Southwest Airlines on March 1 will implement a long-awaited major overhaul of its frequent flyer program that has been years in the making, creating a new system that not only is aimed at increasing the program’s appeal to business travelers but also ties rewards to how much a customer is willing to pay for a ticket.
The new system replaces a program that awards credits for each one-way trip, for the most part without regard for flight distance or fare paid, and offers awards without regard for distance or cost. The old system also makes the credits expire after two years and includes some seat availability restrictions and blackout dates.
The overhauled Rapid Rewards program effectively awards customers with unexpiring “currency”—weighted toward customers paying higher fares—that they can cash in for any available seat on any domestic flight at any time. Redemption requirements also are weighted.
Southwest could find itself leading the way in changing how frequent flyer programs are structured, predicts Jay Sorensen, president of U.S.-based IdeaWorks, which advises airlines worldwide on ancillary revenue and loyalty marketing programs.
Sorensen says Southwest did not hire IdeaWorks to help with its Rapid Rewards overhaul. Nonetheless he sees the program as validation of a trend IdeaWorks predicted in late 2008: that mileage-based frequent flyer accrual will slowly be replaced by points tied to the fare paid by the passenger, and that mileage-based rewards will be replaced by market-priced awards that let members spend point balances to buy reward travel.
Some airlines already had moved in that direction and most new ones do, with carriers such as Virgin Blue, Vueling and Virgin America linking accrual to the fare paid by passengers and offering market-priced awards. But Southwest, for its sheer size in the market and the extent to which it has tied points to fares, could have a bigger influence if its program proves successful, Sorensen believes.
“Mileage has nothing to do with the value of the customer,” Sorensen says. Airlines used it as a proxy when frequent flyer programs were launched, because the first revenue accounting systems joined up revenue to the ticket, not the reservation. That barrier does not exist for most carriers anymore, but they are “fully invested in miles for everything they do," he says.
Southwest, on the other hand, had ample motivation to make big changes. Its Rapid Rewards program was created in 1987, when it was a leisure carrier serving primarily short-haul routes. It since has grown into a nationwide carrier with more medium- and long-haul routes than it used to have, carrying more domestic passengers than any other U.S. airline and making a big push to increase its business traveler appeal.
The airline already has put its flight availability and fares on GDSs, expanded its corporate sales department and created products to offer priority boarding and security lane access. It began service to congested business-market airports it once would have avoided, such as New York’s LaGuardia, and is installing inflight Wi-Fi.
But Southwest Chairman, President and CEO Gary Kelly says non-Southwest customers told the carrier the No. 1 remaining thing it could do to attract more business travelers would be to improve its frequent flyer program.
“It’s one of the centerpieces of our revenue-generating strategy going forward,” Kelly says.
The overhaul also should enable the carrier to raise more revenue in other ways, such as with more loyalty program partnerships, higher utilization of the branded credit card, more incentives to purchase a higher fare and more loyalty, the airline believes. Kelly says the airline expects the new program to add hundreds of millions of annual revenue for the airline eventually.
The risk, Sorensen notes, is that the program's structure could be confusing. Under the new Rapid Rewards, members will earn points based on the fare purchased. Southwest sells tickets in three fare families—Wanna Get Away, Anytime and Business Select.
For the lowest fares, Wanna Get Away, travelers will earn six points for every dollar spent. For the higher Anytime fares, they will get 10 per dollar. And for the highest fares, Business Select, they will get 12 per dollar. Loyalty program members who fly enough to attain a higher status (A-List or the new A-List Preferred) will get bonus points, enabling points earnings as high as 24 per dollar. Members also will earn points with purchases made on the branded credit card.
To redeem points, customers will use them as cash for purchasing tickets on the website. For Wanna Get Away fares, 60 points will equate to one dollar. For Anytime it will be 100, and for Business Select 120. After conducting a flight and fare search, customers can toggle to a matrix showing the cost in points for the same flights, so customers will not have to make the calculations themselves.
Customers will be able to use the points to buy seats on any flight at any time, as long as there is an empty seat on that flight available for sale. There will not be a fee for booking with points, and points will not expire as long as the loyalty program member purchases a ticket or earns points in other ways during a two-year period.
“We’re looking at this as an extension of currency,” Kelly says. “It works just like money.”
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