Frequent Flyer Programs Research Articles

Hubs versus Airport Dominance

We address the issue of the sources of dominant airlines' pricing power by separating the premium due to hub operations from that due to airport dominance. The presence of airports serving as hubs for two carriers enables such identification via difference-in-differences. Moving from lower to higher prices, the total pricing premium of hub operators (both dominant and nondominant) increases; while the share of the airport dominance premium diminishes relative to that of the hub premium. Absence of a hub premium at the lower end of the price distribution (and lack of dominance premium at the higher prices) suggests frequent flier programs rather than product differentiation as the likely dominant source of the hub operator's pricing power. The dominant airline's ability to charge higher fares due to either its airport market share or access to scarce airport facilities is confirmed.

Commitment Decisions: The New Kind of Settlement in European Competition Law. Application in Air Transport

A ‘commitment decision’ is a decision through which Competition Authorities make commitments offered by companies binding on them in exchange for the termination of investigations into anti–competitive practices. The purpose of this article is to show how this new and extremely interesting kind of formal settlement can be applied in air transport cases. It analyzes the origin and the procedure of commitment decisions and focuses on the types of possible commitments in the fi eld of air transport. Airlines may offer slots to their competitors, share their Frequent Flyer Programs (FFP), enter into interline agreements with other airlines, and facilitate intermodal services, thus avoiding an infringement decision. An independent trustee with the necessary competence can monitor the accomplishment of these commitments. This article clears up some legal uncertainties and suggests ways in which interested parties, such as cooperating airlines and worldwide alliances, can make better use of the new mechanism and propose acceptable commitments to Competition Authorities. It also discusses both relevant case law of European Competition Authorities and air law doctrine and concludes that commitment decisions could lead to healthier and undistorted competition in the airline industry.

Are Frequent‐Flyer Programs a Cause of the “Hub Premium”?

This paper estimates the relationship between frequent‐flyer programs (FFPs) and fares at hub airports. I exploit the formation of partnerships that allowed members of one airline's FFP to earn that airline's points on flights operated by its partner. If FFPs allow an airline to charge higher fares on routes that depart from its hubs, these partnerships should allow an airline's partner to charge higher fares on routes that depart from these same airports. I find that offering the FFP points of the dominant carrier at an airport does, indeed, lead to higher fares. Combining these estimates with estimates of the “hub premium” suggests that FFPs may account for at least 25% of the “hub premium.”

Frequent Flyer Programmes under Article 82 EC—Is the Sky the Only Limit?

Frequent flyer programmes (FFPs) are ubiquitous marketing tools used by airlines all over the world. Many airline passengers are members of FFPs, and most of them probably perceive FFPs as something positive. This article examines the status of FFPs under EU competition law. More precisely, the article analyses the FFPs of dominant airlines under the law on loyalty rebates in implementation of Article 82 of the EC Treaty. Five particular characteristics of FFPs are closely scrutinized: the duration of the reference period, the retrospective nature, the multiplicity of reward levels, their character as bundled rebates and the particular efficiencies which FFPs can create. The conclusion of this analysis is that the FFPs’ characteristics may conflict with the current law, to various degrees. Based on this finding, the article advances a number of propositions on how the law on rebates could be improved. Finally, the article goes beyond the law on rebates, and examines the effects on competition of a particular feature of FFPs—the so-called principal-agent relationship.

Do enhancements to loyalty programs affect demand? The impact of international frequent flyer partnerships on domestic airline demand

Frequent flyer programs (FFPs) may allow airlines to exercise market power on routes that depart from airports at which they are dominant. Prior research, however, has not disentangled the effects of FFPs from other advantages that dominant airlines may possess. I exploit variation in the extent and scope of U.S. airlines' FFP partnerships with international carriers to evaluate the economic impact of enhancements to FFPs. The results indicate that enhancements to an airline's FFP are associated with increases in its demand on specifically those routes that depart from airports at which it is dominant.

The 2005 ISMS Practice Prize Winner—Customer Equity and Lifetime Management (CELM) Finnair Case Study

The Customer Equity and Lifetime Management (CELM) solution is based on a decision-support system that offers marketing managers a scientific framework for the optimal planning and budgeting of targeted marketing campaigns to maximize return on marketing investments. The CELM technology combines advanced models of Markov decision processes (MDPs), Monte Carlo simulation, and portfolio optimization. MDPs are used to model customer dynamics and to find optimal marketing policies that maximize the value generated by a customer over a given time horizon. Lifetime value optimization is achieved through dynamic programming algorithms that identify which marketing actions, such as cross-selling, up-selling, and loyalty marketing campaigns, transition customers to better value and loyalty states. The CELM technology can also be used to simulate the financial impact of a given marketing policy using Monte Carlo simulation. This allows marketing managers to simulate several targeting scenarios to assess budget requirements and the expected impact of a given marketing policy. The benefits of the solution are illustrated with the Finnair case study, where CELM has been used to optimize marketing planning and budgeting for Finnair’s frequent-flyer program (FFP).

Customer complaints about airline service: a preliminary study of Turkish frequent flyers

PurposeThis paper aims to identify common complaints made by Turkish frequent flyers related to their program membership.Design/methodology/approachA questionnaire was administered via the internet for the research study reported here. The population consists of 15,000 passengers who are Elite members of the Frequent Flyer Program of Turkish Airlines (THY). For sampling purposes, 2,000 members were randomly selected from the Elite membership in February 2003. Following the survey, 608 usable questionnaires were included in the analysis stage, which represented a response rate of 30.4 per cent.FindingsIn the context of this study of the Elite members of the Miles&Miles program of THY, the common complaints of members fall into five categories. The main concerns are related to the availability of free tickets and upgrades of the flight class, the behaviour of personnel, card ownership issues (e.g. high number of miles needed to retain membership), level and type of priority services offered within the program and the lack of alliances with other airlines.Research limitations/implicationsThe research is limited by the sample – THY is the only airline that provides a frequent flyer program in Turkey. Nevertheless, the findings provide a fresh perspective on the opinions of Turkish frequent flyers about the quality of their particular program.Originality/valueAlthough customer complaints have become increasingly common in many industries, research on this aspect of marketing is not extensive. In particular, studies about the specific complaints of frequent flyers concerning their respective program are limited. This paper will be of interest to executives in Turkey, airline companies with operations in Turkey and researchers interested in international management and marketing practices generally.

Optimizing marketing planning and budgeting using Markov decision processes: An airline case study

Many companies have no reliable way to determine whether their marketing money has been spent effectively, and their return on investment is often not evaluated in a systematic manner. Thus, a compelling need exists for computational tools that help companies to optimize their marketing strategies. For this purpose, we have developed computational models of customer buying behavior in order to determine and leverage the value generated by a customer within a given time frame. The term “customer value” refers to the revenue generated from a customer's buying behavior in relation to the costs of marketing campaigns. We describe a new tool, the IBM Customer Equity Lifetime Management Solution (CELM), that helps to determine long-term customer value by means of dynamic programming algorithms in order to identify which marketing actions are the most effective in improving customer loyalty and hence increasing revenue. Simulation of marketing scenarios may be performed in order to assess budget requirements and the expected impact of marketing policies. We present a case study of a pilot program with a leading European airline, and we show how this company optimized its frequent flyer program to reduce its marketing budget and increase customer value.

Building Relationships with Business and Leisure Flyers

Frequency marketing programs are widely used by service providers to build relationships and loyalty. This study examines one particular form of frequency marketing program the frequent flyer program and the factors which influence loyalty to the service provider. A survey of frequent flyers shows that business and leisure flyers find different aspects of these programs to be important. Compared with leisure flyers, business flyers were somewhat more interested in the points per se as a way of “keeping score,” while leisure flyers were somewhat more concerned with the procedural aspects of frequent flyer programs.

Are loyalty-rewarding pricing schemes anti-competitive?

Many economists and policy analysts seem to believe that loyalty-rewarding pricing schemes, like frequent flyer programs, tend to reinforce firms' market power and hence are detrimental to consumer welfare. The existing academic literature has supported this view to some extent. In contrast, we argue that these programs are business stealing devices that tend to enhance competition, in the sense of generating lower average transaction prices and higher consumer surplus. In highly competitive environments this result is robust to alternative specifications of the firm' commitment power and demand structures. However, it could be reversed if the number of firms is sufficiently small and if firms are restricted to use program designs with sufficiently weak commitment capacity.

Airline choice, switching costs and frequent flyer programmes

Switching costs are costs that customers face when switching from one firm to another. In markets such as the airline market where repeated purchases are common, switching costs may be substantial. In this paper, the switching costs are estimated for domestic airline routes in Sweden between 1992 and 2002. In addition, the determinants of these switching costs are tested for; in particular, to what extent factors such as frequent flyer programmes and flag carriers have an effect on switching costs. A substantial switching cost is found. Although a large part of this calculated switching cost can be attributed to perceived quality differences, it is also found that frequent flyer programmes contribute a non-negligible part of the switching cost. The paper ends with a brief discussion on the welfare consequences of switching costs, where the connection between habit formation and switching costs is discussed.

The alchemy of the upwardly mobile: symbolic capital and the stylization of elites in frequent-flyer programmes

From a sample of 51 major international airlines, we offer a critical discourse analysis of so-called loyalty or frequent-flyer programmes and their related business-class services. As examples of cultural capital par excellence, these seemingly innocuous discursive formations act as significant agents of, and channels for, globalist relations of power in the context of international travel and tourism. The principal logic of frequent-flyer programmes hinges on establishing a synthetically personalized (see Fairclough, 1989) framework by which ‘loyalty’ is defined and rewarded, and by which privilege is then awarded and regulated. However, what actually sustains this commodified interpersonal appeal is the airlines' skilful reworking of symbolic capital, their manipulation of the illusion of distinction, and the exploitation of social anxieties about status. This is all achieved through a series of discursive strategies that stylize(see Cameron, 2000a) ‘preferred’ passengers as elite. Our analysis of frequent-flyer programmes and business-class services exposes some of the ways social privilege and superiority are nowadays measured, as well as the normative production of luxury. We argue that, for the sake of global marketability and profit, the semiotic realization of super-elitism by the airline industry powerfully ‘re-organizes' anachronistic modes of tourism while also reformulating very traditional notions of class distinction.

Emergence of a Market for Southwest Airlines Frequent Flyer Awards

The Internet has facilitated the emergence of a secondary market for Southwest Airlines flight tickets awarded by its frequent flyer program. Possible reasons for the existence of this market are explored, because Southwest bans the sale of these travel vouchers. With data from eBay auctions, hedonic regression results show that a later expiration date, no blackout dates, and the inclusion of drink coupons have positive effects on the prices of these vouchers. Additional security fees and whether a voucher is in paper or electronic form do not appear to affect the price. It is calculated that by selling the voucher, the seller receives, on average, a $34 rebate on each round-trip flight traveled on Southwest.

Modeling Demographic and Unobserved Heterogeneity in Air Passengers' Sensitivity to Service Attributes in Itinerary Choice

Modeling passengers' flight choice behavior is valuable to understanding the increasingly competitive airline market and predicting air travel demand. Standard and mixed-multinomial logit models of itinerary choice for business travel are estimated on the basis of a stated preference survey conducted in 2001. The results suggest that observed demographic- and trip-related differences are incorrectly manifested as unobserved heterogeneity in a random-coefficient mixed logit model that ignores the demographic- and trip-related characteristics of travelers. Among demographics, gender and income level have the most noticeable effects on sensitivity to service attributes in itinerary choice behavior, but membership in a frequent flyer program, employment status, travel frequency, and group travel also emerge as important determinants. However, residual heterogeneity is significant because of unobserved factors, even after accommodating sensitivity variations due to demographic- and trip-related factors. Conseq...

Modeling Demographic and Unobserved Heterogeneity in Air Passengers’ Sensitivity to Service Attributes in Itinerary Choice

Modeling passengers’ flight choice behavior is valuable to understanding the increasingly competitive airline market and predicting air travel demand. Standard and mixed-multinomial logit models of itinerary choice for business travel are estimated on the basis of a stated preference survey conducted in 2001. The results suggest that observed demographic- and trip-related differences are incorrectly manifested as unobserved heterogeneity in a random-coefficient mixed logit model that ignores the demographic- and trip-related characteristics of travelers. Among demographics, gender and income level have the most noticeable effects on sensitivity to service attributes in itinerary choice behavior, but membership in a frequent flyer program, employment status, travel frequency, and group travel also emerge as important determinants. However, residual heterogeneity is significant because of unobserved factors, even after accommodating sensitivity variations due to demographic- and trip-related factors. Consequently, substitution rates for each service attribute show substantial variations in the willingness to pay among observationally identical business passengers.

Emergence of a Market for Southwest Airlines Frequent Flyer Awards

The Internet has facilitated the emergence of a secondary market for Southwest Airlines flight tickets awarded by its frequent flyer program. Possible reasons for the existence of this market are explored, because Southwest bans the sale of these travel vouchers. With data from eBay auctions, hedonic regression results show that a later expiration date, no blackout dates, and the inclusion of drink coupons have positive effects on the prices of these vouchers. Additional security fees and whether a voucher is in paper or electronic form do not appear to affect the price. It is calculated that by selling the voucher, the seller receives, on average, a $34 rebate on each round-trip flight traveled on Southwest.

Frequent Flier Program Partnerships, Substitutability, and Airlines' Profit

This paper offers a first model of parallel frequent flier programs partnerships, rather typical for the US domestic market. We model these partnerships as arrangements which make carriers' services more substitutable, in a setup where consumers value frequency and exhibit varying degrees of brand loyalty. We show that joining frequent flier programs can increase profits of partner airlines, even where no explicit coordination between them is allowed.

Loyalty Programmes in Civil Aviation: An Overview of the Competition Issues Concerning Frequent Flyer Programmes, Corporate Discount Schemes and Travel Agent Commissions

Loyalty Programmes in Civil Aviation: An Overview of the Competition Issues Concerning Frequent Flyer Programmes, Corporate Discount Schemes and Travel Agent Commissions

Frequent flyer programs for European low-cost airlines: Prospects, risks and implementation guidelines

The continuous growth of passenger numbers masks the fact that the European market for low fare air travel is radically changing. New airlines, takeovers as well as bankruptcies are reflecting strong competitive pressures within the market and from established network airlines fighting back to retain their market shares. European low-cost airlines (LCAs) operate with significant differences in unit costs and most of them are reporting marginal profits or losses. This suggests that many market participants will re-evaluate their business model and depart from aggressive low-cost, no-frills positioning by using service features such as frequent flyer programs (FFPs) to offer something more than simply cheap tickets. The author assesses prospects and problems involved in setting up FFPs and outlines how such a program should be designed for European LCAs to increase customer loyalty and long-term profitability.

The empirical analysis of the impact of alliances on airline operations

Airline alliances dominate the air transport industry with the largest carriers belonging to one of the four alliance groupings—Wings, 1 1 There has been consolidation of the alliances in 2004 with Wings gradually dissolving as KLM and Air France have effectively merged with the former joining SkyTeam. Northwest and Continental are also joining in 2005. Star Alliance, oneworld, SkyTeam—which represent 56% of world revenue passenger kilometers. Although much research has been carried out to evaluate the impact of alliance membership on performance of airlines, little has been done on the perceived impacts by participating airlines. This paper gathers opinions of all the airlines, belonging to the four global alliances in 2002 on the impact alliances have had on their traffic and on their performance in general. To achieve this, a comprehensive survey of the alliance management departments of airlines participating in the alliances was carried out. The survey examined which type of cooperation among carriers (frequent flyer programmes, code share, strategic alliance without antitrust immunity, strategic alliance with antitrust immunity) have produced the most positive impact on traffic and which types of route (short haul, long haul, hub–hub, hub–non-hub, non-hub–non-hub) have been affected the most. In addition, the respondent airlines quantified the effect alliances have had on specific areas of their operation, such as load factors, traffic, costs, revenue and fares. Their responses are analysed by alliance groupings, under airline and under geographic region to establish which group, type of carrier and geographic region has benefited the most. The results show that each of the four global alliances groupings has experienced different results according to the type of collaboration agreed amongst their member airlines.