The Brancatelli File



May 18, 2006 -- The Big Six have relentlessly promoted the fact that this month marks the 25th anniversary of frequent flyer plans. After some initial missteps, American AAdvantage and its progeny have developed into gigantic moneymaking machines for the legacy airlines. And since the terms moneymaking and legacy airlines are almost never used in the same sentence anymore, the Big Six can be forgiven for some of their hyperbole.

Of course, business travelers can be forgiven if they don't share the excitement. Frequent flyer programs stopped being fun for frequent flyers a long, long time ago.

After 25 years of tweaks and changes, the programs are hard-to-use, harder to understand and laden with so many rules, regulations, fees and loopholes that they barely resemble the earliest generation of what once seemed like loyalty programs. The folks who live to game the system or earn zillions of miles for buying pudding may still find the hunt exhilarating. But for those of us who earn our miles the old-fashioned way--by flying on planes--and expect airlines to deliver reasonable rewards for our brand loyalty, the frequent flyer programs are now at least as detestable as the Big Six fare structure.

Some of us think that frequent flyer plans, like the fare structure, are irretrievably broken. Others, like Steve Grosvald, think the programs simply need to be rethought and recreated for the 21st century realities of air travel.

"After 25 years, an overhaul is in order," he says. "Today's program economics are not sustainable over the long term. The programs are hurting, but I really do think that there's a system out there that could ultimately benefit the airlines and the customers."

You should listen when Grosvald talks about frequent flyer programs. He was intimately involved with the invention of two of them: He directed the development and launch of United Mileage Plus and later, as staff vice president of marketing programs at Continental, played a key role on the team that developed OnePass. Two-tier award charts--restricted awards for lower mileage levels and unrestricted awards for a higher price--were his idea. The first credit card that ever offered frequent flyer miles was launched and marketed by his staff when he was running OnePass. He has consulted on frequency programs and loyalty plans for airlines around the world. And if he says that they can be fixed--and even be fun again--then I believe him.

"What I've been thinking about in the last year or two is a dramatic redefinition of the basic architecture of the programs," he says from Tulsa, where he runs Grosvald & Associates, an airline marketing consultancy. "Rather than credit people for the distance they fly, airlines should credit customers on the basis of fares they pay. That's not a unique concept in itself. Airlines have experimented with it from time to time. But with current economic conditions, a revenue-based system is a better way to keep the programs viable for both airlines and customers."

Grosvald can recite a torrent of reasons why this change is in order--a dramatic decline in the number of available seats, rising fuel costs and the increasing divergence between the mileage flown and the fare paid are just a few--and his calculations reflect the complicated nature of frequency programs. But his approach is always based on something he first told me 20 years ago: Frequent flyer programs are, first and foremost, marketing and advertising vehicles that must be win-win propositions for airlines and customers.

So how would what Grosvald calls a "revenue-based mileage accrual system" work? For starters, he explains, it's important to realize that retail and credit card loyalty-reward plans offer customers a return of 1-2 percent. By contrast, the frequent flyer programs are more erratic propositions. Sometimes they offer returns of less than a penny, a miserable deal for flyers. Other times the reward balloons into the 30 percent range, very bad economics for the airlines. In between those two extremes are a wide range of fees, rules and traps that complicate the programs and make them less fun to play, which, of course, makes them less useful to airlines.

Grosvald thinks basing mileage accrual on dollars spent can help eliminate the extremes and make frequent flyer programs 2 to 5 times richer than the credit-card or retail-reward plans. "Revenue-based accrual can also embrace elite-level bonuses and periodic promotional bonuses. And it can accommodate all of the existing non-travel partners," which long ago transformed frequent flyer plans into what Grosvald calls "multi-sector travel and retail programs."

How would the award charts change? In Grosvald's mind, a "revenue-based" award chart could still offer both capacity-controlled and unrestricted travel awards and merchandise "with the objective of providing frequent flyers a better return than competing consumer-reward programs."

When Grosvald describes his ideas--with admirable energy and all of the enthusiasm that used to surround the first generation of frequent flyer plans--I can't imagine why honest-to-goodness business travelers wouldn't be the biggest supporters of his approach. After all, we're getting hammered in the current environment: Airlines not only make the cheapest seats almost impossible to get, but they are also running out of seats at the unrestricted levels. And desperate to squeeze every dime from the programs, carriers are pummeling us with fees and have resorted to letting people buy their way into elite status, a practice most regular flyers detest.

"If we started with a clean sheet of paper and designed a program that met the needs of today's airlines and today's customers, I'm convinced that it would look a lot like what I'm talking about," Grosvald says. "I'm not saying mine is the only idea that will work or even that it's the best idea, but something along these lines needs to be done."

As far as I can tell, there are only two roadblocks to what would essentially be Grosvald's fresh start for frequency plans. What would airlines and frequent flyers do with the bloated, complicated and ultimately unsatisfying plans that currently exist? And how can the cash-strapped and timid Big Six be convinced to change gears before they completely destroy the metaphoric goose that has laid them so many golden eggs?

Grosvald figures the first problem is relatively easily solved. "Customers can choose what to do with the miles in their existing program," he explains. "They could use the miles against the existing award charts for a period, of, say, 12 to 24 months. Airlines could also create a conversion path to the new program."

The second issue--convincing the majority of U.S. and international airlines to make fundamental changes in how the plans function--will take more effort, Grosvald admits.

"What's required is significant creative development of marketing and communications, tactics and strategies internally. By necessity, any changes would have to include input from the financial, legal and information-technology constituencies inside an airline. They all have valid contributions to make and concerns that must be addressed. But the programs must be designed by the sales and marketing folks. They are ones who know and understand what motivates preferential support from customers."

Given that Big Six carriers haven't recently been known for their creativity or willingness to address a problem until long after the situation is insoluble, I asked Grosvald the obvious question: Does he really expect the Big Six to turn the page on 25 years of history and adopt newer, better and more timely ways of doing frequent flyer programs?

"The business model of frequency programs was based on the economics of 25 years ago and they were the most successful thing we've ever done in terms of marketing," Grosvald says. "And no one should ignore the huge profits that airlines have made by selling miles. But a new model is essential if the airlines are going to be able to continue to offer programs that include the desirable recognition and rewards customers want, especially those who earn elite status by flying."

Copyright 1993-2006 by Joe Brancatelli. All rights reserved.