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The dynamics of frequent flier and other loyalty programs are changing on several fronts. For
airlines, the recent changes have caused their strategic control over the programs to be in
danger of slipping into the hands of credit card companies that serve as intermediaries
between airline and customer. As this market evolves, companies seeking to capture more
value will have to deepen their understanding of customer behaviour and refine how they
segment customers. For each meaningful segment, companies will then have to crisply define
the currency of their loyalty program, so that customers give them repeat business thats
profitable in the long run.
Within turbulent, highly competitive marketplace, airlines are finding it increasingly
important to respond both quickly and effectively to changing patterns of customer demand.
Who are airlines' customers and what are their needs and aspirations? If airlines don't know
the profitability by customer, how can airlines be sure airlines are serving their best
customers and applying their value to all business decision? If airlines had the means to do
both, profits would soar. Not only would airlines become more efficient, the shareholders
would see an investment in their only real source of revenue, the customer, and the
meaningful profits that result. With so few new revenue opportunities, do airlines need more
aircraft? Or instead should airlines consider a customer relationship management program
that uncovers and maintains shareholder value. Airlines need to know and understand those
customers who contribute the most to their bottom line.
Airlines in today's global marketplace are faced with increased competition and shirking
profit margins. The challenge is sustaining and creating profits in the face of heavier
competition and product homogenization. The opportunities are in managing customer
relationships, controlling costs and applying customer profitability to the entire business.
Competition in the airline industry is intensifying as low-cost carriers continue to gain market
share. Today, airlines are turning their attention back toward the customer after years of
focusing on cost reduction. However, customer relationship management (CRM) technology
is no longer a competitive differentiator. The ability of airlines to sustain long-term revenue
growth and achieve profitability hinges on moving beyond traditional CRM to implementing
comprehensive and integrated loyalty management solutions that support the entire customer
travel lifecycle.
This project study will involve studying the changing phases of customer involvement and
changing models of Frequent Flier Programmes (FFP) and other loyalty programmes in theAirline Industry.
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Loyalty programs are structured marketing efforts that reward, and therefore encourage,
loyal buying behavior behavior which is potentially of benefit to the firm.
Loyalty programs have been used in commerce for many years, originating in Germany
where price based competition was disallowed by governmental restrictions in certain
industries. In the 1950s, S&H Green Stamps rewarded grocery store and gas station
customers with stamps redeemable for appliances and other merchandise. The modern day
loyalty program was launched in 1981 by American Airlines, and was quickly duplicated by
other airlines and other hospitality industries including hotels, car rental companies, and
credit card organizations.
Airline loyalty programs, or frequent flyer program (FFP), are the harbingers of todays
sophisticated CRM programs. FFP membership has grown faster than growth of airline
industry itself. However air travel, as well as its loyalty programs has now become a
commodity. As a result, airline loyalty programs have drifted away from their original
purpose of promoting loyalty for an airlines brand, to being run as independent profit
centers.
The majority of airline frequent flier miles are now earned outside an airplane, by frequent
buyers than frequent flyers. Airline miles are earned for the use of credit cards, hotel stays,
car rentals, retail purchases dining out, and even for mortgage and real estate agents. A result
of this broadening of earning opportunities is that three times more airline miles are being
generated than are being consumed. This is a testimony to both the programs success as well
as failure, in not giving enough options to members for redeeming miles. Airlines usually
allocate limited seats per flight for redemption of award travel, giving preference to revenue
space over free tickets.
The airline industry has reached a crossroad. While on one hand fuel and labour costs
continue to be key issues, the phenomenal growth in passenger traffic has created new
opportunities for growth. In this highly competitive industry, while operational efficiency
helps reduce costs, customer satisfaction is the key to market leadership and sustained
profitability in the long term. Airlines have realized the importance of having happy
customers and are therefore focusing on customer relationship management (CRM) as a tool
for managing customer relationships. Unfortunately, in many cases, they have failed to
recognize CRM as a holistic strategy, instead viewing it as synonymous with their frequent
flyer programs.
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In order to manage the customer more effectively across all lines of service, airlines must
change their approach to CRM in a number of ways:
Customer segmentationAirlines need to recognize that mileage-based segmentation is
inadequate, whereas value-based and needs-based approaches can help guide investment
decisions and drive greater insight into the needs of high-value customers.
CRM initiative developmentIn order to differentiate themselves from the competition,
airlines must abandon a fast follower approach to CRM initiative development, in favor of
investing in initiatives with a high return, which respond to the needs and desires of their own
customers.
Organizational design and managementAirlines need to instill a service mentality in
their employees, empowering them with a complete view of the customer and clearly
articulating the employees role in the CRM strategy.
By taking steps to implement a truly consumer-centric approach to relationship management,
an airline will be better positioned to acquire, develop and retain high-value customers.
Through the development and implementation of customer analytics and decision-support
technologies, airlines can begin to use customer information not only to differentiate service
levels based on customer value, but also to drive crucial operational decisions. In the end, an
airlines CRM program becomes a platform for achieving both near-term operational
efficiency and long-term relationship management and growth.
This study aims to answer some questions like
How can the airlines balance between earning revenue and retaining the loyalty oftheir existing customers through FFP?
How can they implement best practices of CRM in spite of the flight centric natureof an airlines legacy IT infrastructure?
How can an airline strike an optimum balance between revenue managementobjectives of maximizing flight revenues versus retaining the loyalty of existing
customers, and meeting the redemption expectations of their loyalty club members?
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The study of CRM practices would not be confined only to airlines but would also involve its
users. It will involve an overview research of the Airline industry its CRM practices for e-
CRM initiatives also.
To understand and analyze the CRM practices employed in Airline Industry and also
Frequent Flier Programme (FFP) which in turn helps to enhance its business processes.
!
Airlines pioneered a new era in the travel industry when they created frequent-flier programs
in the 1980s. Decades later, these programs have grown in size and complexity and are
ubiquitous throughout airline, hotel, and travel retailer segments.
Today, more than a billion people are enrolled in what now are referred to as loyalty
programs. Airlines alone possess more than 125 million customers who have signed up to
receive free travel, upgrades, favorable treatment, and other rewards in return for patronizing
a particular carrier. Indeed, airline points have become the new currency in travel, with
more than 1.9 trillion pointsworth more than US$570 billioncurrently in circulation.
As loyalty programmes have become commonplace, airlines have struggled to differentiate
their offerings from the offerings of other companies. Many have formed partnerships with
other airlinesthe OneWorld and Star alliances, for examplethat allow customers to
collect points from any alliance partner and spend them on the program of their choice.
Airlines have also developed extensive networks through cross-industry partnerships that
enable travelers to collect airline points for hotel stays or from using jointly branded credit
cards with banks. Additionally, airlines have created multitier loyalty programs to provide
different rewards as well as incentives for customers to upgrade to the next tier.
More Choice, Less Loyal
The original loyalty programs, pioneered by airlines in the 1980s, relied on air miles to
reward customers. Reward miles became the de facto currency that customers earned by
traveling and burned by redeeming for free air travel once they had accumulated certain
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threshold mileage amounts. Hotels and car rental firms soon followed the airlines. Mileage
rewards became the common currency of the realm and promoted travel that many customers
might otherwise not have been willing to buy.
Airlines found value in several characteristics of the loyalty programs:
They helped shape customers travel decisions through the incentives of the air milesand rewards.
As airlines distributed rewards, loyalty programs became an opaque channel fordistribution of their marginal capacity.
Airlines and credit card intermediaries benefited from the float of miles and breakageeconomics (the difference in customers collective rate of earning and burning the
points).
Credit card companies entered this market as intermediaries on the earn side of the equation,
allowing frequent flyers to earn reward points by using credit cards for purchases. To do this,
credit card companies bought miles from airlines and other enterprises for cash. Customers
would then burn points to claim free travel rewards from the airline. Today, revenues from
credit card partners constitute the great majority of major airlines total loyalty program
revenues, according to analysis by Mercer Management Consulting. The top three North
American airlinesAmerican, Delta, and Unitedeach derive close to $1 billion in revenues
from their loyalty programs, from more than 50 million members each. The programs
encourage customers to
earn and burn mileage
points in order to sustain a
cycle of repeat purchases.
They also promote use of
credit cards and other
partner business, so that the
airlines can sell more miles
to their partners (Exhibit 1).
In recent years, with more
planes flying close to full,
the availability and,
possibly more importantly,
theperceivedavailability of
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reward seats has declined. Among airlines and a few other cases, the float or overhang of
outstanding reward points has reached exorbitant levels: Out of the roughly 2,000 billion
miles awarded, only about 500 billion have been redeemed. As a result, customers have been
turning to credit cards not only for earning miles but for burning them as well. In a recent
WebFlyer survey, 81% of respondents agreed that loyalty programs have gotten worse in
rewarding loyal customers over the past 25 years. Not surprisingly, customers perceived
value of the currency is declining; in the same WebFlyer survey, 93% of respondents agreed
that loyalty programs are not serving loyal customers, but are primarily a marketing tool.
This attitude has a direct impact on how credit card companies and their customers value a
point. If customers put a lower value on a certain reward currency, they have little incentive
to use the associated credit card to earn that currency. Customers have been demanding more
options, and credit card companies are pressuring airlines to boost the perceived value of
their points by providing more options to burn mileage (Exhibit 2).
American Express has reacted to the perceived decline in reward currency values. In a recent
overhaul of its Membership Rewards program, Amex is making two significant changes:
first, making it harder to earn points, especially double points for everyday purchases at
grocery stores and gas stations, in order to reduce customers earn velocity; second, shifting
customers earn options to new ones that are more attractive to desirable customer segments,
such as those who earn points at the Gap and Target versus those who earn at grocery stores
and gas stations. Some programs have capitalized on the demand for options. For instance,
Hiltons HHonors program offers redemption options including merchandise and tickets for
airlines, rail travel, theme parks, and cruises. Along the way, then, the two core objectives of
airline loyalty programs started to diverge. Providing more options has clashes with the
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airlines core goal of retaining customer loyalty. Consequently, despite the flow of payments
from credit card companies to airlines, value has in fact been migrating to the credit cards.
While credit cards already offer ways to earn points, they are responding to customer demand
for more burn options, particularly for those customers whose marginal utility of reward
points, beyond a threshold, is low. These include customers who cannot find travel rewards
they would consider meaningful; those who would rather pay for their travel rather than deal
with the hassles of award redemption; and those who have earned more points than they can
ever use. Hence the tag line for the American Express Membership Rewards program:
Because not everyone lives to earn airline miles. The program lured customers who did not
want travel rewards, offering to redeem earned miles for other rewards. By expanding their
intermediation, the credit card firms are diluting the travel loyalty programs influence over
travel purchase decisions. Capital One has made perhaps the most aggressive push into the
airline loyalty space with its No Hassle Miles cards. Customers trade 15,000 miles for
flights worth up to $150, 35,000 miles for $151-$350 flights, and so on. Why would this be
attractive to some customers? Airlines may or may not be able to fulfil an award trip to
Hawaii, depending on seat availability. But with the credit cards, by contrast, there is no
guessing, because credit cards buy the ticket outright. In return for removing this uncertainty,
customers pay a transaction fee.
Coin of the Realm
Its helpful for executives to think of the loyalty market as a form of currency market.
Airlines, hotels, credit cards, and other program owners all have their currencies floating in
consumers wallets.
Some currencies are
turning out to be
stronger than others.
Starwood, the hotel
and resort chain, has
engineered a higher-
value currency than
have airlines or other
hotels. Customers
realize that their
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implied returns vary across loyalty programs, and they are increasingly choosing one
currency over another (Exhibit 3).
In real monetary markets, there have been periods when one reserve currency loses favor and
the world shifts to another reserve currency. During the era of the gold standard, the British
pound was the dominant currency. After 1914, as Great Britain turned from being a net
creditor to a net debtor, the U.S. dollar gained primacy.With perpetual current account and
fiscal deficits, the pound never regained its strength, and the dollar has remained
unchallenged as the world's main reserve currency. According to The Economist, nearly 70%
of official foreign exchange reserves are in dollars today, with the Euro being the second
most commonly traded reserve currency. For loyalty programs, competitors must ask
themselves which currency will gain primacy credit card currency, airline currency, hotel
currency, or something else? Airline loyalty program currencies clearly have suffered the
most over the past few years, as customers perceive that less aircraft capacity is earmarked
for rewards, lowering the implicit value of airline miles. In a WebFlyer survey, customers
reported a 50% success rate with airline award availability, compared to a reported success
rate of 75% with hotel awards. As the overhang of reward points increases, the marginal
value of points to customers will decline further, leading to decreased influence on future
purchase and redemption decisions. With credit card companies increasing more earn and
burn options, customers are learning to bypass the traditional airline loyalty program, putting
the viability of this traditional model in question. The risk of erosion of customer loyalty,
therefore, is real for airlines, and loyalty programs must be restructured to acknowledge this
new reality. Those programs that do not change face the risk of being secondary currencies,
with a downward spiral of their currency and customer loyalty. Those that do restructure raise
their odds of owning a dominant currency that customers want to keep and tradeleading to
a mutually reinforcing spiral of increasing currency value and strong customer loyalty.
Several scenarios are possible:
Realizing that credit cards are offering a more tradable reward currency, customersstampede out of airline programs. Given the slow pace of change in loyalty programs
(there havent been any major overhauls of loyalty programs in nearly a decade), this
scenario seems unlikely, since customers keep demanding air miles.
A more likely scenario is the continued gradual erosion of airline loyalty programs, withcredit cards seizing strategic control and airlines experiencing diluted monetary value
and eroded loyalty. Loyalty programs must realize the next wave of change will be
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driven by financially flush credit card providers, such as Capital One, trying to disrupt
the direct bond between loyalty programs and customers. It all depends on how quickly
and aggressively the credit card providers are able to capture value.
Some airlines arise to confront the challenge. Uniteds recent launch of the Choicescurrency, which allows customers to redeem miles for non-travel awards, looks like such
an attempt.
Customer who carry Uniteds co-branded credit card from Chase can earn a parallel currency
to Uniteds travel miles, thus increasing the perceived value of the cur-rency for those
customers who value nontravel rewards. This approach could keep the credit card partners
happy as well. For airlines, it would be a false hope to depend on customers existing balance
of reward points as equity in loyalty programs. Customers can change behavior quickly,
especially when they perceive their marginal utility of reward points to be declining. Airlines
must act before the credit
card partners either decline
to renew or substantially
restructure the contracts that
generate so much revenue
for the loyalty programs. In
addressing this multi-
dimensional challenge,
where should managers of
loyalty programs start their
analysis: Customer
satisfaction with the
program? Customers intent
to re-purchase? Customer
value? Credit card partners
satisfaction? Parent airlines
willingness to provide
capacity? Our experience suggests that to capture value in this market with its new
economics, airline executives should redesign their loyalty business by addressing four
fundamental questions (Exhibit 4).
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Which customers is the loyalty program targeting?
Different customer segments have different marginal utility of a currency and different
reward preferences. Do you have the right currency for the right customers? One useful
approach in this regard is to establish two currencies for different segments: a primary
currency to meet the needs of loyal customers and a secondary currency for those who seek
other rewards. It is possible to identify several meaningful customer segments and respond to
their needs with several reward currencies. However, implementing more than one currency
will require investment in the program infrastructure and capabilities, as most loyalty
programs today, especially the airline versions, are operating with aging systems. Moreover,
the approach to customer selection must be tailored to the unique characteristics of the loyalty
program and underlying service brand (Exhibit 5).
Which partners should the program keep?
Because customers are showing a healthy appetite for more reward options, loyalty programs
need trading partners to help strengthen the brand and currency. Of course, customers
preferences for a given partnership and perceptions of a given brand have to be considered in
establishing partnerships. In a recent Mercer survey, a large customer segment, which had
high spending on groceries, displayed three times as strong a preference for earning airline
miles via grocery shopping and gas stations as via wireless service. Other segments with
different demographics would have other preferences. Yet loyalty programs are not currently
differentiating among segments or developing partnerships accordingly. Much airline loyalty
Programs, for example, continue to bombard frequent flyers with wireless service
promotions, when many of those travelers may have little desire for them.
In the same survey, customers indicated their preference will increase if events and
experiential rewards were added to airline rewardsand their preference would increase four
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times as much if merchandise were added to the reward list. Here, loyalty programs face a
risk. A partnership with a casino, wherein spending money at the casino can earn reward
points, may not be acceptable to all customers. Some might prefer a partnership with a steak
house, others with an electronics retailer. The key is to offer the right selection of partners or
trading merchants to the corresponding customers so they can use their currency as they
prefer.
Which earn and burn structures should be offered?
This involves determining, first, howa reward point will be valued by customers, since this
will determine how much partners are willing to pay for points. Next, determine at what
exchange rates customers will be able to trade the currency with other reward currencies.
For example, in Uniteds Choices programs, 15,000 Choices can be redeemed for a $120
hotel stayan implied exchange rate of 125 Choices per dollar. Hilton HHonors program
lets customers redeem 55,000 points for a 3-day pass at Disneyland worth about $100, an
implied exchange rate of 550 points per dollar.
What relationship with the parent company is optimal?
Traditionally, loyalty programs have been owned by the parent enterprise, but this is
changing. For the next generation of programs, executives must determine if they want to
retain full ownership of their currency, or to float it freely. Both options have merits and
drawbacks. Owning a currency implies backing it up with reserves, that is, the capacity (and
contingent liability) to provide rewards. However, ownership also provides greater control
over the selection of trading partners and exchange rates. On the other hand, by spinning off
the loyalty program, enterprises can unlock substantial monetary value. Last year, Air Canada
raised $200 million by selling 12.5% of its loyalty scheme, Aeroplan. This implied a total
valuation of $1.6 billion for Aeroplan.The prospect of unlocking value from the loyalty
program has to be balanced with the risk of the program being too independent to drive repeat
purchase behavior to the airline enterprise.
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"#$%&
The methodology will be:
Secondary data collection from internet on CRM practices and FFPs in AirlineIndustry and also e-CRM places for the same.
My project has involved in exploring these CRM practices prevailing in airline industry
globally. This will include individual companies leading airline industry market in India and
also leader companies in world airline market. The project will also involve exploring e-CRM
practices for airline industry.
'(&
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CRM research shows that most airlines have only a rudimentary understanding of customer
preferences, what influences customer decision-making, and the triggers for ensuring
customer loyalty. This is due primarily to the fact that most airlines still use inflexible,
siloed legacy systems that prevent key stakeholders from accessing all the information they
need to make informed decisions in a timely manner. In addition, most traditional CRM
solutions lack the advanced
analytical capabilities that are
needed to gain actionable
insight into customer behavior.
Instead, airlines need
integrated systems solutions
that go beyond CRM to
support complex and
multifaceted loyalty programs.
Loyalty Management provides
exactly this capability by
supporting an integrated
loyalty management lifecycle
approach to managing loyalty
that can address all customer-facing actions airlines can take (Figure).
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Successful airlines today need integrated loyalty management lifecycle capabilities that help
them address all customer interactionsfrom developing promotion and marketing
campaigns to answering customer questions and processing transactions and customer
rewards, to measuring results, tracking member profiles, and targeting customers for new
promotions.
'!%#&$!%
Traditionally, loyalty management was a bookkeeping activity triggered only when a
passenger completed travel on a ticket or traded mileage points for a free flight or an upgrade.
But loyalty management can be much more powerful and effective when the entire customer
lifecycle is addressed.
At the heart of a successful loyalty programone that is implemented across the entire
lifecycleis a technology solution that collects all data about a customers activities and
preferences, analyzes this data thoroughly, and makes the results available transparently to all
stakeholders throughout the airline. (Figure below)
Pretravel
The customer lifecycle begins when customers start shopping for airfare, hotels, car rentals,
and other travel products and services. During this phase, carriers have a broad array of
strategies they can select to enhance customer loyalty. For example, carriers can vary the
number of miles needed for free travel on domestic and international flights by tier, and offer
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their most loyal customers targeted discounts on tickets they purchase to common
destinations.
This is also an area where airlines can more effectively leverage their channels; they can offer
premium customers access to reservation centers with little or no waiting time and targeted
incentives for choosing specific hotels, car rental firms, and other vacation packages based on
customer profiles. Sending personalized e-mail or letters containing special mileage offers
extending bonus points for booking child-friendly vacations to customers with young
children, for exampleis a proven way of differentiating the customer experience and
proactively increasing wallet share during the pretravel stage. Bonus mile offers to existing
customers for new-customer introductions and to corporations for encouraging employees to
use a particular airline are also effective strategies.
Travel
During the travel phase, airlines can truly make or break customer perceptions of their
products and services. Customer-centric airlines already differentiate the customer experience
for first- and business-class customers and for elite members of their loyalty programs, with
special check-in counters, kiosks, and security lines. Airlines can further improve customer
satisfaction during the airport check-in process by providing lounge access, upgrades, or spot
point awards when passengers use kiosks. And with new loyalty management systems,
airlines can now provide real-time point balances to customers on kiosks or on boarding
passes so passengers have a greater incentive to redeem miles for retail purchases or other
services while they are at the airport. Once customers check in and clear security, airlines can
differentiate the customer experience even further. Most airlines already provide their
premier customers with priority boarding. Some are moving beyond that to accepting loyalty
points for in-flight service purchases, such as meals, drinks, electronics, or catalog purchases.
The greatest opportunity for encouraging loyalty during the travel phase, however, is by
promptly compensating customers when they experience flight delays, canceled flights, or
missed orders for special meals. By empowering gate agents and flight attendants with the
ability to award loyalty points, purchase vouchers, or other promotions as compensation for
service failures, airlines can retain customer loyalty even under adverse circumstances.
Post-travel
After customers reach their destinations, the customer experience is driven by a swift
disembarkation process, efficient baggage delivery, and prompt processing of any claims.
Although loyalty management in the post-travel phase traditionally has centered on managing
accruals, innovative airlines are administering post-flight surveys to help compute loyalty
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metrics and to provide instant loyalty rewards if baggage is delayed or damaged. Airlines
need to think of each flight as a snapshot of the customer experience and therefore an
opportunity to gain valuable insight into customer behavior. All three phases in the travel
lifecycle provide opportunities for airlines to secure higher customer loyalty, which in turn
allows them to increase market share and profits. Enabling technology is key to helping them
achieve these goals. (See Figure)
Clearly identifying objectives and making use of the right processes and technology to reach
these objectives is helping airlines enhance the customer experience and achieve profitable
results.
'$%%&!%&
Despite all this potential to engender loyalty throughout the entire travel lifecycle, present
day airline loyalty programs are struggling to achieve their desired effects. The chief
challenges are discussed below.
Lack of Differentiation
Airlines face a parity deadlock, because loyalty programs have all started to look alike,
with offers of free enrollment, similar ways to calculate points for miles flown, and similartiers of membership based on miles. Research on the hotel industrywhich has mature
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loyalty programs just like the airline industry and faces similar challenges with lack of
differentiation and perishable inventoryshows that loyalty programs did not ensure repeat
business or improve hotel chain profitability.
As travellers increasingly enrol in multiple airline loyalty programs and are given the
flexibility to retain miles for extended periods of time, loyalty programs no longer drive their
choice of an airline.
Customer Inability to Easily Redeem Points
One of the biggest sources of discontent among customers is the difficulty involved in
redeeming points. With increasingly high load factors and tighter capacity, airlines reserve
just a few seats on each flight for loyalty program members. Growing program membership
coupled with this low seat inventory means that loyalty travel has to be booked months in
advance. Airlines do offer other avenues for redeeming points such as lounge privileges and
retail purchases, but a recent study4 on the airline industry showed that nonairline flight
redemptions account for only 3 per cent of airline point redemptions. The difficulty of
redeeming airline points during peak travel periods is an especially huge issue for road
warriorsthose business travellers who are the most frequent fliers and who potentially pay
higher prices than leisure travellers. Airlines need to balance their commitments to their most
loyal and profitable customers with their need to get every last dollar of revenue from each
flight.
Growing Operating Costs
Over time, loyalty programs have grown more complex by becoming part of large partner
networks that encompass other airlines, banks, hotels, and myriad other travel providers.
Airlines have also had to invest in customer service centers, Web sites, and interactive voice
response (IVR) systems to cater to the ever-increasing roster of program members. All these
services increase costs.
Difficulty Managing Loyalty Across the Travel Lifecycle
Multiple systems for sales, marketing, operations, and loyalty management running on a
variety of platforms make it difficult for airlines to analyze the customer experience
throughout the travel lifecycle. The lack of systems integration also creates roadblocks to
offering targeted promotions or providing compensation for service failures. Because airlines
dont have the ability to deliver real-time intelligence to ticketing agents, gate agents, flight
crew, and customer service representatives, they miss opportunities to increase customer
loyalty through personalized service at each point in the travel lifecycle.
Failure to Link Marketing and Loyalty Management Initiatives
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Measuring the impact of marketing campaigns on the buying behavior of customers is critical
for assessing which campaigns and channels are most effective in driving repeat purchases.
Disparate systems and lack of a single customer data repository make it difficult for airlines
to increase customer loyalty through targeted personalized marketing campaigns. Airlines are
also unable to measure the return on investment (ROI) in marketing campaigns because they
are unable to link marketing campaigns to customer transactions across multiple channels.
Delays in Bringing Loyalty Program Innovations Quickly to Market
Loyalty program innovations are critical, as customers are always looking for new ways to
earn and redeem points. Todays legacy loyalty management solutions run on specialized
mainframe or midrange hardware, and require software development tools and databases that
are either at end-of-life or no longer supported. Implementing new loyalty programs, making
changes to the business rules for existing programs, and adapting business workflows are
difficult, time-consuming, and risky using these outdated tools.
')&!%&
Process Customer Accruals More Efficiently
Most airline loyalty programs include partnerships with businesses from a variety of
industries, including hotels, car rentals, cruise lines, and financial services firms. Partnership
agreements vary greatly from partner to partner and from industry to industry, and it can be
challenging to ensure that transactions submitted by partners are valid and possess the
required data attributes to process member rewards successfully. Loyalty Management allows
airlines to create and enforce data validation rules across each partner and product. They will
subsequently spend less time resolving routine transaction processing problems, reducing
labor costs and improving worker productivity.
Capture Highly Profitable Corporate Segment Through Corporate Rewards
Business travelers are airlines most profitable customers. Loyalty Management allows
airlines to create corporate-employee joint reward programs in which business travel benefits
both the company and the individual. This in turn gives corporations greater incentives to
encourage employees to patronize a particular airline rather than a competing carrier.
Manage Partner Relationships More Effectively
Loyalty Management simplifies the partner-billing process and automates common
transactions. These results in quicker setup of new partners; faster time to market of new
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partner products and joint promotions; and easier administration, including cost sharing, of
the partnership program.
Streamline Customer Redemptions
One of the most important things an airline can do to enhance customer loyalty is to make it
easy for customers to redeem miles. Loyalty Management supports variable redemption
pricing, offers customers a wide variety of payment options, and enables them to redeem
points at a broad range of touch points. The net results are lower administrative costs and
improved customer satisfaction.
Align Loyalty Promotions with Other Marketing Initiatives
Loyalty Management enables airlines to integrate their loyalty promotions with other
outbound marketing initiatives. This improves the time to market of new member products
and services as well as the effectiveness of promotions in general, which in turn enhances
revenue growth.
Easily Create and Administer Customer Tiers
Loyalty Management makes it easy for an airline to create as many tiers as it wants, and to
adjust the rules that determine customer tier status on the fly.
Enhance Customer Service
Loyalty Management supports an airlines multichannel support capabilities and provides
superior service to customers whether they visit its Web site, call a customer service agent, or
interact with a partner. By helping an airline dramatically increase its understanding of each
members lifetime value, so it can then tailor service levels and promotions accordingly,
Loyalty Management allows carriers to treat their most important customers with the special
care they deserve, leading to reduced customer churn and greater long-term profitability.
Personalize Member Communications
Airlines need to be in constant communication with loyalty program members through a
variety of channels, including the airlines Web site, e-mail, and direct mail. Loyalty
Management provides tools to initiate outbound communications to members for a wide
variety of preidentified loyalty events, such as enrollment, tier changes, and redemptions.
Integrate with Existing Enterprise Applications
A key component to ensuring customer loyalty is an airlines ability to recognize individual
customers, and to have transparent access to all information about each oneincluding
loyalty status, history, value, expectations, and preferencesduring each interaction. A
loyalty solution that does not provide for integration with operational systems at least at a
data level, if not at a process level, will fail to reap the full benefits of a loyalty program.
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'"(*(%&
Mileage Expiration
Mileage expiration has been an on-again/off-again issue since the beginning.
Current situation: Most U.S. programs allow miles to "live" indefinitely, provided a member
has some account activity during a 3-year period.
Programs outside the U.S. typically expire miles 3 years after they're earned.
Taxation
Are FFP awards taxable? As far as a direct tax on the award user, the most recent IRS ruling
states (with some equivocation) that free tickets are taxable IF they are earned in the course
of business travel AND they are used for leisure travel. This rule has proved too difficult to
apply, so enforcement has been practically non-existent. For the future, though, we should
never underestimate the government's appetite for tax revenues.
To wit, the recently enacted 1997 Taxpayer Relief Act attempts to tax FFP transactions
covertly. For more information on this continuing saga, please see "The Taxpayer Relief Act
-- More Grief than Relief?".
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Costs
FFPs work because there is a balancing of consumer and airline interests. From the airline
standpoint, the generous awards can be justified because average award costs are closer to the
direct costs of carrying a passenger (an extra meal, extra aircraft fuel, etc.) than to the actual
cost of purchasing a comparable ticket. That's because award seats are limited, thereby
reducing the likelihood of an award passenger displacing a revenue passenger.
While it can be frustrating trying to get an award ticket on popular routes during peak times,
we as consumers must bear in mind that seat limitations are just what make the programs
economically viable.
Coupon Brokers
Coupon brokers buy FFP tickets from members, and sell them (at a substantial discount to
published fares) to bargain-hunters. All airlines include language in their FFP member
materials that states that FFP mileage, coupons and tickets may not be sold, bartered or
otherwise transferred for any type of consideration. At one time, this was a $150 million-a-
year business. It continues, but on a much smaller scale because the airlines have
aggressively pursued and prosecuted the brokers, sellers and buyers. Don't sell or buy FFP
awards. It's illegal, and the costs of litigation, fines and replacement tickets can be
substantial.
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FFP Economics
As with any marketing program, FFPs generate both costs and revenues. A summary follows:
Costs Revenue
OPERATIONS COSTSFFPs are big operations, employinghundreds of marketing, customer service andtechnical staff. Other significant costs:facilities, computer hardware and software,phone systems.
COMMUNICATIONS COSTS
Member communications: enrollmentmaterials, program brochures, newsletters,postage, etc.
TRAVEL AWARDS COSTS
Travel award costs depend on whether themember uses a free award ticket on the hostairline, or an award on one of the programpartners.
1. When a member uses a free ticket on
the host airline, the costs include...(a) Direct costs (extra costs of meals, fuel,etc. required to carry an incrementalpassenger)
(b) Displacement costs (where a non-payingpassenger occupies a seat which wouldotherwise be occupied by a payingpassenger)
(c) Diversion costs (where a customer usesan award instead of buying a ticket)
Whereas (a) will always be a cost, (b) and(c) may or may not apply, depending onhow full the flight is, and whether themember would have traveled even if he'dhad to pay for the ticket.
2. When a member uses an award on a
program partner...The host pays the partner company, inessence buying the award for the member.Typically the rate would be between 1-2
cents per redeemed mile.
PARTNER REVENUESBecause FFPs are such effectivemarketing programs, many companies arewilling to pay for the privilege ofparticipating in them as program partners.(Such partnering also benefits the FFPhost company, which wants its FFP toboast a wide array of high-qualitypartners.)
Typically, a partner company pays the
host company 1-2 cents per mile earnedwhen a member uses the partner's product.(These expenses are counted against theadvertising or sales promotion budget, andcan be significant. A hotel giving 500 FFPmiles (@$.01 = $5) for a $100/night roomstay suffers a 5% yield dilution, right offthe top.)
ADVERTISING SAVINGS
Also counted on the revenue side of theledger are the savings FFP marketingaffords over mass-market advertising.
Because FFPs allow targetedcommunications with the airlines' provencustomers, it is not necessary to spend asmuch on expensive (and inefficient) printand broadcast advertising to maintain theinterest and loyalty of current customers.The dollars "earned" through these
savings run into the millions.
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''%+,#%
Airline's success depends heavily on its ability to intelligently manage sales, marketing, and
service processes and to draw mutual advantages from understanding of airline's customers.
To help airline maximise the strategic value of customer centric initiatives, Airline e-CRM
model provides a comprehensive analytical solution, it can contribute toward improving the
way that measure and optimize airline's relationships with customers. Figure 3 best illustrates
Airline e-CRM model using system engineering methodology.
Figure: Airline e-CRM system model
Airline e-CRM model can be conceptualized as a system that is made up of components,
linkages amongst the components, and dynamics-that takes advantage of the properties of the
Internet to make money. It takes advantage of the properties of the Internet in the way it
builds each of the components-value, scope, revenue sources, pricing, connected activities,
implementation, capabilities and sustainability-and crafts the linkages among these
components. It is what, preferably, enables an airline to have a sustainable competitive
advantage. It includes three components (subsystem): Web Basec Airline-Passenger
Interaction subsystem; Airline Data Warehouse subsystem; and Airline e-CRM operation
subsystem.
Airline e-CRM model is an asset-based solution that includes best-of-breed components to
build an e-CRM infrastructure and enable any-channel, any-time communication with
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customers. At the heart of this offering is the CRM Foundation, which includes the CRM data
model, starter set of CRM queries, reports and analysis, sample data, a demonstration
prototype, data utilities and scripts, and comprehensive documentation that covers
implementation guidelines, business perspective and analysis guidelines, system components,
data model descriptions, and use and customization guidelines.
Since managing customer interactions is a vital piece of the e-CRM puzzle, planning and
implementing a Multi-Channel Interaction Management solution with the other subsystems
and enterprise solutions is crucial. Without Interaction Management, the puzzle remains
incomplete. Interaction Management is the foundation for evolving customer service into
customer satisfaction by tying together all customer data - no matter where it is located
within the enterprise. Making this information easily and quickly accessible to the customer
management process, and ensuring each customer is handled in the most efficient and
effective way possible is the ultimate result of a well-defined and deployed strategy and
solution.
Airline e-CRM model also:
Provides an understanding of customer behavior and enables airlines to measureresults of marketing and merchandising changes.
Supports more effective promotions through integration of data between marketingand merchandising users.
Provides a single view of customers across the enterprise and across contact points. Gives airlines the ability to respond more dynamically and quickly to market
demands.
Significance derived from airline-CRM implementation will allow for new e-business model,
based on the wide availability of information and its direct distribution to end-customers.
Directly connect airlines and passengers. Support fully digital information exchange between airlines and customers, reduced
cost of a customer contact.
Suppress time and place limits. Support interactivity and therefore can dynamically adapt to customer behaviour. To be able to satisfy customers' need, build customer confidence and retention. Can be updated in real-time, therefore always up-to-date. Enhance airlines competitive advantages over its rivals. Profitable and sustainable revenue growth.
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'-,#&
Revenue increase comes from three areas:
Re-attracting defected customers, which accounts for between 0.1 and 0.3% ofrevenues;
Increasing the share of a customer's travel wallet, which accounts for 0.3 and 1.2% ofrevenues;
Acquiring new customers, which accounts for approximately 0.05% of revenues.Naturally, associated with these revenues are costs, but these only amount to between 0.3 and
0.6% of the existing cost base: The marginal additional flights needed as incentives estimated
to be between 0.2 and 0.4% of costs; Additional CRM initiatives amounting to between 0.2
and 0.5% of costs. Savings in costs due to more efficient and targeted running of the existing
CRM program, providing a reduction of 0.1 to 0.3% of costs;
As stated above, the bottom line impact of CRM is significant, but varies according to the
airline implementing the initiatives. The range estimates are:
For a large airline: $100-$250 million per year;
For a midsize airline: $25-$60 million per year;
For a smaller airline: $15-$50 million per year.
There are many benefits to be gained for airlines and airline passengers, firstly, passengers
could book and check in through internet 24 hours, 7 days a week, at any time, any where.
Secondly, airlines could reduce sales cost. American Southwest Airlines CEO, Gary Kelly
said the Web site is playing a major role in mitigating the rise in unit costs affected by high
fuel prices. It's 10 times cheaper to deliver to customers through the online service than
through a travel agent, Kelly said, and costs 5 times less than using Southwest's own
reservation staff. The booking cost per passenger online is "well under $1," said Kelly, and is
scaling down even further. He said Internet use by passengers was helping the carrier keep
fares at low discount levels.
Massive investment in both business-to-business (B2B) and business-to-customer (B2C)
information systems is expected to translate into important cost savings in procurement, sales,
billing and other support activities. The airline's fully automatic ordering system, for
example, should reduce order processing costs by 90%, according to Chairman/CEO Juergen
Weber of Lufthansa Aviation Group.
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Specific benefits to implementing a CRM strategy with Interaction Management
include:
Planning and implementing business processes across airlines and CRM applications ensures
customers are handled in the most efficient and effective fashion from the beginning to the
end of the interaction based on their real-time value to airlines.
Implementing CRM applications may simultaneously lower the cost of design,
implementation, installation, training, ownership and administration. It also reduces the risk
of re-engineering systems at a later date.
Consistent and dynamic processes are built up-front for the customer. This force the airline to
consider each element in the process design including the network, switch, multi-media
management, and the CRM - ensuring streamlined processes are in place before the customer
makes contact.
Influence and enhance intelligent call routing by leveraging the data gathered from the switch
(ANI, DNIS, Caller ID), caller, and CRM applications.
Create and leverage detailed statistics/metrics and cradle-to-grave reports.
Real-time access to historical customer information allows support staff to know who your
customer is, why the customer is calling, what's been done, what needs to be done, and
respond in the most efficient, expedient manner possible.
Benefits for the customer
The E-mail was responded to immediately, with personalized, valuable information.
Web self-service allowed customer to take immediate action to resolve issue.
Personalization enabled promotion tailored to customer profile - enhancing one-to-one
marketing.
The "callback" option was easy to use, enabling the customer to quickly request live support.
The intelligent interaction routing engine immediately connected the customer to the right
CSR.
The customer information provided by Apropos and the CRM application enabled the CSR to
provide efficient, personalized service.
Customers enjoy personal treatment, together with appropriate advice on getting the best out
of their purchases. The airline may also put customers in touch with others with whom they
have similarities, for example by inviting them to meetings.
For the airlines implementing CRM, it becomes possible to single out customers who are
profitable, gaining an understanding of their preferences to improve retention and increase
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the volumes sold. These valuable customers can become advocates for the airline and its
products. Finally, CRM helps an airline to build loyalty. Because it is a marketing truism that
it costs five times more to generate new customers than it does to retain existing ones, that is
a compelling argument.
With e-CRM, airlines can increase sales and customer loyalty. This strategy can improve
sales effectiveness, bring higher value to all of airline's key business relationships, help
airline to understand what each client relationship is truly worth, develop and reinforce a
consistent experience for customers, improve management effectiveness, improve tactical
and strategic planning, respond faster to competitive challenges, use critical resources more
efficiently, and reduce administrative burdens and overall cost.
'.%
Building relationships with customers becomes the necessity in the present markets. By
becoming more customers centric, airlines can better understand their customers, develop
new products and services that are consistent with their brands, and provide sufficiently
differentiated experiences to retain and grow their customer bases.
Airlines realise that an integrated e-CRM strategy will allow them to manage customer and
supplier relationships more effectively than ever before, allowing them to build long-term
customer relationships, brand loyalty and repeat sales that result in increased, sustained
profitability. The challenge is how to overcome hurdles, minimise the risk and guarantee
results. Rather than seeking all the answers before making an effective start in eBusiness,
companies should first define a clear roadmap of their objectives, implement and measure the
success of a pilot project, and build from there. The greatest danger is allowing the pace at
which the market and technologies are changing to delay the opportunity that is eBusiness.
The end result is a better bottom line-successful e-CRM can mean millions of dollars in
incremental revenue from increased customer retention, greater revenue per customer, the
ability to cross-sell and up-sell customers, better customer loyalty and greater customer
satisfaction. That is the true potential of an IT infrastructure built around enterprise storage-
something every company needs to consider as a means to gain competitive advantage in
both the old and the new economy.
Airlines that empower their executives and employees with Loyalty Management will be the
winners in todays intensely competitive airline marketplace. Based on different analysis, the
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system of CRM enables to determine the best strategies and their effective implementation
that company should apply for particulars customers groups. Both continuous and subsequent
controls of the whole process represent a logical culmination that shows effectiveness of
implemented systems and can help to find possible improvements. Only with application of
the complex process of CRM, the company can effectively allocate its resources and ensure
its own competitive position in the market.
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http://www-935.ibm.com/services/in/igs/pdf/may27_customer_focused_airline.pdf
http://searchcrm.techtarget.com/answer/Are-airline-loyalty-programs-becoming-a-disincentive
http://www.crmbuyer.com/story/69239.html http://www.crmtrends.com/loyalty.html www.infosys.com/offerings/industries/airlines/.../frequent-flyer-
programs.pdf