In this short summary episode, Paula Thomas looks back on a fascinating conversation with Evert de Boer, Managing Partner of On Point Loyalty, who discussed how the aviation sector has earned such huge profits from their loyalty programs over the years.
And how their importance grew even further in importance through the global pandemic, offering airlines a stable, recurring source of revenue even though customers were unable to travel, and even challenged the widely-held view that redemption seats are an expense for airlines.
Listen to this short summary to hear the highlights of our discussion with this airline loyalty industry thought-leader.
Welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals. I’m your host, Paula Thomas. And if you work in loyalty marketing, join me every week to learn the latest ideas from loyalty specialists around the world.
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Hello and welcome to this week’s short episode of Let’s Talk Loyalty. When I’m looking back on an episode specifically about airline loyalty programs with Evert de Boer Managing Partner of On Point Loyalty in Singapore.
Evert first shared with us a couple of fascinating data points on how profitable these programs are for the airline industry. And most interestingly, really how underappreciated and misunderstood they are. Often these programs are seen as simply giving away something for free. When in fact it’s the opposite. These programs generate revenue, and in some markets and awful lot of it. by selling points or miles to partners. Selling seats in this way can actually be more efficient for the airlines because it lowers commissions and distribution costs. In fact, we talked about the fact that sometimes an airlines loyalty program can actually be more profitable than the airline itself. And I’ll never forget the first time I heard that, it completely blew my mind.
The airlines loyalty program also has very different business characteristics than running the basic airline. With an airline, there are so many factors which are completely out of our control. Things like the fuel costs, the overall economy, even the weather, and of course, we don’t even need to talk about the pandemic. But with loyalty programs, it is exactly the opposite. Almost everything is within your control. So a loyalty program is profitable, It can have stable revenue stream to what can otherwise be an inherently unstable business model.
To really illustrate how underappreciated airline loyalty programs are, Evert shared with us a McKinsey study. And clearly McKinsey is by any standard, a superb company with an impeccable reputation. But one study they did on the airline industry concluded that the entire industry is simply not very profitable. But in fact, that report made no mention of the airlines loyalty programs in that 52-page reports. And I do think McKinsey was right in their assessment of the industry as a whole. I remembered a similar, shocking statistic from the former chief executive of Air Lingus. I attended a presentation and at that, he explained that in its entire 100 year history, the airline industry had yet to make an overall profit.
Everet then shared with us his own research on the valuation of some of the world’s leading loyalty programs in the industry. Just to give us a sense of the numbers we were talking about. For example, Delta Sky Miles, he estimated to be valued at about $26 billion. Yes, that’s a billion with a B. AA advantage from American Airlines was worth about 23 billion. And The Mileage Plus Program from United. He had estimated to be worth $20 billion. Just some staggering numbers, and yet they’re often underrated on sometimes even forgotten.
Evert talked about some of the ways that airlines have monetized their programs in the past. Including even sometimes selling them off with an IPO In some cases. The most interesting thing was in 2020 United Airlines came up with an ingenious way of leveraging their program with the help of Goldman Sachs in order to raise capital by collateralizing the future cash flows of their loyalty program, just as everything was shutting down due to the pandemic. This restructuring saved United a huge amount of money in interest payments. Obviously lending money to an airline in 2020 would have been extremely risky, and of course, they would have been charged a very high-interest rate. But United still had the steady cashflow from its highly profitable loyalty program, so they were able to borrow the money they needed to get through 2020 out of the significantly lower interest rate.
The next part I found super interesting was when Evert described how running an airline is so vastly different to running a loyalty program. And in his view, increasingly airlines are starting to treat their loyalty programs as standalone companies that are often now running very separately to the core airline business. They simply require a different skillset to manage, so spinning them off instead of treating them as just another department in the airline in fact, seems to be working much better in helping those loyalty programs run much more smoothly and profitably. Another potential revenue source for our loyalty programs is of course always the massive amounts of data they are collecting. So for airlines, it seems there’s still big opportunities to monetize that. It would mean they would have to position themselves with competing directly against the likes of Google, apple, and Facebook, but it does seem to be an opportunity in the media business to think about nonetheless.
Lastly, Evert shared with us, his thoughts on why the airline industry is uniquely positioned to run such effective programs. Quite simply it’s to do with the difference between the perceived value of the rewards, the customers receiving compared to its actual cost. The perceived value of a free plane ticket is extraordinary. When in certain situations, once the loyalty program has run well, the actual cost of fulfilling that seat should be much smaller. This was a fascinating episode with Evert de Boer. And if you haven’t heard him speaking, you should really head over to let’s talk loyalty.com/82, and listen to the whole discussion in its entirety.
That’s it for today. Tomorrow we are back with another interview this time with another loyalty podcaster, Iain Pringle. Together, we’re sharing what we’ve learned in the combined five years that we’ve been running our podcasts. Then on Thursday, I’m chatting with Albertsons, the second largest grocery chain in the United States to hear some of their incredible innovations driving loyalty at scale throughout the recent global pandemic.
That’s it for today. Thanks again very much for listening everyone.
This show is sponsored by The Wise Marketer. The world’s most popular source of loyalty marketing news, insights, and research. The Wise Marketer also offers loyalty marketing training through its loyalty academy, which has already certified over 245 executives in 27 countries as certified loyalty marketing professionals. For more information, check out thewisemarketer.com and loyaltyacademy.org.
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