loylogic: reinforcing the value of frequent flyer miles

FFP Expo 2008 Dallas, May 13, 2008

Reinforcing the value of frequent flyer miles

How a great reward experience drivesmileage currency and FFP value.

Dominic HoferCEO Loylogic

FFP Expo 2008 – Loylogic Inc.

... hopefully see rewards as your main value driver rather than

your biggest cost factor;

... collect ideas on how to make your currency more valuable.

At the end of this speech you ...


What do experts say about the importance of rewards?


“The reward is a crucial part of any loyalty programme. It has to be desirable enough to change the

behaviour of the customer.”

(The Loyalty Guide)


“What we marketing managers have to understand is that rewards are

the most important weaponwe have at our disposal.”

(The Wise Marketer)


“Every dollar a program spends on members that are not redeeming

is wasted money.”

(Kelly Hlavinka, FTMA 2008)


In other words: If the rewards are wrong the program will not perform.

Great Concept

Great Campaigns

Great MarComm

Great Accrual

Great InsightGreat Benefits

Great ServicingSuccessful

Loyalty Program

Unattractive Rewards

UnattractiveLoyalty Program


And how much of a “weapon” are rewards in today’s FFPs?


Fact 1: Miles issued grow 10x faster than (reward) seat capacity.


Fact 2: Big FFPs satisfy less than 50% of reward seat requests.


Fact 3: One mile is now worth 44% of the value it had 8 years ago.

Source: TPG; Bain & Co.

Devaluation of a frequent flyer mile


Fact 4: Frequent flyers say FFPs are less valuable.

“Over 64% think frequent flyermiles are less valuable

than 5 years ago.”

(Survey USA Today & FTMA, April 2008)


(International Herald Tribune, April 2008)

Fact 5: FFP managers say we cannot continue like that.


It seems like miles are worth less than a couple of years ago.

But does the decreasing mileage value really impact the FFP’s

miles sales business?


Yes, absolutely!

Frequent travelers shift their credit card spending to frequent guest

and credit card programs.


This is how frequent guest programs boost reward value.

SPG

Experience rewards & recognition wherever your travels take you.Exclusive benefits, flexible reward options … and more.All with no blackout dates on Free Night Awards.

IHG Priority Club

Any hotel, anywhereThe American Express branded pre-paid lodging cards can be used worldwide to pay for hotel stays anywhere American Express® Cards are welcome.

Experiences in EuropeLooking for the perfect gift experience for any occasion is easy with Golden Moments! Whether you are buying a gift for your family, adding an activity day to your Hilton Family hotel stay or surprising a loved one, we guarantee a memory that will last a lifetime!

Hilton HHonors


“Over 43% think frequent guest points are more valuable

than 5 years ago.”

(Survey USA Today & FTMA, April 2008)


“The devaluation of airline miles has allowed consumers to take a fresh look at hotel loyalty programs. The devaluation has been a boon for

their hotel partners.”

(COLLOQUY, CensusTalk, April 2007)


This is how credit card programs boost reward value.

Pay with Points: Redeem Membership Reward points with American Express Travel.

Flight & Room Finder:Search flights and hotel rooms, transfer Membership Rewards points to your favorite frequent flyer and guest programs.”

AMX Membership Rewards

Redeem for a wide range oftravel rewards:Tailored Travel: Fly on virtually any airline, at anytime, with no blackout dates.Exclusive Travel: Customize your dream vacation.

Diners Club Rewards Citi Thank You

ThankYouSM lets you travel the way you want, when you want:Our travel booking tool, powered by Expedia®eliminates hassles like minimum point requirements and blackout dates.


“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 model in question.”

(Oliver Wyman, December 2007)


(Freddie Awards Survey, February 2008)

Survey: 42% think about switching cards; 18% have already done so.


So how can FFP’s smartly reinforce their reward offering and their

mileage currency value?


Increasing flight rewards is not a viable solution to the problem ...

(A) Increase Reward Seats

Impacts flight displacement cost for limited relief on

reward demand.

(B) Increase Airline Capacity

Commercialdemand

Rewarddemand

Overallrequired capacity

Not very attractive, as airline capacity increase comes at

70% fixed costs!


... while offering non-flight rewards seems to be a very smart option.

Non-flight reward advantages:

FFP defines cost/mileEasy to manage/scaleAttractive for any profileCome at low/no fixed costsFree demand on flight rewardsDrive program member growthSteer deferred revenues (IFRIC 13)



Survey: 51% say non-flight rewards are important.


And leading FFP managers agree.

“Non-air rewards are a smart thing. They drive member engagement which is good for our

partners.”

(Craig Landry, AeroplanFTMA 2008)

“A spin-off would give us the opportunity to offer

non-air rewards which are a valuable option for our members that travel all

the time.”

(Robert Sahadevan, UnitedFTMA 2008)


And how should an attractivenon-flight reward solution look like?


Reward Value:“It’s really worth collecting.”

Miles to pay(e.g., Apple iPod 4GB Nano)

Miles-plus-cash(e.g., 1-mile redemption)



Miles to pay Miles-plus-cash

Survey: 52% seek value; 94% seek miles-plus-cash.


Reward Choice:“That’s exactly what I need.”

TravelProductsExperiencesMerchandiseConversionsDonationsVouchersand many more

Cardiac Health Check65,000 miles

Sand-X Dune Bike2,270,000 miles

Meet John Travolta124,000 points

1-Day Cover Star 135,000 points

Pit Crew Member 103,000 points

JT VIP Package62,000 points


Reward Access:“Show me the rewards.”

Personalization(show relevant rewards)

Ease-of-use(avoid multiple platforms)


Reward Thrill:”It’s fun having these miles!”

Auctions Raffles

Gambling


OK. Now how can this be soldto the airline CFO?

He doesn’t have anon-flight reward budget.


“Current” Case:FFP without non-flight rewards.

“Current” Case: Without non-flight rewards anddecreasing co-brand credit card miles sales (illustrative)

0

program operations

miles sales

non-flight rewards

Year 1 Year 2

flight rewards

FFP EBIT


“Opportunity” Case:FFP with non-flight rewards.

“Opportunity” Case: With non-flight rewards andgrowing co-brand credit card miles sales (illustrative)

0

program operations

miles sales

non-flight rewards

FFP EBIT

Year 1 Year 2

flight rewards

FFP Opportunity(∆ Case 1 and 2)


Two financing options can cover for a missing non-flight reward budget.

1. FFP/Airline: Allocate saved costs from flight rewards.

2. Credit Card Partner: Financesthe non-flight reward solutionand deducts miles redeemedfrom miles issued.


Take Aways

1. Rewards are key to loyalty success.2. Mileage currencies are losing value.3. Credit card programs & frequent guest

programs gain momentum.4. Non-flight rewards are a very smart

option to reinforce mileage value.5. CFO’s can chose between two options:

Accept the non-flight rewards cash-out (same cost!) or accept a decreasing FFP EBIT.


“Making Miles & Points More Valuable than Money™.”

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loylogic: reinforcing the value of frequent flyer miles

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