The integration of Alaska Airlines and Virgin America is now largely complete. The final major milestone – single PSS go-live – was largely uneventful in late April. Save for one “whoopsie” in the process: Too many award seats. During the quarterly earnings analyst call this week EVP & Chief Commercial Officer Andrew Harrison explained that the carrier simply put too many seats into the award system. And MileagePlan members were none to shy about snapping those seats up.
[W]e have a very generous loyalty program. The problem was, we were just way too generous post PSS. There’s a couple of key drivers to that. Firstly, we just weren’t set up correctly with our inventory. We were way too open just to say it. Our lowest fare award redemptions were up 40% year-over-year. So we’re all about generosity. But, we had the inventory misaligned with the demand.
Not only were too many seats available, but the opportunity came during the booking window for peak summer season travel. By making those awards available where fares are typically higher the program members benefitted significantly. Alas, the move proved negative for the carrier. The increased award bookings hurt revenue to the tune of 150 basis points in Q2. That impact will extend at similar levels through Q4.
The cost of generosity
Extra generosity at the time of PSS integration has some benefits, particularly when looking at the Virgin America customers acquired with the merger. Concerns about the value of the MileagePlan program relative to Elevate are hard to address given the general skepticism around mergers and the comfort consumers have in their “home” program. Seeing that award space is plentiful helps offset many of those concerns. But it comes at a significant cost, one that Alaska Airlines cannot bear long-term.
From a loyalty and brand perspective higher redemptions are very encouraging and our go forward objective is to strike the right balance between paid tickets and offering great value to our loyalty members. – CCO Andrew Harrison
Evolving the program, altering the value proposition
Striking that balance comes down to the inherent conflict of distressed inventory versus point value. Many larger programs evolved to allocate internal point values and inventory such that the channel through which the seat is sold – revenue or award – is inconsequential to revenue targets. Alaska Airlines is not yet at that point. This could be seen as contributing to the increased value proposition to consumers but it also challenges the internal operations to perform better.
I think we’re trying to balance two very important economic drivers of our business. One is obviously selling revenue tickets and the other one is to continue to grow the loyalty program which is also generating significant economics through both the [co-branded credit] card and [revenue] passengers. I think the industry right now is basically indifferent. I would say we are not at that place although we are continuing to work on how indifferent we do plan to be as it relates to loyalty going forward. So we think we have the best of both worlds right now.
For MileagePlan members this should be seen as a warning: The program intends to continue adjustments towards a revenue-neutral position for points or cash when buying tickets. That’s not necessarily to say it will become a revenue-based program. Indeed, while not broached in this quarter’s call the company has been outspoken about avoiding that shift. Even lacking an explicit revenue-based transition consumers should expect that the “sweet spots” will continue to erode as the program moves closer and closer to aligning the revenue per ticket across awards or paid seats.
Even as Harrison explains that the current setup is “the best of both worlds” it seems that change is on the horizon.
Some earnings transcript quotes via SeekingAlpha.
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