Airlines have begun to shift to a new model of “paid loyalty” in a bid to keep customers coming back while the coronavirus pandemic continues to disrupt global travel while hitting the disposable income of many, according to one expert.
The coronavirus pandemic caused an unprecedented downturn in air travel last year as global lockdowns kept people at home and borders closed. This pressure led to several airlines closing down as dampened travel hit the bottom line. Compounding this issue is the economic havoc wreaked by COVID-19, with unemployment skyrocketing in some parts of the world, leading consumers to have less income – and less money to spend on travel.
Paid loyalty programs, which resemble normal loyalty programs but involve a fee, either one-time or recurring, may be one way for airlines to keep customers coming back. A 2020 McKinsey survey found that paid loyalty program members are 60 percent more likely to spend on a brand than free loyalty programs, which only saw an increased likelihood of spending by 30 percent.
“A significant new trend is that of paid loyalty, providing airlines’ customers with choice and flexibility … At the same time, given the right value proposition, customers are shown to be happy to commit themselves financially to the airline and giving them a larger share of a potentially smaller customer wallet,” Priyanka Lakhani, regional commercial director - Middle East, Africa and Director South Asia at Collinson said.
Borrowing on airmiles
In the face of this crisis, some airlines have taken the unusual route of borrowing cash against their airmiles programs as cash flow became critical. Lakhani pointed to Delta Airlines $6.5 billion loan, backed by its Skymiles program, and United Airlines $5 billion loan, backed by its MileagePlus program, as examples of this trend.
Airmiles are sold to credit card companies by the airline for the company to offer as a reward to their customer. The business is significantly more lucrative than many realize – United has previously valued MileagePlus at $21.9 billion, nearly twice the market capitalization of the airline at the time of writing. These valuations aren’t going anywhere soon, Lakhani explained.
“Another indicator of the future value of frequent flyer programs [FFPs] is the massive pre-purchase of miles by card issuers in the US. This demonstrates the underlying strength of FFPs, their currencies and their member base and speaks to the trust in the future value of frequent flyer programs,” she said.
However, airlines in the Middle East, some of the biggest in the world, have still yet to make a similar borrowing move, Lakhani added.
“We are not aware of any airlines in the region taking such steps to borrow against assets and believe it is unlikely,” she said.
The age of revenge travel
Surveys and expert analysis have predicted that as consumers have adapted to the new normal of life under COVID-19, confidence is beginning to return. Economic downturns tend to produce pent-up demand, which, when unleashed, creates a revenge consumerism phenomenon as customers seek to make up for shopping and travel time lost during the downturn.
Lakhani agreed with this theory in relation to customers that are eager to get back to using their airmiles.
“The term “revenge travel” was coined earlier this year to represent the pent-up demand for travel and those who’ll be planning their trip of a lifetime to make up for lost travel time throughout 2020. In other words, it is the type of travel you do after getting fed-up with the lockdown and it could well be a blessing to the travel and hospitality sector,” she said.
Collinson has found that among 22,000 frequent flying Priority Pass members it surveyed, nearly three in four, 71 percent, are ready to return to travel immediately within the next three to six months, Lakhani explained.
“As customers re-evaluate their options in the post-pandemic world, airlines will need to go above and beyond evolving their offerings in the face of consumer demands. This will remain a critical factor in maintaining customer loyalty, and ultimately, advocacy,” she concluded.