Perspective: AAdvantage marks its 20th year

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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.

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