f you're old enough to remember the
Beatles' first appearance on "The Ed Sullivan Show," you probably
also remember S&H Green Stamps.
When Mom went to the grocery store, she would get a handful of
stamps. The more she spent, the more stamps she received. They all
went into a drawer.
When the drawer started to overflow, Mom would leaf through the
Green Stamps catalog to see what sort of "prize" she could claim --
a toaster or an iron, perhaps -- while you and your siblings were
enlisted to lick the stamps and paste them into a little
booklet.
For some reason, you thought this was fun.
Like many of his generation, Thomas Plaskett was a veteran
paster of Green Stamps, and they were on his mind back in 1980 when
he became American Airlines' senior vice president of marketing,
replacing Robert Crandall, who had been named president.
Crandall bequeathed to Plaskett a project that would
revolutionize airline marketing and ultimately produce what has
been widely hailed as the most successful marketing program in
history: The AAdvantage frequent flyer program, which in May marks
its 20th anniversary.
But when Plaskett took over the marketing position, the
department was still struggling with the concept of "loyalty."
It was a new idea for the airlines, which only recently were
forced to compete with each other by virtue of the Airline
Deregulation Act of 1978.
There were lots of obstacles to overcome.
Plaskett recalled, "We were struggling with the question: Is it
possible to build loyalty in a commodity product where price has
been the primary differential?"
Someone proposed a "loyalty fare," but the idea was quickly shot
down.
"I told them, 'You guys are smoking the drapes. You'll never
create loyalty using price as the differentiator,' " Plaskett
said.
If an airline cuts the price, competitors match in a nanosecond
and total revenues go down, he added.
So everyone groused and thought some more.
Another obstacle was the fact that by 1980, automation had
allowed travel agencies to become the middlemen in corporate
travel. That meant that even though Sabre could "strip" telephone
numbers from passenger name records, those numbers often led back
to the agency rather than the traveler.
At the same time, American's data processing people were trying
to figure out a way to "tag" the airline's best customers.
Avis had come up with the idea of a unique identifier for one of
its promotions. "We got our data processing folks to build a
capability to track individuals," Plaskett said. "We didn't know
how long it would take; we just told them to go do it.
"We sent them off to build it not knowing what we were going to
do with it," he continued.
Around the same time, Plaskett visited travel managers in the
Northeast. He noticed that one of them had a plaque on his wall
honoring the manager's membership in American's Admirals Club.
The long-disbanded club gave its members use of a nice airport
lounge and little gold stars for every 100,000 miles they flew.
Cost-cutting, along with the Civil Aeronautics Board's decree
that airlines had to open lounges to all who would pay to use them,
spelled the end for the Admirals Club as a membership program, but
the travel manager still proudly displayed his two-star plaque.
Two pennies dropped. Plaskett put them together -- the promise
of a reward (a la S&H Green Stamps) and the pride of
recognition (those little gold stars representing mileage) -- and
came up with the idea of rewarding passengers based on the miles
they flew.
In a perfect world, the airline would have preferred to reward
passengers based on the amount they spent, rather than the miles
they flew: A passenger who consistently flies first class or full
fare warms the cockles of a marketer's heart more than the frequent
traveler who is so organized that he can take advantage of discount
fares.
But Sabre wasn't set up to track revenue, so mileage, which
never changes, became the "proxy" for revenue.
Plaskett's team then tackled the issue of the payoff.
"Initially, the thought was that everybody wants to go to
Hawaii, so we would give everyone a free trip," he said."But we
didn't know how many customers would qualify, and we had visions of
ferrying huge planes to Hawaii with nonpaying passengers."
Eventually, the team decided it made more economic sense to
offer a free ticket to anywhere, spreading the award usage over
thousands of flights rather than concentrating the freebies on just
a few.
"It was a much more powerful message," Plaskett said. "It looked
like the right way to go."
Over the next year, American Airlines readied itself, setting up
the technical side and the collateral materials, "but there were
still internal differences about whether we should do it at all,"
he said.
Plaskett recalled that Michael Gunn, who eventually would take
the chief marketing position when Plaskett left American, led the
charge for the opposition, which also included Peter Dolara, who
eventually would head American's Latin American operations.
"Mike's logic was not unsound," Plaskett said.
Gunn evoked the litany of all airline marketing officials: "Our
fate is in the hands of our dumbest competitor; everyone will
one-up it, they'll screw it up, it will become a zero-sum
game."
In the end, everyone got one last chance to express their doubts
before the final go-ahead was given.
Gunn and Dolara, reassured by a "safety valve" provision that
American could kill the program after a year, agreed that the
project should go forward.
"It was a bold move for the industry," Plaskett said, and
"obviously there was risk."
Up until the day it was unveiled, AAdvantage was cloaked in the
sort of secrecy that would do the CIA proud.
That was essential, Plaskett said. Competitors were certain to
match the program, but there was no way they could offer a fully
automated plan on a moment's notice.
Nor did they. With stunning speed, United responded with Mileage
Plus, but its program required passengers to submit their boarding
pass stubs. The program upped the ante in one respect, however --
it had no expiration date.
Meanwhile, the fathers of AAdvantage were watching the response
by travelers.
"We hit 500,000 enrollees in three months," Plaskett said. "We
started thinking that this could be big."
And it was.
Two decades later, the AAdvantage program is still the biggest
of the big, said Bruce Chemel, president of the AAdvantage
marketing division.
"It has the most members, the most partners, generates the most
revenue, is the most talked about," Chemel said.
Randy Petersen, founder of Inside Flyer magazine and WebFlyer.com, a
mileage tracking site -- and no less than the King of the Mileage
Junkies -- has called Chemel "the best and worst thing for frequent
flyer programs -- best for American and worst for its
competitors."
Chemel, who led AAdvantage for 10 years, has steered the program
through an evolution that has spawned a powerful profit center.
If you eat Kellogg's cereal, subscribe to America Online or use
a certain Citibank credit card, you know about AAdvantage
partnerships. You may have come across a partner when shopping for
a car or a mortgage. You may have been the beneficiary of a
partnership if your company rewarded your performance with frequent
flyer miles.
In the beginning, partnerships were linked to the
mileage-earning flight: If you used a certain hotel chain or car
rental company in conjunction with an American flight, you would
earn a few extra miles.
The hotel or car partner might also might provide part of the
award, offering a certain number of free nights or rental days at
various award levels.
But today, AAdvantage serves two distinct functions.
It is a loyalty program for frequent flyers. It also earns
billions of dollars by virtue of the sale of mileage to "partners"
of every stripe, many of which are wholly unconnected to
travel.
By selecting the right mortgage company, the purchaser of a new
house can earn enough miles for a free domestic trip.
And then there was the Pudding Guy, who took full advantage of a
Healthy Choice promotion that offered 1,000 miles for every 10 UPC
symbols.
He invested $3,140 in Healthy Choice pudding cups and got more
than 1.25 million miles, worth $25,000 in airline tickets.
Rumor has it that a Hollywood movie based on his caper is in the
works. The Pudding Guy character will use his miles to follow his
elusive true love around the world.
Chemel loves to hear about people like the Pudding Guy as well
as the 170,000 people who have redeemed Kellogg's cereal coupons
for miles.
Those miles are paid for by the "partner," but there is an
"ancillary feature" that should not be overlooked.
"You better believe that those people start flying American,"
Chemel said.
The power of loyalty
As the AAdvantage program marks its 20th anniversary, observers
still debate whether frequent flyer programs are the best or worst
thing ever to descend on the airline industry.
But there is little debate over the impact the program has on
the industry.
"Frequent flyer programs are the biggest detriment to
competition ever devised by man," declared Michael Boyd, president
of aviation consultancy The Boyd Group.
"They are designed to do one thing: ensure and enforce brand
loyalty."
Boyd said he believes the endless hand-wringing over airline
service and competition by Congress misses the point.
"It's not gates and slots that are keeping new entrants out,
it's this: If you have Frontier and TWA leaving St. Louis two hours
apart, and you are in TWA's Aviators Club, you take TWA even if the
Frontier flight is closer to the schedule you want," he said.
But Boyd suspects Congress may be missing the point on
purpose.
"Every one of those guys is collecting miles," he said. "It's
such a strong incentive that if you could outlaw it, there's no
question you would see more new entrants."
Randy Petersen, founder of Inside Flyer magazine, agrees. "It is
the biggest barrier to new entry," he said.
But Petersen added that in any industry, the early adopters of
relationship-building marketing programs have the edge.
Thomas Plaskett, whose marketing team at American created
AAdvantage, knows better than most how powerful a tool the program
is.
He came up against the monster he created when he co-founded
Legend Airlines, a new entrant that tried, and failed, to compete
in American's backyard of Dallas.
Boyd cited another downside to the programs. "The airlines don't
have to be as nice to you. They know that if you have a lot of
miles in their program, you aren't going to walk away."
Petersen added that Continental's OnePass probably saved the
airline when it went through an era of awful service in the early
1990s.
"It was a case study on how valuable these programs are," he
said. "People just couldn't leave behind 100,000 miles."
It also speaks volumes that when airline service gets really
bad, the airlines respond by throwing even more miles at their
customers.
That's how Northwest regained loyalty after its 1998 pilots
strike and is how United appeased its frequent flyers after last
year's Summer of Hell.
Why do passengers excuse bad service in order to get more miles
so they can travel more on the same airlines?
"Greed," said Plaskett.
"Greed," concurred Petersen.
It wasn't the first!
Michael Boyd said AAdvantage was predated by the Commuter Club,
a frequent flyer program founded in 1972 by Bar Harbor (Maine)
Airlines, a now defunct regional carrier.
Boyd, who worked at the airline in the 1980s, believes the
program was the first of its kind.
"You got a little card, and every time you flew, your card was
punched," he said. "After 10 flights, you got a free flight. You
could fly from Albany, N.Y., to Presque Isle, Maine, for free."
It was, admittedly, not the same as a free trip to Europe.
But Boyd noted that even in those days of pre-deregulation, the
tiny airline had some sense of the power of customer
information.
"We had a list of the real movers and shakers and a secondary
list of people to suck up to," he said.