Why Airline Loyalty Programs Are Poised To Make A Comeback, Part 1

This is Part 1 of 2 in a series of posts airline loyalty programs. It seems everyone has a loyalty program nowadays. Buy 6 cups of coffee at your local cafe, get the 7th free. Get points for transactions at your bank. Reap rewards for your gas purchases. And the newest one I learned about just this past weekend when I went to grab some lunch -- make sure to get your Panera Card. [more]But it's true that the airlines pioneered the loyalty program. American's AAdvantage Program launched in 1981 and while official membership is not published, rumors are that it exceeds 50mm people. Air Canada is famous for spinning off its Aeroplan loyalty program from the airline business to raise cash in 2005. The top airline loyalty programs are frequently cited as being worth more than the airline business itself. This has led to some interesting summations of the airline industry as simply flying planes in order to get people to join your rewards program, with the major revenue streams coming from the banks that buy miles for their credit card customers.During the last decade it's true airline have clamped down on the value of miles as they've made it harder to redeem for flights. As such, lots of folks have shifted their attention to other programs (hotels, credit cards, etc.) and focused less on miles.But I believe airline loyalty programs are about to begin a major renaissance that will once again return them to being the flag-bearers and trend-setters of loyalty building programs among travelers.I say that for two main reasons:1) Fees.  The fee culture is rampant in airlines as they look for new sources of non-tariff revenue to boost the bottom line. But if you do a survey of the core revenue generated from folks who are members of a loyalty program vs. not, the results are startling: Loyalty program members generate significantly more revenue per passenger than non-members, even from the same cities with the same demographics. In short, loyalty is worth money to the airline operation, and lots of it.  And that money out-weighs the revenue generated from baggage fees and exit-row seating.Fees have generated a whole new area of "benefit" for loyalty members, namely the ability to not pay the fee. Get the Chase Continental One Pass credit card and you no longer have to pay baggage fees. Get the Barclays US Airways Visa Signature card and you get to board in Zone 1. Get Elite status on nearly any airline and you get most of your baggage, priority boarding, priority check-in, and priority seating fees waived. It turns out these perks might outweigh the actual miles accrued. I don't care at all whether I have 50k or 90k Mileage Plus miles, all I care about is whether I have the 25k in 2010 to earn Premier Associate elite status (good news, folks, I'll have it by November!).  And the reason I care is that I want Economy Plus seating on all United flights. And I'll fly United exclusively to earn that status, and then enjoy the perks once I get it. That's loyalty at its best.2) Consolidation. When there were 6 or 8 US carriers to choose from for domestic flying, loyalty was harder to maintain. If you're like me and you're willing to pay only a little bit more for your preferred carrier, that meant sometimes you could justify it and sometimes not. But that number has been reduced -- to only 5 major coast-to-coast carriers, and really just the 3 big alliances + Southwest. Yes, Frontier (and Midwest), AirTran, JetBlue, Virgin America, and Alaska all have market presence, but there are basically three alliances that can get you anywhere. This means it's easier to choose your preferred carrier. It also means there are fewer loyalty programs to join and maintain. I'm an active member of 5 airline loyalty programs, so technically I get benefit whenever I fly any of those airlines plus any other airline they share loyalty benefits with. But in one example of this phenomenon, I've never accrued a single Continental One Pass mile, ever, despite having flown Continental tens of thousands of miles in the last few years. Why? When they were in SkyTeam, I accrued Delta SkyMiles. Now in Star, I accrue United Mileage Plus miles. And while I have ~100k US Airways Dividend Miles and used to be a Dividend Gold member for several years, I now no longer accrue those either, I put it all in United since I've moved to San Francisco.The point being that it's easier to consolidate your miles without consolidating your travel, and that makes the programs more useful for the traveler. It might dilute the loyalty benefit to the airline, but in the age of consolidation, it matters less (e.g. Continental and United will be merged soon, so it hardly matters to Continental that I earn United miles on them).This resurgence of the programs is not lost on the airlines. United has been advertising their Mileage Plus program on billboards and TV spots in the San Francisco area for the last year, and given the upcoming combination with Continental's One Pass program, that is not likely to stop as that newly merged program stands to benefit from the combined membership and marketing power that goes along with it.The trend of dumping airline rewards for credit card rewards and cash back is starting to come to a close. Credit card and other broad-based rewards programs will continue to be important and valuable, but airlines are once again regaining their mojo and their ability to assert their loyalty dominance.  If airlines truly recognize this opportunity, we'll see them making their programs more beneficial and competitive in the coming year, rather than more restrictive. There's been a slight trend towards that lately, look for it to continue.Nothing quite like making life more difficult for everyone else to make loyalty program members feel like kings and queens!Up Next in Part 2: How to master airline loyalty rewards programs and which are the best.
Evan Konwiser is co-founder of FlightCaster. These thoughts are excerpted with permission from his blog.