In this latest episode of the Loylogic podcast, Evert De Boer, CEO and co-founder of Fidivio, and Managing Partner at On Point Loyalty, joins Gabi Kool, CEO of Loylogic, to discuss how the full potential of airline loyalty can be realized.
In this entertaining and insightful conversation, Evert and Gabi discuss how loyalty programs, once the best kept secret of the airline industry, have stepped into centre stage of global airline economics. They delve into past stories about the development of airline loyalty, talk about present perceptions and how loyalty programs have become lucrative assets…and detail how the untapped potential of these programs can be unlocked.
Finally, Evert and Gabi look to the future and what they think the future holds for frequent flyers and airline loyalty.
Questions answered in this not-to-be-missed podcast include:
Chapter 1: Past stories: two decades of airline loyalty development (1:44 to 7:44)
- How was airline loyalty perceived two decades ago and how has this developed over the years?
Chapter 2: Present perception: lucrative assets, but still more potential? (7:45 to 20:06)
- Thinking about where airline loyalty is at today, it’s clear that loyalty programs are some of the most lucrative assets on airlines’ balance sheets and their sheer scalability, controllability and profitability make them stand-out in an operating environment that is perpetually challenging. Does this mean that programs are no longer flying under the radar like they once were?
- Program valuation is clearly extremely important when it comes to collateralizing airline loyalty programs and enabling attractive financing structures – how can programs ensure they have an accurate valuation?
- How can programs be used as part of capital allocation strategies, along the lines of a recent example such as the Apollo – Air France / KLM transaction related to Flying Blue?
- Where does profit and loss come into play? How can programs deliver higher operating margins?
- Are there any lessons that we can learn from high-achievers within airline loyalty?
Chapter 3: Future thinking: what next for frequent flyer programs and airline loyalty? (20:07 to 29:56)
- Looking to the future, what’s next for airline loyalty? Are we on the cusp of a new era in airline loyalty as organisations look to unlock the full potential? Are we going to see more adoptions of popular airline loyalty currencies by other airlines, like the recent examples of Finnair and Qatar adopting AVIOS?
- What opportunities are there for airlines to develop structures that will deliver ongoing growth?
- How do you see rewards developing over time?
- What headwinds will programs face and how can program managers overcome them?
The podcast transcript
(1:44): Evert and Gabi, you've worked with each other for longer than you probably care to remember, and have no doubt seen many changes in the airline loyalty world over the years. How was airline loyalty perceived two decades ago and how has this developed over the years?
Evert: "You're right. It is quite some time ago that I first met Gabi. In fact, he was my first boss who hired me in my first role at KLM Royal Dutch Airlines in Amsterdam, in 2000. I think on the one side, lots of things have changed. On the other side, some things are still the same. I do think that the program structures and the supporting organizational designs have changed a lot. And I think the programs are essentially more effectively run with stronger designs. And that's all for the better.
"When I joined KLM, back then, the department we worked for was called loyalty marketing. And I think, although in itself, it's a pretty good name, loyalty programs or loyalty strategy goes way beyond just the marketing component of it. It's something that we've witnessed over the last, let's say 10 years, with elements of economics and finance, and more behavioral economics and the whole psychological aspect of it coming into play.
"Back in 2001 or 2002, we were working on a potential merger between KLM and Northwest, who had launched the first transatlantic joint venture. As part of that project, it was considered to essential to combine the programs of KLM and Northwest. In the end, it didn't happen for a lot of reasons. But if we fast forward almost 25 years and see what's happening in the industry, now, with consolidation and sort of consolidation of loyalty currencies, it's interesting to see that the industry is still facing similar challenges, but at the same time, it's coming up with solutions for them."
Gabi: "Of course I have very fond memories of those 20 years ago when we were still young and innocent and full of ambition to make an impact on the world, which has been fun! I also recall from that time, you had to, as a loyalty marketer, really try to pull out all the stops to get it on the Board's agenda. Nowadays, of course, the asset value is so clear to the airline boards that the dynamic has completely changed.
"I remember that that we had one of the pioneers in the industry, Randy Petersen, who a lot of people will know well from Inside Flyer and the awards that he runs every year. I remember that we brought him over to talk to the KLM board and share, from an external point of view, the 10 recommendations that the airline should consider while thinking about loyalty strategies and its frequent flyer program. One of them was actually separating the state from the church argument that he used at the time, which basically meant considering running the loyalty program as a standalone business, spun out of the airline and treated as its own independent entity in the in the airline group. That was, in those days, a very early and challenging recommendation to make. Fast forward 20 years and you will see that, of course, a lot of different models have evolved in that space."
Evert: "If I can just pick up on Gabi's use of the term loyalty marketeer. I agree that it's a good term, but at the same time I sometimes warn my clients and colleagues, don't position yourself as a loyalty marketeer because it goes way beyond just the marketing aspect of it. In reality, it's a very interesting crossroads of all sorts of disciplines, including data analytics, operations, research, breakage, and liability management, financial optimization. I feel that we're kind of shortchanging ourselves if we call ourselves loyalty marketers, because it goes way beyond just the marketing aspect of it."
Gabi: "That's a very fair point. I think those kind of terms like member equity, the collective sum of the expected future profits of these kinds of customers. If you think about it in that way, then you also start thinking very differently in the boardroom about how do you grow that kind of significant assets of that consumer base across all your kind of touch points and businesses that you run as an airline can improve?
(7:45): What you're saying there leads us nicely into the discussion around the present perceptions and the fact that if we think about where airline loyalty is at today, it's clear that loyalty programs are some of the most lucrative assets on airline balance sheets, and their sheer scalability, controllability and profitability make them stand out in an operating environment that is perpetually challenging. Does this mean that programs are no longer flying under the radar like they once were? And how have perceptions changed?
Evert: "It's a fair statement, although I would put some nuances on it. Again, if we were to go back in time, 20 or 25 years, and I'm speaking not just about KLM but aviation or airlines in general, if you were to go to members of the board, or even the CFO or CEO of a large and medium sized airline and ask them, 'What is the value of the loyalty program? How much profit is it making?', I think they would struggle to give you a meaningful number. And the same goes for many of the shareholders and investors and analysts looking at airlines. Today, I think the picture has completely changed.
“To some extent, that is thanks to what happened during COVID-19. With all the collateralization and increased level of reporting done by airlines. So yes, that has completely changed. However, I would say that being aware of it, and doing the right thing are two separate things. If we were to ask that same question to the board or the CEO and the CFO today, I think a lot of them would have an increased knowledge and appreciation of the potential profitability of the program. But that's not to say that they have a full understanding of the drivers of profitability and the levers that they have at their disposal. Awareness, yes, but actually turning that into meaningful actions and, you know, implementing the correct strategy and organizational structure, I still think we have some ways to go."
Gabi: "Yeah, I would fully echo that. I think while airline CEOs or the boardroom know the value, of course of those FFP departments, I still see very often that they are somewhat hampered in the being a true kind of marketing company as well, to really kind of create the full value of what these FFP departments can unlock for an airline.
"Governance is key, because there are still many airlines where it's extremely hard for the people running FFP departments to be true partners to their non-air partners in the schemes. A lot of partners would sometimes struggle with limited exposure to the database, or the marketing that they can send out via the programs. There's always this kind of trade-off between how much do we communicate to a member? How do we communicate about airline related matters and offers? And how do you basically enable a structure whereby the FFP department can be a marketing bureau for the partners and the benefit of the members? That comes with elements like setting up the right opt-in and opt-out type structures for members. Rather than having one opt out for any communication that goes out for both the airline and the frequent flyer program, and for the members, you need to put a different kind of infrastructure in place, that so if somebody decides that they do not want to get more offers or content from that particular program, that they are not lost to the larger airline group. And so there are certain elements that that often hamper the true potential of the commercial elements of what such an airline loyalty business really can be."
Evert: "Just to add to that, I think you would be surprised about the number of airlines that we encounter, where revenue management still considers reward travel as non-revenue. So they put it in the same bucket together with travel agents or other incentive categories, and essentially don't attach any monetary value to miles being redeemed, which, in our view, doesn't make any sense. But that's just one sort of very tactical example. I think there's lots of headroom to grow and fully appreciate the value and then institutionalize that appreciation in the actual algorithms and financial reporting, and not completely disregard it."
(12:35) Related to that is program valuation, which is clearly extremely important when it comes to collateralizing airline loyalty programs, and enabling attractive financing structures. How can programs ensure they have an accurate valuation?
Evert: "I agree with what you said, and valuations are important. And clearly they play an important role in any potential collateralization. However, I think they are one piece of the puzzle. I think the bigger puzzle is around understanding what is the value expressed as a P&L and then have control over it? How do we influence that P&L? Then I can take the P&L and apply it in my capital allocation optimization strategy. Getting the valuation right is important, but probably even more important is understanding, okay, what's the opportunity? What levers can I pull or push to influence the performance of that segment? What are the underlying trade-offs?
"Collateralizing is basically using the program as collateral to raise financing. That's one thing that you can do, but there's other avenues as well. But if you don't have the full overview of the landscape, you'll never be in a position to judge the competing alternatives. So we say first, establish a proper view of how is the business or the segment or the unit performing today, and how could it perform in the future? And what are the underlying trade-offs that you are faced with?"
(14:04) How can programs be used as part of capital allocation strategies, along the lines of a recent example of the Apollo Air France KLM transaction related to Flying Blue?
Evert: "I think, basically, if you have a well run program, it's an asset within your toolbox that you can use to raise financing. The Air-France KLM example is indeed a very recent one, where basically they got an external investor to buy bonds on their separated loyalty business, and that allows them to treat it as equity under French IFRS rules. Well, clearly, I am no expert on French IFRS rules but from what they have disclosed, that seems like a good solution for their problem.
"I think if we go back in time, Avianca first used this tactic whereby they used the loyalty program to raise financing instead of the airline. And by doing so they were able to exploit much favorable terms of credit. In other words, the coupon or the interest they have to pay on the on the loan was much less than if they had used the airline. The model is out there. It's tried and tested.
"I guess the bigger picture here is that airlines continuously need to raise finance. And because of the different characteristics that a loyalty business represents, if there is an efficient degree of separation, you can exploit some of those characteristics to your benefit, and basically run a more effective capital strategy."
(15:55) Gabi, if I could bring you in here, where does profit and loss come into play? And how can programs deliver higher operating margins?
Gabi: "If you've got to break down a P&L in a simple way, you would sell miles at a certain price to non-air partners at a certain rate per point. On the other hand, you've got a cost per point when the actual redemptions are taking place. So if you can, in a very simplistic way, think about how you can increase that spread by also, for example, lowering the cost per point on the redemption side, then by definition, you will increase your operating margins.
"There's an interesting trend that we foresee around quick micro redemption options. For example, if you think about using your miles or your points for sweepstakes or raffles at a much lower cost per point, but still do it in a way that members enjoy and find fun, then you can drive a certain portion of the miles redemption into that redemption bucket, that could have an impact on the overall weighted cost per point, i.e. a lower weighted cost per point, which of course would improve your operating margins, and also technically allow you to reclassify your outstanding points liability against that lower weighted cost per point across all redemption categories.
"There are all kinds of levers to play with. But what is often forgotten somehow is the impact that redemption cost can have in this whole mix, because that's still where 70% of all the costs are sitting in these kinds of programs. When we look at the P&L side, that would be an area of focus for me."
(17:41) Are there any lessons we can learn from the high achievers within airline loyalty?
Evert: "Ultimately, what drives success? If we have to boil it down, it's utility in the currency, meaning it's easy to earn, there are no complex terms or conditions. It's intuitive. It makes sense, members get it and will go out of their way to get their hands on the points or miles or whatever.
"I think a program can achieve that when the program can move with speed and precision. And what I mean by speed and precision is that you run a loyalty business that puts out an attractive currency, effective partnerships, it can move rapidly, it's not bogged down by IT issues. Precision is important because it implies having control over the performance of the business if I pull this lever, this is what will happen to my yields. If I pull that lever, this is what will happen to my cost per point to my breakage. If we look at programs, or loyalty companies that we think are very successful, I think these are the common characteristics."
Gabi: "I think to build on Evert there, we are talking about currencies here, airline miles are currencies. Every currency lives or dies with trust in that particular currency. The predictability and not a lot of unexpected devaluations all the time of that currency and the fact that members and partners can rely on the airline program as a reliable partner who will do anything to try to protect, within the economic kind of environment, the value of the currency, that is also a very important element in my view."
(20:07) If we look to the future, what's next for airline loyalty? Are we on the cusp of a new era in loyalty as organizations look to unlock the full potential, are we going to see more adoptions and kind of popular airline loyalty currencies been picked up by by other airlines such as the recent examples of Finnair and Qatar adopting Avios?
Evert: "As you rightly point out, Finnair and Qatar Airways are adopting or have adopted Avios as their currency whilst retaining their own program. I think this is a great example of showcasing or demonstrating, again, the utility in the currency. I would speculate that these airlines considered the various alternatives and ultimately made a decision to join a very strong currency that offers a lot of utility. So I think that makes total sense.
"Coming back to my earlier point, building on the increased awareness across all the different stakeholders and constituents in the system, I think airlines will continue to come up with better strategies and stronger content for their programs. I think IAG is an interesting one. They talk a lot about IAG loyalty, they've set it up as a separate segment. And they're really trying to educate the market and the analysts about how this is a very exciting business that we have here. It wouldn't surprise me if, at their upcoming capital markets day, they will talk a little bit more again about their loyalty business. And I think others are sitting up and considering, 'Hey, you know, what should we be doing? Should we be looking at a P&L? What is our P&L? How do we optimize it? And then if you have the P&L, how do we then communicate that to the market?' I think there's lots of interesting things that will happen in years to come."
(21:57): Gabi, what opportunities are there for airlines to develop structures that will deliver ongoing growth?
Gabi: "I expect the largest growth is in the space of the frequent flyer programs being present in the daily online shopping lives of their members. If you look at the P&L of frequent flyer programs, co-branded credit cards have counted for ages as the most important accrual partner in the program. I do think there's a similarly large opportunity existing in the space of affiliate marketing connected to the online spend of the members, but not in a way that it has been done for the past two decades.
"Affiliate marketing, as a customer journey, has always been extremely clunky, I would say, for users to go to an airline loyalty website, click on a link, go from there to kind of a shopping portal or a website and then basically wait six weeks before their points or miles were credited. And of course, nobody shops that way. I'm predicting that if you look at a program Flying Blue, and we are involved as Pointspay as the Loylogic Group to help them with their new venture of Flying Blue plus, which is entering into the affiliate payments space, by having their own payment button implemented on leading websites in France and the Netherlands in this particular case. I think there's an enormous amount of accrual Income to be generated there for the airline. At the same time a lot of value can be created for those online merchants by connecting them to this affluent consumer base."
(23:34) Gabi, sticking with you, it would be wrong to not discuss rewards in more detail here. So how would you see rewards developing over time?
Gabi: "I think it has been a quiet, kind of stable base for a lot of programs, but there's an opportunity to reimagine how these rewards shops should look and the content that they should offer.
"Coming out of COVID-19, a lot of load factors are higher, airlines have rationalized their capacity, and as a result, reward seats are harder to get than prior to COVID. And you see some kind of pushback in the media, either in Australia or in in the US last week with Delta, you see kind of a lot of stress in the system on the flight-related reward. So, I think non-air rewards have to play a more significant role.
"Now, the question is, how do you structure that in a way that the cost per point, if this means cash going outside the ecosystem of the airline groups into third party type rewards offerings, in such a way that if that cash out happens that you benefit from that as airline loyalty program with a lower weighted cost per point? I think the rewards require a lot more imagination, having different brand partnerships in place to have unique content in the reward shop, which might not be easily found elsewhere, like early access to new releases or unique offers, but also presented in a much more memorable user experience than what it has been for the last few decades.
"If you look at loyalty programs in the fast moving consumer goods industry, they are very often run by very brand focused marketeers, I would say, and you will see that rewards shops are truly an extension of the actual brand positioning of that particular brand. I think it might be interesting for frequent flyer programs to also really think through what should such a brand extension mean, in light of my brand, what I stand for. We've also chasing a new dynamic around sustainability, so what kind of brand extension would you like that reward shop to be? So I do foresee that it's time to reimagine that part.
"Another element that could be interesting to think about is cash as a redemption offer, which of course, has always been popular in any kind of loyalty offering. Traditionally, airlines have been quite reserved in offering that, but we do think that there's probably a space for having virtual rewards cards as an alternative to gift cards that can be then embedded in Apple Pay or Google Pay or Samsung Pay wallet. But again, at the lower kind of cost repoint compared to the regular rewards, the flight rewards. And this probably would not be something that I would let loose on the entire FFP database. I more see this as an extra benefit for elite members who will redeem their miles anyway. And then you might want to position that more virtual cash element only for that segment. So these are just some of the hypotheses were having what we might see in that space."
(26:49) To wrap up the discussion, what key takeaways can you give anybody looking to maximize the potential of their airline loyalty program?
Evert: "I think I'll repeat myself when I say that, in order to truly benefit from the potential value that a loyalty program can bring, it's critical that you understand how it's performing and what are the levers that you have at your disposal to influence that performance? I think that's critical.
"I do want to mention two headwinds that I think are important to talk about. The first one is kind of building on what Gabi said, increased pressure in the system on award availability. I think that's true. And I think, you know, the most successful programs will develop this skill to optimize or revenue manage access and pricing to rewards. In other words, you need to have a strategy that determines who gets access to what flight rewards at what price, and basically make sure that that's done in a in a smart way. So your best members get the best value. And yes, there is a role to be played for non-air because it can bring down cost per point, as well as act as a release mechanism for built up pressure.
"The other thing that I think it's important to mention as well, is that I think we're going to see increased regulation and legislation around loyalty programs, specifically in Europe. I think frequent flyer programs, that name itself, is enough to attract a lot of attention in the very near future. And I suspect that more and more regulators and legislators will turn their attention to it. I think it's inevitable, and it's up to the industry to come up with an appropriate response that makes sense for all involved stakeholders."
Gabi: "I think another potential headwind to be mindful of, is the continued pressure on interchange remains a risk for the frequent flyer business model. So again, diversification, or by focusing on tapping into, for example, online commerce might be an appropriate strategy.
"To wrap up this call, I would urge everybody to reimagine what the future could look like, taking all of these macro factors into play, but also making sure that the FFP department is truly positioned and enabled to function as a real marketing company for its partners within the airline ecosystem. I think that's a key takeaway for from my side, talking to a lot of FFP managers lately.”