Co-Opetition - Adam M. Brandenburger [69]
Actually, the win-win outcome for the airlines is a controversial point among some. For example, Professor Max Bazerman of Northwestern’s Kellogg School of Management argues that frequent-flyer programs are an instance of a mutually destructive escalation game. He points to episodes of intense competition, such as the 1987 “triple miles” war, when American, then Delta, and then everyone else offered three frequent-flyer miles for each mile traveled.27 Bazerman observes that, as a result, travelers have stockpiled well over a trillion frequent-flyer miles—a potentially huge hidden liability for the airlines. His conclusion: frequent-flyer programs have been a lose-lose game for the airlines.
We agree that a trillion (1,000,000,000,000!) frequent-flyer miles is a very big number. A back-of-the-envelope calculation suggests that clearing the slate would require nearly 100,000 roundtrips of a full 747.28 That’s a lot more than some free peanuts.
But that perspective greatly overstates the real cost. To avoid displacing paying customers, airlines restrict usage. As a result, many miles will simply never be used. Furthermore, airlines, somewhat controversially, changed some of the program terms: the miles can expire if unused within a certain time; the number of miles needed for free travel has risen. The reality is that the airlines have a lot of discretion in cutting the liability down to a manageable size.
It’s true that frequent-flyer programs create competition among airlines to sign up new members. Hence the triple-miles war. It’s worth investing today to create loyalty tomorrow, but only to a point. It isn’t smart for one airline to fight too aggressively to sign up members. It should prefer that other airlines have some loyal customers, too. Otherwise, competitors have little to lose; they have every reason to cut price in order to attract customers. Remember the glass-house effect described in the previous chapter under “Eight Hidden Costs of Bidding.” It’s important that competitors have something to lose from getting into a price war.
Even with their flaws, frequent-flyer programs are a stroke of genius. They are an unparalleled way of increasing the total pie and creating loyal customers. True, competition to sign up members may, at times, have escalated out of control. But, on balance, we think it’s been a win-win-win—for American, for the other airlines, and for passengers, not to mention tourism in Hawaii.
Frequent-flyer programs have helped companies in other businesses engineer customer loyalty, too. Car rental agencies, credit-card issuers, hotels, long-distance phone companies, and others have formed “affinity” programs with the airlines to allow them to offer frequent-flyer miles to their own customers. For example, there’s the Citibank credit card with American, and the First Chicago card with United. Each dollar charged on these cards earns a frequent-flyer mile. Long-distance phone company MCI gives five miles on Northwest for each dollar of calls; sign up with Sprint and get five miles on TWA. Program partners pay the airlines a fee for this privilege, around a penny a mile. These pennies add up. The airlines earn an estimated $2 billion annually in fees from affinity programs. The programs are so large that over half of the miles credited to frequent-flyer programs are now earned on the ground.
Saying Thank You
Frequent-flyer programs hold an important lesson for every business. You want to say thank you to your loyal customers. It’s a critical step in building a relationship. We think that saying thank you is an essential part of establishing added value in a competitive market.
Say thank