How AirNZ Untied the Knot with its Customers Part 1

By my reckoning changes just made to Air NZ’s trans-Tasman ticket pricing have disemboweled its loyalty program. Untangling the logic behind what they have done helps clarify the differences between loyalty and reward and how (infuriatingly) branded customer service trumps them both.

Almost every company claims to have a love affair with their customers-but there has to be limits. I have it on very good source (see here) that Rob Fyfe, the CEO of Air NZ recently wrote a letter to a certain gentleman who had pushed a little too far and invited said customer to never darken the doors of his airline ever again. Ouch.

But that’s not going happen to me! Since I moved to Brisbane earlier this year I’ve flown trans-Tasman more than 40 times. Rather than being my usual price obsessed, penny-pinching, godless airline swapping jezebel, I have instead (for reasons that will shortly be explained) been entirely faithful to Air NZ (ok, there was a meaningless one flight stand with Emirates). As a result Air NZ has rushed me through their loyalty program from Jade to Gold Elite. Now I am hooked. I hardly even look at other airlines.

Until last month they divorced me. Oh they don’t mind if I hang around and use their services but the relationship is no longer exclusive. My loyalty is no longer required or expected – and if you are mostly a trans-Tasman flyer then you are in the same boat (or plane). You can now fly on whoever you want. Goodbye hello Webjet.

It all comes down to the new ‘Seats to Suit’ service that Air NZ has just launched on its trans-Tasman routes. Air NZ,responding to the cut-price offers from other airlines,has now made a range of things optional that use to be standard, namely bags, meals and movies. Additionally they have also made it possible to buy access to the Koru Club. It’s this last move that’s so controversial – I figure it was either a strategic oversight or part of a general plan to dismantle the loyalty scheme.

All this has made me think about the difference between reward, loyalty and brand, and what each can learn from the other. So let’s start with the difference between reward and loyalty, because up until recently I would have said that they were the same thing.

You’d think that the purpose of frequent flyer programs would be to reward loyalty. Ha! Fat chance. Airlines don’t care whether you’ve flown with them once before or a hundred times before. They are only focused on influencing your next purchase decision. They have two levers to do that- they can try and entice you to buy from them and not others or if you have previously flown with them make it harder for you to go elsewhere. I’d argue that the first strategy is about reward and the second is about loyalty.

The first large scale air mile program was put in place by American Airlines in 1981. It was so popular that it was quickly copied. By January 2005 a total of 14 trillion frequent flyer miles had been earned. But now with every airline offering them they stopped being an effective differentiator and as they are costly to maintain they are always first on the list for trimming when airlines are facing tough times, which for airlines is most of the time.

For example while Air New Zealand has its Airpoints Dollars program it is (from a normal consumer’s point of view) functionally useless because you only earn dollars on the most expensive airfares that you would never buy willingly. Instead earning a few dollars becomes a grudging consolation prize for having left your ticket shopping too late.

Frequent flyer programs are mostly about reward, in the sense that points are mechanically doled out whether it is your first flight for your one thousandth. To some extent they entice you to come back so you can accumulate enough points to be able to redeem them on a flight but as they become watered down this becomes increasingly less appealing. Qantas even allow you to buy airfares with a combination of points plus money which removes the small loyalty advantage of points all together.

So if air miles programs are expensive and ineffective then the only things left for an airline is to promote loyalty.  How can they do that? Not by giving you more – but by threatening to give you less. Let me explain.

I know a group of guys who hire a boat every year and spend 10 days fishing for marlin. It is not entirely clear what happens on the boat but apparently it’s so epic that there is a big waiting list. But here is the thing – getting a 10 day leave pass is very hard to slide pass the Home Controller. So it is tempting for one of the Boys to think that maybe they could skip a year. To disincentivise this outrageous behavior the team have a very simple rule. If you miss a year, you go to the bottom of the waiting list. The result? Loyalty is excellent.

This is the essence of ensuring loyalty. It’s not by rewarding frequent patronage, it’s by punishing disloyalty. Mafia henchman are loyal to The Boss not because they love him but because they know what happens if they aren’t. Similarly it’s not so much what you give customers, it’s what you take from them. High value customers should be using your products and services not because they will get more but because if they don’t then they will get some highly valued perk that they’ve ‘earned’ taken away.

In my next blog I will explain how this works in practice, and go into what Air NZ has to offer that could be so compelling and how the ‘Seats to Suit’ ticketing has mucked it up.


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