News about the rumored changes to the United Mileage Plus program came as quite a shock to me. Although the final details will likely not be released until after Labor Day, it will still be advantageous to analyze each of the changes under consideration:
I. Upgrade Waitlist Priority – VERDICT: Fail
United is mulling over making a passenger’s upgrade waitlist position based on a single-transaction rather than prioritizing a a customer’s long-term patronage. Upgrade priority for elites would be sorted in the following order:
- Full-fare tickets
- Mileage upgrades with co-pays
- Systemwide and regional upgrades
- Complimentary upgrades (unlimited domestic upgrades)
Global Services members would be exempted, enjoying upgrade clearance before any other elites, no matter what the fare class.
The idea is to encourage elites to purchase higher priced tickets, but the result of saying a Silver on a $300 M fare receives an upgrade before a Diamond on a $170 L fare serves only to discourage the Diamond from buying a more expensive fare in the future.
Let’s say Bob qualifies for Diamond status on United each year through a mix of paid-business class travel for work and economy class travel, amounting to several thousand dollars, for family leisure travel. He runs his own consulting firm and travels a few times each year to Asia in paid business class on United because he enjoys the domestic perks that come with elite status. That prompts him to choose United for his personal travel, including his upcoming weekend getaway with his wife to Miami, despite the higher price and less convenient schedule than American offered, primarily for the opportunity to upgrade a companion.
He wants to maximize his chance at the upgrade, so immediately after booking months in advance, he requests an upgrade for himself and his wife using confirmed regional upgrades that United’s top-tier flyers earn each quarter. United has held back upgrade space, hoping to sellout the first class cabin with full fares, so Bob’s upgrades are waitlisted.
Then there is Sue. She’s a road warrior and flies whatever is cheapest, though that is enough to give her silver elite status across a number of airlines. When she travels for personal travel, she always goes for the cheapest option.
Sue’s business trip to Des Moines is cancelled, so she decides to take a quick holiday to Miami with a friend. It’s the day before the flight, though, so ticket prices are rather high. She books on United because it is the cheapest, without ever giving much thought to getting an upgrade, and isn’t even aware she purchased a “full-fare” ticket.
In San Francisco the next morning, there are two first class seats remaining at the gate on the flight to Miami. Despite the thousands of dollars Joe spends on United tickets each year, he loses the upgrade to Sue and her friend, who were only semi-cognizant that they were even flying United and pleasantly surprised to receive the upgrade, though not particularly enthusiastic or grateful.
How do you think Bob will respond? He wasn’t entitled to the upgrades, but he’s going to think, “Wow. I spend $10,000 per year on travel on United and this is how you reward me? I could have flown non-stop on American for a cheaper price at a better time. And you know what? Next time I will. And I’ll start doing the same for my business trips as well.”
Sue and her friend enjoy the upgrade, but Sue books her next work trip with Delta because it’s cheaper and next holiday on Alaska Airlines because it saves her $75. Bob decides to book with Cathay Pacific for his upcoming business trip to Hong Kong and falls in love with the great service offered at an even cheaper price than the United. Unbounded from the “shackles” of loyalty, he enjoys a better product while United loses $10,000 in revenue a year, all because he missed out on an upgrade after United deemed him to be less valuable than someone who bought a last-minute ticket.
I hope that my long-winded story about Bob and Sue helps to demonstrate why United would be making a huge mistake if they choose to prioritize upgrades on a transactional basis, with a narrow and frankly ignorant definition of loyalty applied.
My example above did not even touch on the fact that mileage upgrades will now be prioritized over upgrades using systemwide or regional upgrades.
Say Bob is taking his family on a vacation to London and paid $400/ticket extra to purchase an upgradeable W-fare for his family of four, so that he could upgrade his family to business class. The upgrades are waitlisted, but multiple seats remain open as the day of travel approaches. Sam also wants to take his family to London from San Francisco and has no-status with United, though he has banked miles from opening up a few Chase Mileage Plus credit cards. So he books the cheapest economy class ticket on United and applies for upgrades using miles + a $500 co-pay.
If only four seats remained and it was Bob versus Sam competing for the upgrades, Bob would again lose. He would not get the $1600 extra he paid to book an upgradeable fare class and he would be faced with once again having upgrades sitting in his account that he could not use. The denied upgrade would move Bob to move travel away from United, perhaps toward American, because on American he would not even have had to purchase a higher fare class and would have been upgraded before anyone who did not hold status.
United is failing to look at the big picture if they really believe that incremental revenue on a specific flight is more important than overall loyalty.
II. Elite Status Requirements – VERDICT: Fail
United is considering the introduction of minimum spend requirements in addition to the mileage and segment thresholds to achieve elite status:
- Four Segments on United Airlines/Continental/Copa/Aero Republica +
- Premier Silver – 25,000 miles/30 segments + $2,000 (or just $5,000)
- Premier Gold – 50,000 miles/60segments + $4,000 (or just $10,000)
- Premier Platinum – 75,000 miles/90 segments + $6,000 (or just $15,000)
- Premier Diamond – 100,000 miles/120 segments + $8,000 (or just $20,000)
It seems to me that rather than shrink the elite ranks, the above change in policy will massively expand the elite ranks.
Think of the businesswoman who takes two trips from Washington to Paris on United each year in paid business class. The ticket is $8,000 r/t and she flies non-stop. After the two trips she is a Premier Platinum, even though she chose United only because it is the cheapest non-stop business class option as her company travel policy dictates. At ~15,000 actual flight miles for the year, is she really a frequent flyer?
The fundamental problem I have with the proposal under consideration is that high transactional spenders are not the people that frequent flyer programs should be targeted at. Those people will continue to spend the money on flights anyway, because they book directly into premium cabins and don’t sweat things like upgrades to business class or mileage bonuses. Instead, an airline’s frequent flyer program should encourage passengers to move elective travel from other carriers to their own because of the increased benefits that come with doing so. An extra $30 here and $50 there to fly on a preferred carrier does not break the bank for individual consumers but when aggregated leads to a nice additional chunk of change for the carrier.
Someone buying a full fare ticket, the last seat on a plane, may be the unprofitable one – if someone else would have come along and bought the same full fare ticket that’s now unavailable. Or at least that full fare passenger provides zero incremental dollars compared to United’s next best alternative. The economic profit on that passenger is zero. Amount of profit accruing to an activity has to be determined on an opportunity cost basis.
Someone buying an expensive ticket based on company policy to fly United on a given route, or based on a corporate contract for that route, is not generating any extra revenue as a result of the frequent flyer program, either. Awarding them miles is done at an economic loss, because doing so just adds a future cost beyond what’s necessary to attract revenue. Awarding those customers miles or upgrades is not done at a profit at all.
The customers most people think as being the most profitable may not be profitable at all. Awarding those customers perks, benefits, future award travel may well be unprofitable.
To be clear, these are very extreme cases used for illustrative purposes only, that’s not the median case. And I am not saying at all that an airline shouldn’t try to attract more customers who pay more for the same product, not at all!
The overall point is this: a profitable frequent flyer program is one that influences consumer behavior at the margin, to generate revenue they would not have otherwise gotten, above the marginal cost to produce what the customer is receiving.
Rewarding high spend that you’re going to get regardless of the program makes no sense at all.
Saying that a passenger flying a $250 transcon is unprofitable is to say that the airline would be better off if that customer were not flying. Which is generally absolutely false. The claim compares the passenger’s marginal contribution to the airline’s revenue with the airline’s average cost, a common mistake.
On the other hand, someone buying cheap tickets that the airline makes available in a low fare bucket on the expectation that those seats would otherwise have gone empty or that would not be sold at a higher price, those customers are indeed profitable!
The marginal cost of that extra customer is near zero. The seat going empty generates zero revenue. Nearly every dollar United takes in from such a customer is pure profit!
Gary sums up perfectly my thoughts, saving me time and helping to clearly explain why the $250 transcon mileage runners are not just leeches who take benefits without giving anything in return.
Let’s use me as an example. I re-qualified for 1K status after surpassing 100,000 elite qualifying miles in mid-May. I bought a few pricey tickets, but primarily tickets from the lower-end of the fare class buckets: the $700 return trips from Frankfurt to the States or the sub-$300 transcon trips, many offset by vouchers collected from delayed flights, broken equipment, or lack of special meals the previous year. In total, I’ve spent about $4,000 on United to re-qualify for 1K status, which admittedly is higher than some have been able to do.
United’s new policy essentially tells me that the sum of my business mean nothing to them unless I am flying on a high-priced ticket that day. But what is going to happen if the changes to elite qualification requirements are implemented as laid out above? United will continue to get the high-end business traveler, often tied to United due to company travel policy, but they may lose me and the thousands of others who were happy to go out of our way or pay a bit extra to fly on United or Continental because of our personal attachment to the carrier and because the carrier offered a mix of benefits that recognized the frequency of our business.
And what has the carrier really lost by coddling the small subset of loyalists (after all, I think it is safe to assume that most who fly 100,000 miles on United will easily surpass the $8,000 threshold) who chose to travel not always based on where they need to go, but where they can get the best deal to? Lost change fees, baggage fees, upgrades that could have been sold to other customers? Even the lucrative first class awards that people like me save our United miles for do not cost more than what we contribute to United by filling up seats that would otherwise go empty.
If you recall from my frequent travels to the United States as well as my travel on United to Japan and Brazil earlier this year, every long-haul flight and even most of the domestic flights went out with empty seats on them. Don’t try to tell me that my presence onboard those flights constituted anything other than added revenue that exceed costs, icing on the cake.
The requirement that at least four segments be on United/Continental/Copa/Aero Republica is quite interesting, mimicking a policy that Air Canada introduced this year. I do not think the requirement is in the spirit of Star Alliance, but I’ll refrain from further discussion on that until the specific policy details emerge.
I will also refrain from speculating about what exactly will count to satisfy the minimum revenue requirement, but allowing only credit on United and its subsidiaries or joint venture partners further undermines Star Alliance, pushing traffic away from carriers like LOT, SAS, Asiana and Turkish who offer direct transoceanic service from United and Continental hubs.
III. Change in Status Benefits– VERDICT: Pass
A. Elite Award Mile Bonus
Currently, Premier (25K) elites earn a 25% redeemable mile bonus on all United, Continental, US Airways, and Lufthansa flights. Premier Executives (50K) and 1Ks (100K) earn a 100% bonus. Under the new policy, Silvers would continue to earn a 25% bonus, Golds would earn 50%, Plats 75%, and Diamonds 100%.
While I don’t like it, I have less of a problem with this change in policy. I thought the 100% bonus for Premier Executives was very generous (though appreciated) and I think the new policy is not unreasonable.
B. Upgrade Windows
Upgrade windows move from 48 hours to 24 hours for Silvers, 72 to 48 hours for Golds, 72 hours for Plats, and 96 (from 100) hours for Diamonds.
Again, not a big deal.
C. Economy Plus Access
Silvers will only be available to reserve Economy Plus seat at check-in. Currently, they can reserve those seats (and as of just a few weeks ago) also reserve exit rows seats prior to the front.
I don’t have a problem with this change. Poor Premiers—their status means little anymore, but elite status becomes too diluted when half the aircraft is elite. I think United’s decision to allow all elites to use the premier boarding lane was a poor choice, detracting from the recognition of higher-tier elites.
D. Other Perks
When flying behind the curtain, Global Services members will receive a free meal, free drinks, free entertainment (headsets and DirecTV), and a free Red Carpet Club premium drink. Diamond members will get the choice of two of those when flying in economy, while Platinum members will get to choose one. In addition, Global Services, Diamond, and Platinum members will get a Global Entry enrollment fee waiver.
These are good perks, but they are no consolation for the negative changes above.
IV. Fare Class Bonuses for Elite Tickets – VERDICT: Pass
Class of service bonuses for full fare tickets and paid premium cabin tickets will go up to 125% for Y, B, and M fares, somewhere in between for C, D, and Z fares, and up to 250% for F and A fares.
This is a good move, mimicking what other programs like Miles & More and bmi’s Diamond Club already do.
So is it time to change programs?
Not yet—certainly not until the precise program details are announced, but I do not think it is unreasonable for a mileage runner to begin plotting a United exit strategy.
For me, the choices would be American Airlines or US Airways. American already has a better mileage program and domestic product (with unlimited upgrades for Executive Platinum members, Wi-Fi Internet on most aircraft, much better in-flight catering [you never get an enchilada on United on United or a shrimp appetizer and ice cream sundae from Chicago to Los Angeles], and no fare class restrictions on systemwide upgrades) but I am not enthusiastic about the OneWorld Alliance. I have come to love Star Alliance and my yearly award redemptions in international first on Lufthansa, Swiss, and Thai. With American, my award map would be much more limited (especially if LATAM joins Star Alliance) and their polices, like hefty fuel surcharges on British Airways redemptions and less generous routing rules than United/Continental, are not appealing.
I will be back in Philadelphia next year so loyalty to US Airways would not necessarily be bad. US East has a great route network and US Airways still has a decent award program. Furthermore, fares aren’t bad on US Airways and I like their first class product and new international business class seat—I know there is no IFE, but their meals are pretty good and Wi-Fi Internet is increasingly available, a glaring element that is missing on United/Continental. But US Airways also blocks Lufthansa First Class award inventory and booking awards with them, with all kinds of booking fees, is real pain the rear. Plus, I find US Airways agents are not nearly as competent, friendly, or willing to bend rules as United or Continental [non-Newark] agents.
The grass is not always greener on the other side and by no means do the Mileage Plus program changes necessarily mean that I will leave United. We’ll see what United does to Million Miler flyers, but I’m 2-3 years away from hitting that mark and I’d like to hit that if possible, even if it is only lifetime Star Alliance Silver status that is granted.
My Counterproposal to United Mileage Plus
I’d leave the program unchanged, of course, but if changes are necessary I think it is essential that United refrain from prioritizing upgrades by fare class before status. I have no problem with ordering upgrade priority by fare class within an elite category, but a Diamond who happens to be traveling on a cheap fare should clear before a Silver who bought a slightly more expensive ticket. Furthermore, a no-status passenger upgrading with miles should not clear before an elite who paid extra to book into an upgrade-eligible fare class in order to use a systemwide upgrade.
Second, the concept of a minimum-spend requirement is not all-together unreasonable, but can better be achieved by eliminating 100% earnings on the cheaper fare buckets. Actually, the policy as proposed (assuming the lower fare classes will continue to earn 100% credit) is better for travelers like me who tend to buy from the lower fare buckets and would presumably just travel more under the new program, but I am strongly opposed to the concept of a frequent flyer program becoming merely a program that rewards high revenue. Because as my example demonstrated above, I would not call someone who flies two trips between Washington and Paris a frequent flyer or even necessarily a valuable customer.
Last, I would hope that whatever changes are ultimately implemented do not take effect until 01 January 2013. Many (though not myself) already have travel booked through the first half of next year and I view United’s drastic changes as a bait-and-switch to their Mileage Plus program. Insuring that travelers are fully informed about these changes is reasonable, though I suspect the new policies will go into effect on 01 January 2012 and United could change the Mileage Plus program immediately without any legal ramifications.
United is leading for a change. Even though I don’t care for the direction the ship is sailing, I fear that even if I jumped ship American, US Airways, and the others will eventually embrace this bold move that United has made because it sounds good on paper to the bean counters. Nevertheless, I think time will prove that this move to a transactional-based model of loyalty will be detrimental to the United brand image and actually cost the carrier more than it will ever take in by driving away business like mine.