Skift Take

Not long ago, all discount airlines needed to compete was cheap fares. But times change, and with legacy airlines poaching some of their customers, more ultra-low-cost carriers are taking loyalty seriously.

Not long after a private equity firm acquired Frontier Airlines in late 2013 and changed its model to prioritize low costs and low fares, the carrier gutted its elite frequent flyer program, removing perks from many of the airline’s most loyal flyers.

Frontier’s fares were so much cheaper than the competition, it didn’t need to incentive travelers to fly with it. Yes, travelers could earn some perks, such as free checked bags, if they flew at least 20,000 miles, but if they flew more, they couldn’t earn extra goodies. If they sought special incentives for being road warriors, they could fly a major airline, though they’d probably pay a lot more for tickets.

But much has changed since then.

Now, three of the four biggest U.S. carriers — all except Southwest Airlines — sell no-frills, basic economy fares that roughly match Frontier’s product, making it easier for them to compete. And while Frontier is still often cheapest, it has also raised prices to compensate for higher fuel prices. An airline doesn’t have to do much to fill seats at sub-$20 fares, but when the entry price is $79, it’s tougher to get people off the couch.

So that has prompted Frontier again to overhaul its loyalty program, adding a tier for passengers who fly 50,000 miles per year, and another for passengers who reach 100,000. It is betting it can attract more repeat business and keep customers from defecting to full-service airlines.

It’s not the only discount airline re-examining loyalty. As legacy carriers become more aggressive with pricing — United Airlines President Scott Kirby said he does not want to lose customers to low-cost and ultra-low-cost-carriers — many value airlines, including EasyJet and Spirit Airlines, are treating customers better while adding frequent flyer perks. They can no longer take for granted their customers will return.

“We have a loyalty program but we haven’t really invested in it,” EasyJet CEO Johan Lundgren said earlier this month at the Aviation Festival in London. “I think there has been a view that low-cost-carriers don’t involve themselves in loyalty programs. But I don’t buy that. Any company today needs something where you can reward and recognize your customers.”

Both EasyJet and Spirit plan to overhaul their frequent flyer programs soon. The exact details remain secret for both, but in an interview last month at the International Aviation Forecast Summit, Ted Christie, Spirit’s president and future CEO, said loyalty should not just be a focus for full-service airlines.

“By driving loyalty, first of all you’re getting the first look,” said Christie, who becomes CEO in January. “The customer is coming to see you first to buy their ticket. That’s a tremendous value to any product. Secondarily, over time, loyalty breeds the interest in being willing to pay you more for the same product.”

Not a Legacy Carrier Program

No one is going to confuse a discount airline’s loyalty program with one offered by a global network carrier.

The big ones, like American Airlines, or Lufthansa or Air France, often have aspirational programs, teasing customers with the prospect of free long-haul business or first class travel. And because they have vast networks, along with partner airlines, these carriers usually can take their passengers everywhere they want to go.

“They’re driving a product that has a feel to it, that has an affinity associated with the worldwide reach that it can afford,” Spirit’s Christie said. “Those types of things drive a feeling from a customer perspective that creates their version of loyalty.”

The average ultra-low-cost carrier probably won’t help customers take that once-in-a-life time trip to China, and with a few exceptions — Ryanair, perhaps — it’s probably not big enough to transport customers everywhere they want to go. But a discount airline might carry a passenger a few times a year — enough to make a loyalty relationship beneficial, said Daniel Shurz, Frontier’s senior vice president for commercial.

“It is a very consumer friendly program and it is targeted at leisure customers,” he said on a recent conference call with reporters. “It is targeted at customers who we would consider frequent flyers who the major carriers would consider infrequent flyers.”

EasyJet also has no interest in matching legacy carrier programs, saying in a statement earlier this year, “loyalty does not need to be the expensive, complex structure.” But Lundgren, who took over as CEO in December, promised investors in March the airline would take loyalty more seriously.

Today, EasyJet said, about 46 percent of its passengers fly once per year. It said it can improve that number considerably through “reward and recognition” of customers, predicting it can drive more revenue.

“Returning customers book twice as many flights a year as new customers and drive both passenger and ancillary revenue through increased demand, conversion and attachment rates,” the airline said in a statement accompanying its half-year results.

While discount airlines often have more simple programs than legacy airlines, the perks they offer return customers are often the same as big airlines give their best customers. Simple things, like waivers for bag fees or free extra legroom seats, go a long way toward keeping customers loyal.

Anything discount airlines can do to reduce customer churn is probably good business, said Rob Friedman, a consultant and former vice president for American’s loyalty program.

“I believe the renewed focus on the loyalty programs is part of a broader realization by [discount airlines] that retaining and growing existing customers is much more valuable and cost effective than constantly acquiring new customers,” he said in an email. “Repeat customers are highly likely to spend more per trip over time, and have a lower cost of sale.”

Credit Card Game

Discount airlines are rediscovering the importance of loyalty as banks continue to offer big money to carriers for co-branded credit card relationships. That’s particularly true in the United States, where laws make it easier for card companies to reward airline points to consumers.

Thus far, the largest U.S. airlines have been the biggest beneficiaries of increased spending from banks, according to research from Joseph DeNardi, an analyst with Stifel. In an August report, he estimated American had earned more than $1 billion in “marketing revenue” from its loyalty program in the first half of this year. That’s not exactly profit, but it’s a close enough proxy, he said.

Frontier, which is not a public company and does not share many details about its program, likely earns far less from its relationship with its main bank, Barclays. But it is nonetheless almost certainly a profitable enterprise for Frontier.

Interestingly, Frontier overhauled its elite frequent flyer structure at the same time as it overhauled its co-branded credit card. Under the new system, customers can buy elite status through spending money on the card. A customer might reach the 50,000-mile elite level by flying 20,000 miles and spending $30,000 on the card.

Such an arrangement is helpful for both the airline and the card company. Discount airlines know customers are more likely to fly them if they carry a co-branded credit card, and banks know consumers are more likely to use the card if they like flying the airline.

Another U.S. discounter, Minnesota-based Sun Country Airlines, is also overhauling its co-branded credit card to make it more relevant to consumers, said Brian Davis, the carrier’s chief marketing officer.

Sun Country’s average customer probably flies even less than Frontier’s — Davis estimates a typical traveler flies once every 12 to 18 months — and it is betting its co-branded credit card will keep customers interested in the airline when they’re not flying.

“Vacation is one of the most motivating rewards,” Davis said. “When it is very cold here and folks are at the gas station, the idea of a warm getaway is one of the most compelling things for folks to look forward. The bank then is funding your vacation.”

Unlike Frontier, Sun Country no longer has a program to reward frequent flyers. It cut it last year, because it no longer needed a system that rewarded customers who spent at least $5,000 annually on the airline, CEO Jude Bricker said. The entire elite program had only about 300 members, he said.

Sun Country could have redesigned its elite program to make it more appropriate for its customers, but it decided against it. Bricker said he still doesn’t think a discount airline needs to recognize elite flyers if its fares are cheap enough.

This summer, during peak season, Sun Country  flew from Los Angeles to Honolulu— a route it had never flown, between two cities where its brand had little name recognition — and it made money. Sun Country’s average fare in July, one-way, was about $275, while the competition charged $350. It was enough of a difference to attract customers, Bricker said.

“Most loyalty programs offer free travel at the expense of [a traveler’s] employer,” he said. “We don’t have that dynamic. Our folks pay with their own money.”


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Tags: airline innovation, airlines, easyjet, frontier airlines, loyalty, sun country airlines

Photo credit: Spirit Airlines has long attracted customers with its low base prices, which it calls its "bare fare.' But the airline will soon overhaul its loyalty program to encourage more repeat business. 155293

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