Co-Opetition - Adam M. Brandenburger [68]
Not everyone could duplicate the AAdvantage program equally well. American was way ahead in using computer technology, giving it a significant edge in running its program. Airlines without the capability to automate found the programs much more cumbersome to administer. To track miles, they had to collect coupons presented to gate agents prior to boarding.
Frequent-flyer programs gave the large airlines an advantage over the regional carriers and start-ups. With more extensive route systems, they could offer free flights to Hawaii, the Caribbean, and other tempting destinations. Regional airlines tried to compensate by offering more generous rewards. In turn, the major carriers further enhanced the appeal of their programs by forming alliances with international carriers.
How bad was it for American that its AAdvantage program was copied so quickly? It’s true that imitation reduced American’s ability to take share. American was no longer unique. All the airlines now offered improved products, so the playing field was again more or less level.
But that doesn’t mean that the loyalty effect was lost. Even with all the other frequent-flyer programs out there, after a customer racks up a few miles on American, he has an incentive to stick with American the next time. That’s the real genius of frequent-flyer programs. Even when copied, they still create an incentive for loyalty.
Just as American has loyal passengers, now all the other airlines do, too. And once each airline has its own base of loyal travelers, going after share through low prices becomes less attractive. Suppose United lowers price in an attempt to take market share. Doing so is less effective because it’s harder to attract American’s frequent flyers. Similarly, if United raises price, it won’t lose as many of its passengers, because they don’t want to abandon their miles on United.
Overall, price cuts are less effective, and price rises less risky. This is true for every airline. Lowering price gains fewer new customers; raising price loses fewer existing ones. The loyalty effect is particularly strong in the business travel market, where passengers have the most miles. That’s why unrestricted-coach and business-class fares have been so stable.
Frequent-flyer programs do have their flaws. People can join more than one program, and this dilutes the loyalty effect. Even so, there is an incentive to concentrate miles on a few airlines. One 40,000-mile award is better than two 20,000-mile awards, so it doesn’t pay to spread miles across too many airlines. Another drawback is that when miles are cashed in, the loyalty effect fades.
Both of these flaws have been corrected with the airlines’ introduction of Gold and Platinum programs. These second-generation programs give VIP privileges to the airlines’ best customers. To attain Gold status with American requires flying 25,000 miles a year, Platinum status comes with 50,000 miles. United even has a special category—1-K Fliers—for those who rack up over 100,000 miles a year on United. Because the cutoff levels are so high, it’s rare to be able to be a member of more than one Gold or Platinum card program. Thus, the loyalty effect doesn’t get diluted.
Once people hit the cutoff levels, they enjoy unlimited first-class upgrades, special customer reservation service, companion upgrades, and more, over the next twelve months. It’s not a onetime reward, so the loyalty effect doesn’t fade. To take advantage of these privileges, and maintain their Gold or Platinum card status, travelers have every reason to continue flying the same airline. The Gold and Platinum card programs are important because they appeal to the airlines’ most precious customers—those who pay full fare and fly nonstop.
Who Wins and Who Loses? Frequent-flyer programs create loyal customers, and that leads to a win-win for the airlines. They’re an example of what we meant when we said that sometimes the best way to succeed is to let others do well, including your competitors.
What about customers? They get a free trip to Hawaii