Rewarding the Road Warrior

American Airlines’ AAdvantage turns 25 this year. It’s tough to believe there was ever a time when our every purchase wasn’t determined by how many “miles” we were going to get. Frequent-flyer loyalty programs dominate the travel industry, determining the airline we fly, the cars we rent, the hotels we inhabit — even how we pay for services at each step along our travels.

Prior to 1978, there was no need for airline loyalty programs. Government regulated the airline industry, telling companies where they could fly and how much they could charge. During the post-World War II travel boom, airlines advertised the quality of their service, their food, the newness of their aircraft, even the appearance of their flight attendants. The one thing you couldn’t market was price.

When the government deregulated the airline industry, price became a variable — overnight. While fare alternatives were exploited by some canny entrepreneurs (remember Freddy Laker?), another change was occurring within airline operations: computerization.

Computers let airlines track and manage enormous amounts of data, thus fostering the fledgling frequent-flyer programs.

It took three years, however, from deregulation to rollout for the first loyalty scheme. Why did it take American — the largest carrier, then and now — until May 1981 to launch the AAdvantage program? “The people in charge of airline marketing weren’t marketers,” says InsideFlyer founder Randy Petersen. “Prior to deregulation, nobody in the airline business had any real marketing to do. When banks became deregulated, they gave away toasters. The airline industry looked at that with envy and said, ‘What can we do to drive loyalty?’”

American wanted to build loyalty with its best customers. And yet what “started out as a promotion became an integral part of our interaction with our customers,” says American Airlines spokesperson A.J. Dennis.

The AAdvantage program was the soul of simplicity: for every mile you flew you received one frequent-flyer credit toward a free ticket (at 25,000 miles) or upgrade. The genius of American’s plan was that it took a portion of inventory, usually that which went unsold, and allocated it as a reward to its best customers.

The plan’s creators had the foresight to include Hertz and Hyatt as travel partners from the start, thereby allowing consumers to accumulate more miles and rewards. It didn’t take long for most customers to realize that it paid to travel exclusively within the AAdvantage system.

Within days of American’s launch, No. 2 carrier United announced its version, Mileage Plus. Similar to AAdvantage, it had two exceptions: it awarded a 5,000-mile bonus to consumers on enrollment and Mileage Plus miles didn’t expire.

Once these carriers had instituted air miles as their “gold standard,” TWA and Delta followed by the end of 1981. As each airline rolled out its program, it linked with rental car companies and hoteliers. And witnessing the effect air miles were having on their reservations, it didn’t take long before the hotel companies began offering their own frequent-guest programs. Holiday Inn launched its Priority Club, the first affinity program in the hospitality industry, in November 1983. Priority Club was lucrative for travelers: after 75 stays, a member got two airline tickets to Europe, a week’s free hotel in Paris, plus a week’s free car rental. Sales reps, who once had about as much chance of an all-expense paid trip to Paris as they did to Venus, were suddenly booking reservations in Holiday Inns like they’d discovered healing waters there. (Holiday Inn discontinued Priority Club in February 1986, replacing it with a much humbler rewards program — but not before a horde of “road warriors” traveled to “Paree” on its nickel.)

Via Marriott Rewards, guests had a choice of Marriott points or air miles, while Hilton HHonors took the opposite tack, guaranteeing air miles and HHonors points.

“Today, 60% of miles given away come from non-travel related activities,” Petersen says. That percentage is now due in part to credit card companies, which use affinity to make their cards “top of wallet.”

Discover Card is generally credited with being the first credit card company to offer customers a frequent-buyer reward simply for using the card. This reward (generally a credit of around 1% of the amount charged) revolutionized the industry. The success of Discover prompted other card issuers to adopt similar strategies. American Express adopted membership rewards, a paid membership subset of American Express; cardholders received a point for every dollar charged. These points could then be redeemed for merchandise or translated into other loyalty program currencies. Both American Express and its competitors embraced strategic relationships with other travel interests, begetting, for example, the Delta Platinum American Express Sky Miles card and the Visa Platinum Hilton HHonors card. These cards generally offer one free guest point for each dollar charged, with consumers earning a 50% bonus for charging any of the card sponsors’ services on its card.

And yet free air travel is still the largest driver of the frequent-traveler system. Twenty-five years after its creation the “air mile” has become the currency of travel and the ne plus ultra of travel promotions.

“There are just under 400,000 air-mile millionaires,” Petersen says. “We have consumers who consider their miles as ‘travel IRAs’ that will let them see the world for free in retirement. When airlines announce financial difficulties the first question we get isn’t, ‘What’s going to happen to the company?’ It’s ‘What’s going to happen to my air miles?’”

Rod Taylor is a senior VP with CoActive Marketing in Cincinnati, OH. Reach him at [email protected].

CHAINED TO LOYALTY

I’m more than loyal to the affinity programs I belong to; it’s more like these programs are holding me their prisoner. Consider just a few of the businesses that I’m now irrevocably chained to for the rest of my life:

Delta Sky Miles

I’ll reach platinum status this month with Delta, a far more precious metal than last year’s gold level. I just need to hit 75,000 air miles; I’m close enough that if I have to go out and pay for a superfluous round trip just to get the miles, I will.

Hilton HHonors

I’ve achieved the Diamond level here, a feat which impresses my wife more than anything else I’ve ever accomplished. I damn near have to take a pill to stay in a competitive hotel.

SuperCuts Hair Club

I’m rather embarrassed to admit that I get my haircut at a discount chain (for some strange reason people think my hair deserves better), but after eight paid, the ninth one is free; $11.50 here, $11.50 there — pretty soon you’re talking real money.

Jersey Mike’s Subs

You don’t think affinity programs work for fast food chains? I drive past a Quiznos, a Penn Station, a Blimpy and two Subways to get my card stamped twice for my Giant No. 5. Twelve double stamps and Mike buys — sweet!

Airport FastPark Parker

Buy eight get one free. My business travel generates enough parking to cover about a week of free parking from “the man in the van” when we go on vacation. Hey, you’ve got to park somewhere, right?
— RT