Loyalty Programs in the airlines sector (1/4)

Posted on January 30, 2009 by Matthieu Desiderio

More and more frequent flyer miles for airlines users…with a shorter lifespan

The more a Frequent Flyer Program (FFP) offers partnerships, the more it is supposed to be attractive, even though some partnerships might be considered as “Brand exposure” only (e.g. earning 100 miles per car rental).

It is commonly admitted that air travel accrual accounts for almost 80% of mileage accrual. Among the remaining 20%, financial partners account for 80%! For some programs, figures for financial partnerships (mainly affinity/co-brand cards) are even higher.

For a long time, airline industry Controllers have been suspicious about these billions of miles accounting as thousands of potential free fare tickets. They had nightmares of airlines like PanAm flying only FFP award tickets owners in their last living days. Very soon, it was commonly admitted that these miles should be accounted as a debt provision named “FFP Liability”.

In June 2007, IASB (International Accounting Standard Board) issued an accounting directive dubbed as “IFRIC 13” about Loyalty Programs (on a general basis, including hotels, retailers, etc…). FFP Liability had to be evaluated according to new criteria, including full costs. According to the new calculations, FFP Liability was doubled/tripled for most airlines. FFP owners had no choice, but dramatically decrease the number of “sleeping miles”. Main actions taken are listed below (sometimes a mix of them):

terminate lifetime validity without constraints;
decrease miles validity (commonly between 12 and 24 months);
limit the number of activities extending validity (usually alliance partners and parent airlines); and
instore fixed validity of 1, 2 or 3 years without any extension possibility.

Needless to say, communication to FFP members about the above rules is very sensitive. Hopefully, at the same time, the current economical situation will help in providing more award seats, although at an increasing mile rate.

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