Loyalty Myths: Are Tougher Requirements for Elite Status about Thinning the Ranks?

A lot has been written and discussed recently about tougher requirements to earn top-level elite status at both United and American Airlines.

(Note: Whilst this article talks specifically about the nuances of US Airline Status qualification — the learnings apply globally).

Qualifying for Status

If you’re not a US-based frequent flyer (and actually — in many cases, even if you are), the elite qualification programs of American, United & Delta are over-complicated, convoluted, and frankly — just plain ridiculous. It takes the average non-US frequent flyer about 3.2 seconds to reach this conclusion.

We will try and explain them in over-simplified terms.

Basically — to reach elite status — you need to :

  1. Fly a certain amount (# of flight segments or total miles flown) during the year; AND
  2. Spend a minimum amount of “qualifying dollars” with your preferred airline during the year.

If we take a look at United’s elite status qualification levels — we see a ridiculous use of acronyms ( PQM/PQS/PQD… don’t worry, American and Delta have equally confusing acronyms — namely EQM/EQS/EQD, and MQM/MQS/MQD…so much for originality…).

Translating the above chart from United Airlines, in order to reach Premier 1K status, you need to:

  1. Fly 100,000 qualifying miles or 120 qualifying segments; AND
  2. Spend a minimum of $15,000 qualifying dollars with United

The qualifying dollar requirement recently increased from $12,000 to $15,000.

Similarly — with American Airlines, it works the same way.

And just like United — American recently increased the qualifying dollar requirement for its top Executive Platinum status from $12,000 to $15,000.

Tougher to Qualify

Many commentators (and flyers) erroneously believe that the increased requirements are about making it more difficult to qualify — and thus keeping the riff-raff out of the top elite ranks.

Put another way — a frequent flyer who may fly 100,000 miles a year but only spends $12,000 with the airline, will no longer reach or maintain top status.

The theory that the commentators believe — is that the airlines feel there are “too many” top status members and that the herd needs to be thinned.

A common myth amongst frequent flyers is also that by thinning the ranks — benefits such as upgrades will be easier to come by.

Whilst in some cases — fewer elites can improve benefit delivery for those that are left — in the case of American Airlines and successfully getting your upgrade — this simply isn’t the case.

American’s upgrade algorithm (and algorithms at many other airlines globally) already prioritizes those who spend more over those who spend less.

For example — two Executive Platinum members are on the upgrade waitlist:

  • Joe, who spends $12,000 per year; and
  • Suzie, who spends $15,000 per year

Suzie will already be prioritized over Joe — thanks to her higher annual spend.

So, we can bust that myth.

Thinning the Ranks

So are these increased qualification requirements about reducing the number of top-tier elite members?

In short — no… absolutely no!

Airlines want you to achieve elite status. And if you have elite status, they want you retain it, and ideally fly more and achieve a higher status.

Status has a lock-in effect on flyers in two ways:

  1. It introduces “switching costs”. If you have elite status with United, but not with Delta, you tend to not price-shop. You simply go to United’s website and book your fare. Even if you did price-shop — if you chose to fly Delta (due to better price or better schedule) you would not receive your elite benefits such as free bags, priority boarding, better seating, upgrades etc.
  2. You know that you have to fly your home airline in order to re-qualify or maintain your elite status. That means if you choose a different airline — it makes re-qualification harder. This effect leads to flyers dedicating a higher “share-of-wallet” to their home airline.

Airlines want frequent flyers to aim for elite status. They want frequent flyers to feel locked-in, and they want to minimize “splitting”.

A “splitter” in airline-speak, is someone who achieves or retains elite status prior to the end of the year, and then spends the rest of the year flying on a competitor to also earn status with the competitor.

The most common scenario is a mid-level elite status member who chooses to earn mid-level elite status on two airlines, instead of consolidating their share-of-wallet to earn top-status with only one airline.

Airlines hate “splitters”

So if airlines want to encourage elite status — why make it harder to qualify?

It all comes down to loyalty psychology and behavioral motivation.

In simple terms — airlines are betting that existing top-status members who are currently only spending $12,000 with the airline — won’t actually find it too difficult to spend an additional $3,000.

The working assumption by the airlines — is that for most of these “barely qualifying members” — they already have additional airline spend which is currently going to their competitors; and that the new requirements will encourage/force members to consolidate more of their share-of-wallet on the primary airline.

For example, if Joe is currently:

  • Flying 100,000 miles and spending $12,000 on American; and
  • Flying 25,000 miles and spending $3,000 on Delta…

The gamble by American — is that he will change behavior and consolidate all of that flying onto American.

The entire strategy being employed by United and American is to increase revenue — NOT to decrease the number of elite members.

They want existing elite members to spend more

There are a number of psychological elements at play here — but seeing as we’re ultimately asking members to engage in a new behavior (shoot for a new goal) — it comes down to Behavioral Potential.

Professor of Psychology Jack Mearns from California State University, Fullerton explains:

“The likelihood of a person exhibiting a particular behavior is a function of the probability that that behavior will lead to a given outcome and the desirability of that outcome”

The risk for the airlines here is about “expectancy”.

Do elite members feel that the new increased qualification requirements are achievable?

If so, as in our example of Joe above — then the gamble pays off.

But what about the members that were already “stretching” to meet the old requirements — in this case, many members may find the new requirements beyond reach. The result is an erosion of loyalty.

What happens to them?

Some will keep flying with the same airline, and will happily drop down an elite tier…

Others will decide to abandon the airline, and move to a competitor (who may be more convenient based on price/schedule).

And others may find lower elite tiers so lacking in benefits, that they decide to choose an airline based on the best-fare-of-the-day.

Ultimately — United and American are gambling that they “win” more revenue from members spending-up; than they “lose” from members who defect.

It’s a risky gamble.

Credit Card Changes

When Delta and United introduced minimum spending requirements for their elite status tiers — they very deliberately included an easy loophole for members to avoid the spending requirements:

A member who held the airline’s co-brand credit card and spent a minimum of $25,000 on the credit card during the year would have the elite status spend requirement waived.

(Top status on United does not provide a credit card waiver, and top status on Delta requires $250,000 credit card spend — although both airlines waive the qualifying dollar requirement for non-US members).

This was a deliberate strategy to provide an incentive to increase credit card acquisitions and ensure ongoing card spend.

In fact — in her keynote speech at the 2016 Loyalty@Freddies conference, Karen Zachary, Delta SkyMiles Managing Director made note that the program changes at Delta has resulted in significant growth in card acquisition.

Remember — airline revenue from co-brand credit cards is BIG business.

By increasing the qualifying dollar requirement for Premier 1K status from $12,000 to $15,000 — United is literally banking on members either spending-up, or signing up and spending on the Chase co-brand card (which will waive the qualifying dollar requirement for members who end up downgrading to Platinum status).

It’s no coincidence that this change comes hot on the heels of United re-launching their improved co-brand credit card. Improving the performance of the credit card is a high-priority for United.

Just this week, at the Credit Suisse 6th Annual Industrials Conference in Palm Beach, Florida, United’s Chief Commercial Officer — Andrew Nocella, confirmed that the card has been under-performing:

“We haven’t seeing that same momentum at the level that some of our competitors are talking about in this space,” Nocella said. “And so that is a conversation we are having with Chase. We’d like to see it better. They’re committed to making it better.”

American Airlines, on the other hand took a different approach than United and Delta.

When American relaunched their AAdvantage program, they decided not to allow a waiver on qualifying spend for credit card holders.

Instead — they allowed members who held or signed up for their Aviator co-brand card with Barclays, to earn up to $6,000 qualifying dollars through spend on the card.

So it was possible for an American Executive Platinum member to earn top status with only $6,000 qualifying spend on the airline (together with mileage requirements), as long as they also met the card spending threshold.

It was a novel approach which encouraged card acquisition and spend.

The latest changes, recently announced by American — slash the ability to earn qualifying dollars via the credit card.

Just as with the increased qualifying dollar requirement from $12,000 to $15,000, American is trying to increase airline fare spend.

They’re not trying to reduce the number of status members — rather, they want to incentivize these members to increase their core airline spend by consolidating their flights onto American, and away from competitors.

Will it work?

In United’s case — most likely, yes.

For the flyers than can shift competitor flights back to United — they will.

And for those that can’t, the incentive is to sign-up for the co-brand card, and ensure that they spend on the card throughout the year, in order to waive the qualifying dollar requirements for lower status levels.

In American’s case — it’s not as certain. This wouldn’t be the first loyalty mis-step by American in recent years that has resulted in a loss of revenue.

The combination of increasing qualifying dollar requirements, whilst removing incentives to spend on the co-brand card is likely to result in three simultaneous outcomes:

  1. An increase in core airfare spend by some top status members;
  2. A significant number of cardholders reducing spend on the co-brand card, or abandoning the card altogether — resulting in an increase in churn and reduction in co-brand revenue for American.
  3. A significant number of top-status elite members reaching a “tipping point” and abandoning American (especially given that both United and Delta offer spend waivers for elite status).

The only way American can “win” is if they gain more from point #1 than they lose from #2 and #3.

That’s not a bet that I would be willing to make.

Summary

It’s a common myth that increases in status requirements are designed to thin the ranks and reduce the number of elite members.

But the real strategy at play is an effort to increase spend from these members, not send them away.

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David is a publisher and global speaker on airline & hotel loyalty programs, and an expert on loyalty program design, finances, and economics. David works closely with airline & hotel programs to develop strategic solutions to loyalty challenges, and is a leading industry expert on loyalty psychology and behavioral motivation. David can be contacted here.

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More Articles by David Feldman:

BLOCKCHAIN & LOYALTY: A SOLUTION IN SEARCH OF A PROBLEM?

ARE REVENUE-BASED FREQUENT FLYER PROGRAMS DRIVING PROFITABILITY??

ARE FREQUENT FLYER SPIN-OFFS DEAD?

LOYALTY MYTHS: WHAT EXACTLY IS A “REVENUE-BASED PROGRAM”?

LOYALTY MYTHS: DON’T WORRY ABOUT POINTS LIABILITY

LOYALTY MYTHS: IS BREAKAGE GOOD?

IS AMERICAN’S LOYALTY PROGRAM WORTH MORE THAN THE AIRLINE?

THE PSYCHOLOGY OF LOYALTY PROGRAMS

THE PSYCHOLOGY OF BASIC ECONOMY

BAD DATA: WHEN BIG DATA GETS IT WRONG

DOES YOUR AIRLINE EVEN WANT YOU TO FLY THEM?

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References and Further Reading: