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This episode starts by looking at why you have to put your seat back and tray table up before landing. Andrew then talks with StatusMatch CEO and former airline loyalty program head Mark Ross-Smith about airline loyalty programs.

Andrew (00:00):

In this episode of Flying Smarter, I’m looking at why you need to put your seat back and tray table up before landing. Then for the main segment, statusmatch.com CEO and former airline loyalty program head, Mark Ross-Smith joins me to talk about airline loyalty programs. He talks about the airline loyalty business model, current trends and challenges, his tips and advice for travelers and much more.

(00:32)
Welcome to episode 32 of Flying Smarter, the podcast that explores the fascinating world of air travel to help you become a smarter and savvier traveler. Let’s get started.

(00:48)
Why do you have to put your seat back and tray table up for landing? The requirement to have your tray table and your seat back up before landing is all about safety. Approach and landing are some of the most critical phases of the flight, and over half of all fatal accidents have occurred during final approach or landing. In the event of an accident that requires evacuation, a reclined seat can block or slow down axis to the aisle for those in the row behind the seat that is reclined.

(01:16)
Fully upright seats provide the most amount of space and best aisle access for those behind you. In the case of tray tables, it’s also about providing efficient aisle access. As you know, you generally have to put your tray table up to access the aisle during your flight anyway, and if you’re not in the aisle seat, others in your row may also have to do the same to allow you to get out.

(01:36)
So in the case of an evacuation tray tables that are down will block aisle axis as well. Plus, if your tray table is down and there’s a hard impact of some sort, it’s possible that your tray table gets stuck in that position or the mechanism gets damaged preventing you from putting it up, and that could also severely affect your ability and your seatmate’s ability to get out or even worse trap you in your seat. In the case of an accident and evacuation, seconds matter. And for this reason, the seat back and tray tables up rural isn’t just something that the airlines came up with, but as a safety requirement from regulators.

(02:13)
Did you know that Dutch flag carrier, KLM has a lineup of collectible miniature houses? KLM’s Delft Blue miniature houses depict real Dutch buildings and are filled with gin. They’ve been around since the 1950s and are given as a gift to all passengers traveling in business class on KLM Intercontinental flights. There are currently 103 different houses and the airline releases a new one on October 7th each year to celebrate its birthday.

(02:49)
Mark Ross-Smith is the CEO and founder of StatusMatch.com, a company that creates loyalty customer acquisition technology products for airlines and helps travelers switch their loyalty to your status to a new airline or hotel to allow them to enjoy the perks of being a high value traveler. He brings a wealth of knowledge about airline loyalty programs having previously served as a head of Malaysia Airlines enrich loyalty program where he manages the program to the most successful point in the history of the airline.

(03:16)
He’s also the editor of the blog, Travel Data Daily, and his work has been featured on media outlets like Skift, CNN, The Economist and the BBC. I’m so glad to have Mark here with me today. Mark, welcome to the podcast. Thank you for being here.

Mark Ross-Smith (03:30):

Great to be here. Looking forward to exciting conversation today.

Andrew (03:34):

Me too. And so I want to talk to you today about the loyalty business and pick your brains on all your wealth of knowledge and experience that you have in terms of how things work in the airline industry and what it means to the consumers. To start, can you tell me about the airline loyalty business model itself?

Mark Ross-Smith (03:51):

So airline loyalty has been around for about 40 years. It’s not a new thing. It’s changed over the decades in how it works, the structure. About 25 years ago airlines realized there was a big opportunity to sell points of miles to third parties, which we now know today is basically credit cards and earning miles and that kind of stuff. But if we take a step back, sometimes I think that airlines forget that their loyalty programs exist to serve the customer. They exist to serve the traveler, the people, the who put their bums on that seat every day and fly around the world and make them money.

(04:32)
That’s really who this is designed for. And so over the decades, it’s evolved a little more from what we’ll call a status recognition program, people who fly a lot and recognition for flying into more of a points of miles type program. So one side of it is the points of miles, which is super-duper lucrative. The other side of loyalty is the status tiers.

(05:03)
A lot of airlines have been, in my opinion, neglecting this for quite a while. This is the silver, the gold, the platinum type stuff. And this side of the business is important because this is what generates ticket sales. This is what generates selling seats for airlines, right? Very few people will fly just to earn an extra a thousand points or miles. Right? But people will fly that extra ticket to get across the line to keep their gold status for another year.

(05:31)
In fact, quite a lot of people will do that. And people have been doing this for many decades. So if we talk about what is important in an airline loyalty business, you’ve really got two sides to it. One is sale of points of miles to banks and third parties, and everything goes to that, what it looks like. And then you’ve got the, what I’ll call status retailing, which is how do you monetize and further incentivize people to fly or use status as a tool to get people to consider flying one brand over another? And that will drive ticket sales for airlines.

(06:06)
That will put bums in seats and fill planes and airlines can start looking at new destinations, bring on more capacity, charge more for tickets, that kind of stuff. So that’s where status plays into the game. A well-run loyalty program needs a good combination of both. You can’t have one or the other. You need both running together. They typically attract a different type of customer and it’s this synergy between the two.

(06:35)
You can imagine like a Venn diagram, right? Once they’ve set points and miles and only got status either middles or the magic, and that’s what we like to talk about is the middle stuff. That’s the sexy stuff. That’s what we see as travelers. We’ll get into this bit later, but typically airlines, let’s forget the last year, but airlines typically when they sell tickets, they sell seats. It’s a low margin sort of transaction. If you’re in a coach seat, what’s the margin on that seat?

(07:06)
5%, maybe 10 if they’re lucky. Right? So the airlines generate a lot of revenue from selling those seats, but generate not much profit. Again, we ignored the last year because the airlines are totally milking it today, but that won’t last forever. So when you have a low margin business, you need the repeat business. It’s a lot cheaper to keep the customer than to pay and acquire a new customer. On top of that, you’re also trying to generate additional revenue, which is where ancillary revenue started coming from. Because again, if you’ve got five, 10% margin on a product, you need to try and drive up the revenue, the high margin revenue from somewhere else.

(07:51)
And that’s where we started seeing ticket change fees, seat selection fees, bag fees, started creeping in the 2000s, early 2000s, and then ancillary revenue at airlines really started taking off. And that was about the same time that loyalty business models evolved at most of the large airlines where they realized that selling points of miles to banks was extremely lucrative. And that has since transpired into its own business, its own division within an airline.

(08:26)
So there was a report in American Airlines, SEC disclosure in 2020- 2021 where they said that the gross margin on selling miles to banks was around 71, 72% gross margin that was, and the net was around 50%. So 50% net margin on points. I mean that’s a high margin than Apple gets on selling products. And if you are selling billions, and billions and billions, and trillions of miles to banks at a 50% margin, at some point the CFO wakes up and goes, “Hang on, it’s actually quite a lot of money in this.”

(09:03)
And to the point where today, in my opinion, some airlines, they’re not really airlines anymore, they’re loyalty marketing companies that happen to five planes around the world.

Andrew (09:16):

That’s really interesting that you say that. And perhaps for the average traveler, even myself when I use my credit card, we don’t really understand what goes on behind the scenes from swiping the credit card to it becoming points and sort of what the transactions that happen are. Can you tell me a little bit about that?

Mark Ross-Smith (09:33):

Yeah. So on the credit card side, you get the credit card, typically a co-brand card, the logo of the airline on it kind of thing, and you swipe your card at a merchant. The merchant pays a fee to accept the credit card. And in that fee, it gets split up between the acquiring merchant and basically the terminal that swiped it, they get a cut and your credit card, that bank, they get a bit of that transaction revenue as well.

(10:03)
A part of that revenue is used to give you points of miles in your brick or fire account. So you can imagine how many people all around the country around the world are spending on their credit cards every day. [inaudible 00:10:14] There is, I don’t know, about trillions of dollars being spent on credit cards every year. I don’t know the number. It’s a lot. I think it was Qantas that disclosed that it was something like, I want to say 60 something percent of all transactions in Australia could earn Qantas points or were earning Qantas points.

(10:37)
And if you think about the scale that this is at and how many are earning those points from transactions, that’s a lot of money and it’s the right type of money. It’s high margin revenue. It’s not the one 2% margin stuff from selling tickets. It’s the right type of money. That’s what I call it. And because it’s earning the right type of money, the way that the market values a business that has high margin sustainable as well because airline loyalty program revenue has been very consistent over decades versus airline revenue, which is, I mean think during the last three… 2020, right?

(11:20)
I think about what airline cash and revenue looked like in 2020. Pretty disastrous. Right? Loyalty revenue was very consistent. I mean, it dropped, but I think Qantas said it dropped 12% something in 2020 versus the airlines revenue, which dropped what, I don’t know, 90%, 95%. So the airline loyalty, selling points and miles, all that kind of stuff is a very consistent business.

(11:47)
So you can project where it’s going to go in the future and it’s high margin and the combination of these two things. And it’s a big brand, right? The combination of these means that if you were to try and put a price tag on what that is worth as a business, it’s more reliable, right? You’d feel more confident about putting a long-term valuation on it based on these factors. And that’s what we’ve started to see in the market where some of these loyalty programs are worth more than the airline itself.

Andrew (12:18):

So when you have a bank and then you have an airline, every time you “earn points” through your bank, your bank is actually paying the airline in order to reward those points. Is that sort of how it works?

Mark Ross-Smith (12:32):

Exactly. Exactly. So you swipe your card, your bank at that point is making, it might be a couple of cents on the transact… Might be a couple of dollars depending on how much you’re spending. So they make money from that. Obviously, you might be paying credit card fees on that. There’s a big chunk of people that don’t pay off balances every month, so they’re revolving credit. They’re making interest off those people as well.

(12:56)
And that combination might be 4X fees. Some cards still have fees for spending internationally. All these fees add up and they build a way for banks to fund the purchase of points of miles from the airline on your behalf. So if we look at who’s the real customer to the airline here, you could argue it’s actually the bank, it’s not you.

Andrew (13:25):

Now, as you’ve mentioned right at the beginning, I mean loyalty programs have changed a lot over time and especially in the last few years there’s been a lot of change in the airline industry. We’re seeing things like devaluation or the end of COVID status extensions and whatnot in recent times. What do you see as the current trends or challenges in terms of loyalty programs, both either for airlines or for the traveler?

Mark Ross-Smith (13:47):

So you’re totally right on the COVID status extensions. Anyone that had status at the end of 2019 up until for most airlines up until recently still had that status two, three years later. I talk about what’s happened at a bunch of airlines as we’re seeing this book called downgrade tsunami where there’s so many people that have status that was sort of coming to an end.

(14:16)
I think in 2020, the message was it’s not your fault you can’t travel. We’ll keep you at that gold level for another year. And then 2021, it’s like, “Well, you’ve been loyal to us, we’ll be loyal to you. So we’re going to keep you there for another year.” And then 22 came along and at the tail end of 2022, airlines are looking at and going, “Well, we’re extremely profitable. Planes are full, premium cabins are full. We’re charging through the nose for a lot of tickets. Should we be extending status again?”

(14:49)
And there was a bit of a checkpoint there where a bunch of airlines said we should extend it again for maybe other reasons. Not to do with planes being full. And other airlines were like, “Well, it’s time to downgrade folks.” And most airlines took the later approach. And so what was seen in the first quarter of this year is millions of people lose status around the world.

(15:13)
Delta, back in February, United started doing it. There’s quite a lot there. Millions of people. And even more if you include hotels, car rental, these kind of programs as well. And for airlines, I believe this creates both a risk and an opportunity. So for anyone that’s ever had a gold status and they’re being downgraded to silver or nothing. There’s an emotional impact to that. I mean, I’d been in this position many times.

(15:45)
There’s an emotional impact it has on you at that point. You’re like, “Damn them. They downgrade me. How dare they? I’ll show them and not fly them.” Even though it’s your own fault for not keeping the status of not flying, I’m not doing what it takes to get there, you feel ownership of this status. And because of that, there’s an emotional disconnect at that point. And people do and will seek alternatives at that stage. Right?

(16:15)
Sadly, when you’re being downgraded a bit too late to do something. If you still got your gold status and you’re about to lose it, that’s actually the best time to do something about it, right? I mean, obviously, we run StatusMatch.com, but there’s a way to keep that with another airline perhaps for another year or so. So you can keep the problem down the road a little bit and just enjoy those gold perks for another year, right? So there’s definitely risk on airlines with this mass downgrade, we’ll call it. A status cliff is another word I’ve heard for it.

(16:51)
While there’s a lot downgrading, in my view, this represents the significant opportunity for airlines and hotels to go out there and acquire customers because you’ve got millions of people losing status. And status matching as a concept, it’s been around for 35 years, not a new idea. It works really well. And so you got millions of people have been downgraded. You’ve got this way to acquire the people that is cheap or free.

(17:20)
Does this stock represent the largest customer acquisition opportunity in the history of airline aviation? So there are definitely airlines that are going out there and aggressively looking for these customers. It was last month I believe Delta had four different Status Match programs running at the same time just after they had downgraded quite a lot of people. And so they realized that replenishing their downgraded customers with new active flying people really interested in doing it is the way forward.

(17:59)
So I think the next three to nine months or so will be really interesting and to see what kind of offers are out there in the market and how aggressive some airlines get or and hotels over others in terms of customer acquisition. So for you and me and the other moons of travels out there that are in a position to take advantage of some of these things, I think it’s a really exciting time over the coming year.

Andrew (18:25):

Yeah, for sure. And the one thing that you mentioned there that I just want to make sure our listeners understand is for those who aren’t familiar with the idea of status matching, can you just go over what that is really quickly?

Mark Ross-Smith (18:36):

So status matching started about 1986, not at business, but the concept of a status matching, which is say you’ve got gold status of one airline or hotel, and you are thinking of trying a different airline. You don’t want to start from the bottom. You don’t want to start from the base level because you’re a gold member already. You’re used to the perks. You’re used to the lounge access, the priority boarding, sitting at the front of the plane, the welcome champagne on some airlines. Not all, caveat.

(19:07)
You saw all these perks and benefits and you don’t want to start from the bottom by trying a new airline. And the idea of this status is you’ll match your status. This other airline, MAT, you’ve got gold. They’ll give you gold over here and if another airline gives you gold because you’ve got gold over here, the idea is, “Hey, start flying us. We’ve done the right thing by giving you the status upfront so you don’t have to take those 20, 30, 50 flights to get there. Here it is, come fly us.”

(19:34)
And so for airlines, this is extremely powerful tool. You will then hopefully start flying them. Any business they got out of you at that point is entirely incremental, right? Because people are ultra hooked on airlines or hotels that they have status. If you got status in airline, that drives, 30 to 50% of revenue for airlines. People have elite status holders, right? It’s the single most valuable group that an airline has.

(20:08)
And so in theory, the more people that have status, the bigger that group goes up. It’s a really to stickiness factor to the airline. So status patching is like the number one cheapest way to unhook someone from one brand to another. It’s very, very effective and we’ve obviously built a platform around that to automate it and help people facilitate that process of trying a new brand.

Andrew (20:33):

Now, given the context of where we are today with loyalty programs and status, what advice or tips would you have for people when they’re looking at loyalty programs whether it’s they’re using them or comparing them or even selecting one.

Mark Ross-Smith (20:49):

I think getting back to basics sometimes is a good way to look at it. Staying with the same brand I think is quite helpful. I mean, I do this, sorry, [inaudible 00:21:03] flying with the one airline or staying with the same hotel, brand, or chain or staying with the same alliance. So pooling your miles and your status in the one account, it seems like a basic thing, but even the pros don’t do it. I’m making this up, but let’s say you’re in a hub of, say, American Airlines, right?

(21:24)
If you can pull all your flights with American or Oneworld Alliance, this ultimately will benefit you because you’re going to have more miles there. You’ll be more incentivized to fly other Oneworld Alliance. It makes a lot more sense to get the credit card to do all those kind of things that the kind of behavior the airline wants to see. But ultimately you’ll benefit as a traveler from that versus if you did the opposite where one day off fly this airline, then this airline.

(21:51)
And you’re sharing a business around a little bit. What that means is you just won’t have enough aggregated generally most people in any one airline to really build up any meaningful kind of relationship there. It’s not really a hack, but it kind of is because some people don’t do it. Just focusing on one, maybe two airlines, right? Have a backup. Have your main sort of go-to airline, have a backup because you can’t always fly them.

(22:26)
Same with hotels. Stick with a couple of brands. I mean the last thing you need is a few thousand points in 10 different airline brands. And then how do you use them? It comes really difficult. I was personally in the same position recently. I had a bunch of miles with Singapore Airlines and they’re about to expire and I thought, “What am I going to do there?” They’re points that otherwise I wouldn’t care that much about.

(22:54)
So I ended up redeeming these points, not for a flight but for some incense candles and a backpack and all the sort of stuff that actually is not the best value in the world, but it was either that or lose them, right?

Andrew (23:04):

Right.

Mark Ross-Smith (23:05):

So you may as well take something rather than nothing. Whereas if I’d done the sensible thing and pulled my business into a different brand where I’ve got tens of thousands, hundreds, millions of points. I could have done more with them, more leverage to keep them, that kind of stuff. So totally recommend just focus on one, maybe two brands at the most. Unless you’re an ultra freak or flyer and it makes sense to do that, otherwise stick with one brand.

Andrew (23:40):

Now, of course there are a lot of airline loyalty programs out there. And before we wrap up, I’m curious to see what you think some of the top ones are. So what do you think is one loyalty program that is very well-developed and well run from a business perspective?

Mark Ross-Smith (23:55):

So I have the advantage of being in this industry and obviously in loyalty programs, I know pretty well. I speak to a lot of them. So I’m going to give this one to Air Canada Aeroplan and this comes because if you look at the global landscape of loyalty and what’s happening there. They’ve been by far the most innovative in the last few years. They’ve done the most sort of new partnerships. They obviously brought the air program back into the airline as well, which was a genius move.

(24:31)
They created new partnerships. They’ve got a bunch of new and redemption partners as part of the program and it feels like they are doing more. They’re embracing innovation a lot more than other programs are. I am pretty sure that their business economics in the background there are working out very, very well for the airline.

Andrew (24:55):

I’ll ask the flip side of that question then. What do you think is a very well-developed or well-built program for travelers?

Mark Ross-Smith (25:03):

Personally, I’m a big fan of Emirates program. I fly Emirates as well. I have status with Emirates. The way that I have been treated as a customer with them… And I’m only a gold member, I’m not platinum. Just an everyday person, nobody. I suffer in the middle there. I’m not this ultra VIP that gets amazing treatment. I’m somewhere in the middle. When you’ve got a brand like Emirates… Emirates is very interesting because everyone knows them, right?

Andrew (25:41):

Mm-hmm.

Mark Ross-Smith (25:42):

And that might be because they’ve got a fantastic product on board, might be because everyone likes the idea of having a shower on a plane or sitting at the bar and tricking cocktails. These things are absolutely part of it. But the customer side of it, which is really the status side of it and how the brand makes you feel when you have status, right?

(26:07)
So it’s the little things. It’s you sit down in your seat, the manager comes over and says, “Welcome back. It’s great to have you. You’re in economy class today, but can I get you a glass of champagne from business class?” It’s these little things that cost the airline very little, but it sticks in your mind. You go, “Wow, they totally didn’t have to do that at all.”

(26:31)
You and me and many people listening have flown enough to know that that example of the champagne business class is not entirely… It’s not a totally new thing, but it’s good enough where you would feel valued by the airline at that point. It’s not something you would expect every time, but it’s a nice gesture and I think, at least in my experience, Emirates does a fantastic job of this.

Andrew (27:00):

Mark Ross-Smith is the CEO of statusmatch.com which creates customer acquisition technology for airlines, while also helping travelers enjoy the full potential of their loyalty and status. He’s the editor of Travel Data Daily, a resource for loyalty program owners, including airlines, hotels, and other industry professionals. And he also previously served as the head of Malaysia Airlines loyalty program, Enrich. You can learn more about statusmatch.com and Travel Data Daily on the respective websites, which are in the episode description below.

(27:31)
You can also find Mark on LinkedIn and we’ll also link to that as well. Well, thank you again, Mark, for being here. I certainly learned a lot and I think our listeners will have too, and I’m glad you could come to share your knowledge and your experience.

Mark Ross-Smith (27:43):

This has been a fantastic conversation. Thanks for having me.

Andrew (27:53):

That brings us to the end of this episode of Flying Smarter. Please take a minute and follow us on social media where you’ll find things like podcast updates and sneak peeks. Flying Smarter is on Facebook and Instagram at Flying Smarter and on Twitter @flying_smarter. We’re also now on LinkedIn, so you can find the show there as well. Thank you for listening and I’ll talk to you again soon.