Why have airlines devalued their loyalty programs a lot in recent years?

Question

I read this answer from Hilmar:

Airlines have devalued their loyalty programs a lot in recent years.

Why have airlines devalued their loyalty programs a lot in recent years?

Answer 1

The answer is (quite likely) supply and demand.

Let's break this down a bit: The goal of a Frequent Flyer (FF) program is to gain customer loyalty through perks and benefits, so that a customer will choose your airline, even if it's not the most convenient and/or cheapest ticket. The "rate of return" of an FF program is really the incremental profit divided by the cost of the program.

Initially these programs were based on "miles flown", which includes the implicit assumption that "miles" is a stand in for revenue & profit. With dynamic "on-demand" pricing models getting more and more aggressive (and bizarre) that assumption went out of the window.

Let's look at an example (United, 2014 or so). You could make highest status (1k) with just six flight per year from the East Coast to China (HKG, PVG). That came with significant perks, free E+ seating, free domestic upgrades, 6 international upgrades, plus a whopping 220,000 award miles which corresponded to about 9 domestic roundtrip tickets. At the same time, that's a highly competitive route, so the average price of an economy ticket was maybe $800 and it has low profitability since it's LONG: you need two full crews and lots of fuel. That's a LOT of perks for $5000 of revenue.

Compare that to the passenger who flies business Boston to Chicago twice a month. The revenue & profit for United is MUCH higher, but the accrual for the passenger is a lot less (even with business multipliers & segment counts factored).

So the airlines were realizing that they are rewarding the wrong type of customers and have since switched to a revenue based rewards program. The exact details have been extremely convoluted and are still in flux.

Competition plays a big role here. If (US market) Delta decides to de-value the program American and United have the choice to keep their program as is in the hope of increasing revenue by attracting some customers away from Delta OR they follow suite, lower the cost of their own programs. So far they all have followed suite.

The final state of this will be determined by supply and demand and Covid has thrown another massive curve ball into all of this, so we are not going to see some sort of "steady state" for the next year or two.