Airports - the new frontier for travel loyalty servicesNewsBy Viewpoints | January 9, 2012Share This article was originally published on NB: This is a guest article by Sanjai Velayudhan, senior consultant for loyalty programmes at ITC Infotech.Though loyalty programs in various forms have been in existence for a long time, credit for popularizing and institutionalizing them goes to the airline industry.American Airlines initiated the advent of well-designed and structured frequent flyer programs (FFP) in the early eighties.The success of AAdvantage spawned many other programs that number close to 150 today. Originally meant to increase stickiness to the airline, the accrued miles earned were meant to be redeemed for free flights.In a hyper-evolutionary mode, the FFP rapidly transformed into coalition loyalty models that enabled the participation of other allied businesses.The partner-rich program model created a large accrual and redemption ecosystem for the loyalty member, presented enhanced revenue opportunities for the airlines and increased business for partners.This has resulted in the creation and sustenance of one of the most viable loyalty models. Some of the prominent FFP partners include credit card companies, rent-a-car companies, hotels and a host of retailers.Today, this potent combination has ensured that all accruals happen only from flight-related activities.An authoritative study (Web Flyer Group) has indicated main sources of accrual transactions-43% flight, 25% from credit card transactions and hotel stays.Assuming these figures to be close to reality, then the rest of the 32% should come from retail, restaurants and numerous other partners. Substantial amounts of points are accrued through non-flight activities.High accrual velocity of miles vouches for the popularity of frequent flyer programs. It has been estimated that in the last 25 years, more than 19 trillion miles have been awarded to FFP members.However, despite its popularity, these programs have also been characterised by low redemptions and high breakage ratios. While breakage is booked as revenue and helps in reducing liability, in excess it becomes self-defeating.Some of the airlines we worked with have indicated that they are striving towards 75-80% redemption (which is not an easy task) and would like to limit breakage to 20-25% which was considered as legitimate revenue.It has been an accepted fact that earning ‘margins’ on redemptions is a sustainable model than seeking breakage.The primary factors contributing to increased breakage are low exchange value of miles accrued, fewer number of redemption seats and lack of alternative and attractive redemption choices.It is estimated that there are trillions of unredeemed miles in the member accounts (it is estimated to be between 14-15 trillion). Redemption velocity may be a critical parameter to assess the efficacy of a frequent flyer program.The airport opportunityFor FFPs, airports are logical loyalty partners that help in accelerating redemptions.This is primarily because, despite having distinct business models, airlines and airports are intrinsically linked together and are also reliant on each other for operational efficiencies.Responding to changing times, airports are also being unshackled from governmental control and its management is becoming more privatized. Increasing competition among airports has also triggered the need to treat airline passengers as customers especially frequent flyers who spend considerable time at airports.The airports today focus on offering a positive, integrated passenger experience. Extensive revamping and expansion of airports with focus on not just function but form is a sign of changing times.The increasing popularity of low cost carriers (LCC) and increasing number of small airports catering to short-haul flights have offered tough competition to larger airports. Contemporary passengers have the choice of not only choosing airlines but airports too.Revenue pressures have also pushed airports to seek ‘non-aeronautical’ revenues. They have metamorphosized into an open format to survive in a marketized rather than subsidised environment. Contemporary airports are no longer utilitarian hubs geared only towards handling passengers and baggage.By launching or sponsoring airport-specific loyalty programmes like Thanks Again (JFK, EWR & LGA airports), Privium (Schipol airport), Via-Milano (Milan airport), World Miles Program (British Airports Authority) etc, airports have indicated that they are becoming more customer-centric.These loyalty programs are predominantly driven by technology and help airports to identify passengers, understand their needs and customize travel experiences. They also provide the scope of earning substantial non-aeronautical revenues by presenting enhanced retail opportunities to travellers.Like new airports that have incorporated substantial retail space in their architecture, existing airports not initially designed with retail business in mind are also adding more non-aviation areas.Breaking new groundExamples are Frankfurt airport with 30,000 sq m (570 squre meters per million passengers), Heathrow Airport with 68,750 sq/m (1,050 sq/m per million passengers) and Vienna International Airport with 11,500 sq/m (580 sq m per million passengers).The inherent need for airports to increase non-aeronautical revenues mainly through retail sales combined with the compelling need of airlines to provide credible redemption choices makes a loyalty partnership between the two entities a ‘natural’ one.The psychological convergence of airports and airlines makes passengers more amenable to making loyalty transactions within its precincts. Redemptions can be facilitated via vouchers or by enabling instant earn and burn through multiple channels including mobile phones.Passengers would only be happy to redeem their miles for preferential parking, spa services, or indulging in a bit of retail therapy as they can subsidize spend through miles which they might otherwise not have used.Brand value of airlines would also go up as the redemption choices need not be dominated by the already scarce redemption seats. It’s a win-win situation for passengers, airlines and of course, airports.NB: This is a guest article by Sanjai Velayudhan, senior consultant for loyalty programmes at ITC Infotech.NB2:Image via Shutterstock.