way to opportunities, and underlying technology readiness is at the foundation of harnessing these opportunities! Airlines and loyalty program operators can see immediate benefits by prioritizing specific technologies and capabilities to meet the needs and desires of their current elite flyers and spenders and to become the preferred partner for the frequent fliers of the future.
If you are keen to understand more specifics about the techniques, strategies, and digital tools that can help you bring these to life, download our in-depth guide on Transforming Airline Loyalty Programs During the COVID-19 Pandemic and Beyond.
About the author:
Associate Vice President, Loyalty Management Solutions at IBS Software
Binay Warrier has more than 16 years of experience solving challenges for the world's largest and most respected brands in Travel. He leads the loyalty and customer-centricity practice at IBS and is a trusted advisor for some of the world's best travel loyalty program operators. Binay is a self-confessed points junkie, a passionate frequent flyer, and an aero-modeling enthusiast.