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Loyalty Programs – Are We Too Committed To Stay Rational?

Florian Buechting Just Blogging No Comments

I recently ran into a very interesting discussion of the German aviation travel channel Frequent Traveler TV. Lars Costen, the head of the channel, and one of the channel supporters discussed whether loyalty programs and airlines and hotel groups are still working well and if there are sensible. Here is the video (in case you speak German):

Lars’s guest made an interesting point, when he said that once he enrolled to Miles & More, the frequent traveler program of Lufthansa Group, LOT, Luxair and Croatia Airlines, he wants to have some sort of bonus already. Lars jokingly replied that they state that you can earn miles now. I thought about this idea and more and more came to one point, which I felt was missing in the discussion: commitment. In this blog posting, I give you some ideas about it. I will take a rather radical postion in here, also because I feel that we as frequent travelers don’t think about it too much from that perspective. Hope you like it!

 

Why Do I Feel that Commitment is a Key Point?

Let’s imagine you have your first flight with Lufthansa. Why would you enroll to their loyality program Miles & More? I just assume that you act rationally and don’t just like to feel being part of a community or similar. Two me, there are two arguments which could support it:

  • You have (rather) immediate benefit. For example, your flight leads to so many award miles that you immediately receive a bonus, which is valuable for you. This may not only be a point about very expansive tickets. I am for example Icelandair Saga Club member, just in order to use the few points I receive there to convert them into food on the next flight. I will never collect sufficient points to have a free flight, but it is a nice perk – and they got my data anyway.
  • You expect a future benefit. This means you expect that you will earn more miles, maybe reach a status level and thus, in aggregation of your current and future flights, have at least a chance (maybe your expectation fails) to reiceive something valuable.

I am sure that there are just very few people who enroll to loyalty programs as they receive an immediate benefit (and thus could leave the program soon after they received it again). They take a future-looking decision. This one the one hand means that they trust the airline or the program in a way that the conditions will still give them benefits in the future. On the other hand, at the point of enrolling, they also state that they expect to have future business with the airline or some of the partners of the program. Enrolling to a loyalty program expresses commitment of the consumer to have a longer lasting relationship with this franchise.

 

Vice Versa – the Airline Perspective

This might be the harshest wording in the whole posting – but if I just take the thought about commitment above and take an airline / alliance perspective, I would come to the following conclusion: From the perspective of the issuing body, the ideal loyalty program creates the highest level of commitment under the lowest level of effort / cost. Coming back to the idea mentioned in the discussion. Why should Lufthansa give you a one-time free piece of luggage or a seat reservation as a Miles & More newbie? Frequent travelers often joke about their typical wording Auf vielfachen Kundenwunsch – “based on frequent customer request”. But finally, maybe the customer just did not demand too hard.

 

The First Class Paradoxon

The YouTube discussion made a very interesting point: if I am really a die-hard frequent traveler and fly first class almost each and every time, the benefit of being a loyalty program might be rather small – at least a “status hunt” is not sensible. If you fly Lufthansa First Class, you can use the car transfer, the First Class Terminal and all the nice perks. Why should you then go for Lufthansa’s premier HON Circle status – which is granting you exactly the same services you received anyway. Booking the ideal flight for you in that situation comes back to the basics – the price, the service on the ground and on board.

The only way you could attract this passenger to a certain loyalty scheme might be by having a nicer value for the award miles this person is receiving. If I value Air France and Lufthansa equivalently and they give me the same flight for the same price, it may be an argument that the miles I receive lead to a business class free flight in one case and to an economy ticket in the other.

 

My Personal Situation

I definitely do optimize my portfolio of frequent traveler programs. I am for certain status levels at loyalty programs. Just giving you a few of them, which might be most interesting from a commitment perspective:

  • I feel that the most interesting way of expressing commitment is my gold status at Accor ALL. I simply buy it buy purchasing a new ibis business card every two years. This leads to the status at the whole hotel chain, better availability and cheaper hotel prices. I typically evaluate if the status is still sensible before I buy it. So far, the value the ibis business card is giving me (which does not only need to be a financial value) is paying back. It is thus a rational decision to actively buy it, but also a commitment towards the group for the next two years. You may be in a similar situation if you for example have a US credit card, which leads to a certain status at hotel chains or airline alliances.
  • Staying at hotels, you know from my blog that I frequently stay in Hilton Hotels.I did start my status career with a credit card, but now easily exceed the limits and have an even higher status. One of the key reasons why I went for Hilton was their reliability in quality and also the free breakfast. These conditions have changed, so that they will be in focus later. I also receive complimentary room upgrades and executive lounge access. I especially value the latter quite high.
  • On the airline side, I am Gold member at both, British Airways and Lufthansa / Miles & More. If I come back to my thoughts about the lowest level of effort above, Lufthansa / Miles & More is much closer to that. British Airways feels to value me higher. However, there is no oneworld alliance local carrier in Germany, so that you are always a bit stuck to the Lufthansa Group. The key advantage of being a Lufthansa Gold / Senator member is often on other airlines. I enjoy having lounge access at Eurowings flights and status advantages at other Star Alliance members. Thus, I am currently thinking about putting my Lufthansa status on run-off, when it is expiring in 2025.

A very interesting contrast to these thoughts is Payback, by the way. the program is allowing you to earn points when you are shopping online or in store. The type of products is a wide range, from department stores, fashion to grocery, gas stations and food delivery. They have numerous partners. Recently, one of my most frequently used, the grocery store chain real closed down and thus left the program as well. My commitment to Payback (even though I can convert to Miles & More) is much lower, also because I don’t identify it with one major company or driver. Payback also does not offer a “Gold Status” for people with high revenue. They do give you more coupons for point boosts and additional points if you use the card more frequently. However, the system is not transparent at all, so that it might also be not that motivating to go for these bonuses.

 

Which Kind of Bonus is the Best to Feel Committed?

When I started collecting miles and Miles & More, I always felt having a clear target: a round-the-world flight in First Class, fully paid by miles. I would be able to go for this one nowadays, but it does not feel as attractive to me as it used to be. I use miles typically when paying with cash is just inefficient. For example, I recently had a two night stay at the Conrad New York Midtown in the heart of Manhattan. The ridiculous price per night is about 700 USD. I identified the necessary number of Hilton Points with the total price demanded and made a rationale decision.

From my personal perspective. Hilton Honors drives me much stronger towards collecting more points. The rationale about it is likely rather not too much that I feel that their awards are more appealing – it is rather that the points I need for that are easier to get. An award is for me more appealing when I cannot reach it with normal bookings. If I would really love to go for it, I could buy a First Class ticket round the world. Or I could stay in the Conrad. The reason why I would not do so is purely rationale – the value for money decreases significantly if you pay for it cash.

Lifetime Status

To me, finally, the most appealing awards is the lifetime status. Having been committed to a certain brand for a sufficiently long time that they don’t take away (some of) my advantages any more. With the new rules (if they are in line with what has originally been communicated for 2021), there is a fixed and officially communicated way to receive a Lifetime Frequent Traveller Status and a Lifetime Senator one. I somehow hope that I reach a lifetime status one day at British Airways and Hilton. Both have a clearly defined lifetime status program for their Gold resp. Diamond status.

However, this posting is about commitment. When I reach a Lifetime Status at a certain brand or program, what does that mean? If I don’t feel that there is something “better” (like the HON Circle at Lufthansa or the Concierge Key at British Airways), the Lifetime Status somehow releases me from my commitment. I am back in the fully rational situation: I will book a hotel or a flight because it is the best value for money. Of course, the lifetime status will give me some advantages, so I might use them. But I don’t have to that any more if other offers are “better”. Thus, I feel that a Lifetime Status (similar to employee shares with a deferment period) is a great motivation to stay committed – until you made it.

 

Ultimate Commitment – Mileage Runs and Mattress Runs

Mileage Runs and mattress runs are flights / hotel stays which one majorly did for the sake for gaining points or miles. I never did pure mileage or mattress runs in my life, but I adopted my behavior according to my bonus schedule – either opting for a certain provider of a flight or stay or also using a more complex routing to optimize the “return” (especially for flights) of a certain trip. This is not rational at all is thus to me the highest level of commitment to a program to me.

The alternative, by the way, would be status-hopping. If you several providers on the market give you similar perks as a frequent traveler, you could move between their programs and always chose the most advantageous one for you – which typically means: the program which gives you the same / equivalent status for less (financial / time) effort. This thought is rather theoretical, though. For example, if I decide to stop going for my Lufthansa Senator status, it will be practically impossible for me to keep the advantages on flights currently served by Eurowings. I could only receive similar advantages by investing into programs which are more difficult for me – or change the alliance and then use very complex and longer routes.

 

When Your Buddy is Fooling You – Changes to Loyalty Schemes

I hope you liked my idea about being committed. Maybe you also reflected about whether you are committed to any kind of loyalty scheme or company. One last thing I want you to think about again is how one-sided this commitment is. The issuer of the loyalty program can (with a certain period of notice) change the character of the scheme more or less immediately (at least in a much shorter period than your commitment would usually last). I give you a few examples in here.

Lufthansa Miles & More Changes announced for 2021.

I again want to start with the changes to Miles & More proposed by Lufthansa for 2021 – and which may now become effective (similarly?) in 2024. You don’t need to read my full posting, but what Lufthansa is finally doing here is that they changed their focus on customers:

  • They want to focus on customers who travel Lufthansa very regularly (reduction of a two year cycle to a one year one)
  • People who fly Lufthansa Group very often, even with cheap tickets, have a much better chance for a high status level

On the other hand, there are three classes of travelers, which feel to be less attractive for the German airline

  • Premium Economy passengers (which received the same revenue as cheap ticket Business Class passengers so far)
  • First Class passengers, especially compared to Business Class tickets
  • All kinds of expansive tickets like late / very flexible bookings, as the price and booking class does not matter at all any more.

In the original posting, I gave a weighing of the programs by Lufthansa and British Airways. The result was that British Airways feels to be much more attractive for premium cabin travelers than the new Lufthansa system. I will modify the posting a bit for this post and compare the weights of the old Miles & More classes with the new ones. Again, I go for a flight Frankfurt to New York. There is the same table with and without Executive Bonus, which you receive as a Frequent Traveler at Miles & More already. I norm the mileage / point return to the cheapest ticket / lowest revenue again. The distance between Frankfurt and New York JFK is 3,847 miles. There are rounded figures below:

Cabin Class

(FRA to JFK)

 Old Miles and More Old Miles and More with Ex. Bonus New Miles & More
Economy (K,L,T) 962 (1.00) 1924 (1.00) 15 (1.00)
Economy (Q,S,V,W) 1924 (2.00) 2885 (1.50) 15 (1.00)
Economy (H.M,U) 3487 (4.00) 4809 (2.50) 15 (1.00)
Economy (B,Y) 5771 (6.00) 6732 (3.50) 15 (1.00)
Premium Economy (N) 3847 (4.00) 4809 (2.50) 20 (1.33)
Premium Economy (E,G) 5771 (6.00) 6732 (3.50) 20 (1.33)
Business Class (P) 3847 (4.00) 4809 (2.50) 50 (3.33)
Business Class (Z) 5771 (6.00) 6732 (3.50) 50 (3.33)
Business Class (C,D,J) 7694 (8.00) 8656 (4.50) 50 (3.33)
First Class (A,F) 11541 (12.0) 12503 (6.5) 70 (4.67)

Typically, you won’t compare yourself to the cheapest travelers. However, it may be interesting how many (one-way) flights you theoretically need to become Miles & More Senator. The current number of status miles you need is 100,000 (every two years), the 2021 proposal was 480 status points (every year), rounded up to full flights:

FRA-JFK flights to Senator Status Old Miles and More Old Miles and More with Ex. Bonus New Miles & More

per year
Economy (K,L,T) 104 52 32
Economy (Q,S,V,W) 52 35 32
Economy (H.M,U) 26 21 32
Economy (B,Y) 18 15 32
Premium Economy (N) 26 21 24
Premium Economy (E,G) 18 15 24
Business Class (P) 26 21 10
Business Class (Z) 18 15 10
Business Class (C,D,J) 13 11 10
First Class (A,F) 9 8 7

Of course, this is a bit too artificial – if I do the same with a Cologne to Berlin flight, I might have a very different profile – but it shows you how much the profile is changing. Finally, based on this calculating (keeping in mind you should double the last column), only cheap business class ticket flyers profit from the new system (if you include Executive Bonus). Expansive Economy Class ticket flyers or Premium Economy flyers even need more flights in one year than they used to do in two.

By the way, this table shifts significantly if you go for very short intercontinental routes like flights to African and Asian destinations in the Mediterranean. In contrast to comparably long flights, which were attractive under the old Miles & More System, the program becomes attractive for people frequently flying to the Canaries, to North America or destinations like Lebanon (assuming that the prices on these connections are not significantly increasing). I am wondering if Lufthansa really wants people to fly rather short distances with them.Vice versa, that also means that if you chose Miles and More because Lufthansa and their affiliates give you the best support and service for frequent trips to Asia, you might now be facing a very sudden change in philosophy.

 

Lufthansa II – The Recalculation

In addition, Miles & More originally announced for the 2021 change that they will introduce a completely new way of dealing with your historic flight record. This is of course necessary technically to proceed with the very different points, but may lead to a complete shift in your record, e.g. in regards to achieving a lifetime reward. I feel that Lufthansa does profit here from never having communicated the Lifetime Senator rules under the current system officially. Otherwise, this might even have consequences. Both cases I illustrated show that the issuing body, here: the airline is having quite a strong position to change the character of your commitment in a comparably short notice period.

A similar re-valuation is happening in hotel loyalty schemes rather frequently, by the way. However, the hotel groups typically don’t change the nominal value of your frequent sleeper points, but adjust the number of points you need to spend for a free night. Same effect done in a different way.

 

Hilton Honors in the USA and the Breakfast

Most of the examples here are having aviation background – but finally, I feel that hotel chains even change the conditions of their programs even more often. Typically, they do it by changing the number of points necessary for award miles or other “free gifts” to the client. However, sometimes, they even change the general conditions. A few years ago, Hilton cancelled the free breakfast you receive as a Hilton Honors Gold or Diamond Member – in the USA only. Here, you now receive a credit per person and stay. In the “nice” places, the breakfast pricing is absolutely in line with the credit you receive. During my recent New York stay, though, both New York City Hilton Group places charged me significantly more than the credit (plus tax and tip, of course).

As a customer, you can react on that. Either, you change your loyalty program – which also means that whatever you invested into Hilton is lost. You could even say that this is very profitable (at least short-term) for Hilton. Customers invested a lot of commitment in the past and now give it back without reaching the really fancy (i.e. for the issuing company: expansive) things. Many people I know changed their booking behavior. They stay at Hilton Group, but go to the types of hotel which offer you free breakfast anyway. This for example applies to the two typically cheapest brands, Tru by Hilton and Hampton Inn. The revenue people make with Hilton Hotels may thus reduce immediately. Maybe this behavior is not rationale, but it still changes the customer relation.

 

Some other possible scenarios

I don’t want to go into too many details in these (partially fictive) scenarios, which might leave you  as a customer in a very unfortunate situation:

  • Airlines leaving a frequent traveler entirely, e.g. after megers
  • Management decision to significantly change the routes covered or the cabin service.
  • Political impacts – imagine you would have been collection points on Russian S7 or Aeroflot two years ago..

However, there are also changes on the customer side, which may lead to a different rational decision on frequent traveler programs:

  • Change in economic situation
  • Move to another location, where other carriers are more popular
  • Change in familiar situation.

It is very hard to estimate the risk that any of these potential impacts may happen. However a sensible rational decision should also include thoughts about these kind of scenarios.

 

What can you do?

I feel the most important point is something die-hard frequent travelers already do anyway: de-emotionalize you relation to the company. Don’t feel pushed to do something because you did a decision in the past. Don’t let the commitment become too strong and take the best, rational, ecomomic decision now (which may include your booking history, i.e. advantages you have at certain airlines or hotel groups). Proof whether the money and time you invest into a loyalty program is still worth it.

Hope this posting gave you some ideas about it. Look forward to discuss with you.

 

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