Key points to remember:
- Employers pay an average of 8% more for air travel due to loyalty programs.
- Leisure travelers are less likely to incur higher costs in order to maintain the target pace of a loyalty program.
CATONSVILLE, MD, May 5, 2022 – Airline frequent flyer programs are a staple for air travel, especially frequent business travelers, but are they increasing the cost of business travel for employers? A new study says yes.
According to the study, loyalty programs are win-win-lose when it comes to air travel. The airline wins because the programs generate loyal and repeat customers. The points program member earns due to the incentives of receiving flight upgrades and free airline tickets. But in cases where the employer bears the cost, he loses because he might pay more than necessary for the trip.
The study, published in the current issue of the journal INFORMS Marketing science“Reaching for Gold: Frequent-Flyer Status Incentives and Moral Hazard,” is authored by Yesim Orhun and Andreas Hagemann, both of the University of Michigan, and Tong Guo of Duke University.
Researchers analyzed the transactional database of a major US-based airline’s loyalty program. This included the histories and points accumulations of 3.5 million loyalty program members during the points-earning cycles of 2010 and 2011.
“We found that the closer frequent flyer members get to ‘elite status’, the more likely they are to choose an airline, even if it may be more expensive than flying a competitor,” says Yesim. Orhun. “While this decision is based on a number of factors, an important factor is whether air travelers pay for the flight themselves or if it is covered by an employer or third party.”
Other factors cited by the researchers included whether the traveler was far ahead or far behind in achieving elite status, and whether the traveler’s home airport was the airline’s hub. In cases where travelers were late to reaching elite status, they were less likely to rebook to earn points. At the same time, points members are more likely to choose higher fares and earn points if their home airport is also the hub of the airline sponsoring the points program.
“We found that when travelers are close to their points program’s targeted pace, they are more likely to book with the airline on routes where the airline is less attractive than its competitors,” Guo says. “Loyalty program members, when close to the target pace, showed an average of 8% increase in price paid compared to others taking the same flight.”
The study authors found that when points program members travel for fun, their behavior changes.
“More than a third of the overall increase in the average consumer’s willingness to pay in the market can be attributed to booking cases where the consumer is unlikely to afford the cost of the ticket,” Orhun adds. “If travelers were to pay out of pocket, our estimates suggest companies would save at least 7% of their travel costs.”
Link to study
About INFORME and Marketing science
Marketing science is a leading, peer-reviewed, research-driven academic marketing journal using quantitative approaches to study all aspects of the consumer-business interface. It is published by INFORMS, the leading international association of operations research and analytics professionals. More information is available at www.informs.org Where @informed.
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The title of the article
“Getting Gold: Frequent Flyer Incentives and Moral Hazard”
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