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INNOVATION / MICHAEL SCHRAGE

Why Frequent-Flier Programs Must Bust Out of Paper Prisons

July 15, 1993|MICHAEL SCHRAGE | Michael Schrage is a writer, consultant and research associate at the Massachusetts Institute of Technology. He writes this column independently for The Times. He can be reached by electronic mail at schrage@media-lab.media.mit.edu on the Internet

If Henry Higgins had been a frequent-flying management consultant instead of an Edwardian misogynist, he would no doubt be asking, "Why can't an airline be more like a bank?"

Sure, the airlines are in the transportation business. But--in these turbulent days of price wars and billion-dollar industry losses--the Americans, Uniteds and Deltas increasingly depend on their frequent-flier plans to lock in their best and most profitable accounts.

Pioneered by American Airlines but a decade ago, frequent-flier programs immediately represented the most brilliant and innovative blends of marketing savvy and information technology management around. They enabled the airlines to simultaneously build sophisticated customer databases, better utilize excess capacity and give their best customers more air travel options to choose from--but only on their airline.

Unfortunately, America's airlines--which run on contrail-thin profit margins--seem to think their frequent-flier plans are about managing travel. They're not. They're about managing information. In practice, the challenge of running an excellent, cost-effective frequent-flier program is like running an excellent, cost-effective bank, only without bad loans.

A bank that relied solely on paper checks for its transactions and didn't offer ATM cards or ATM networks would be a technological misfit doomed to expensive inefficiencies. Frequent-flier programs offer a case study of an industry that appears to misunderstand the economic potential of technology it helped create.

While frequent-flier miles have become a valuable form of currency--there are literally billions and billions worth of frequent-flier miles outstanding--the airlines seemingly haven't had the wit or wherewithal to cost-effectively manage them.

"I find it offensive that something that should make life easier for frequent travelers has really turned into a red-tape pain in the neck," says Rolfe Schellenberger, a corporate travel consultant who actually managed the original development of American Airlines' AAdvantage frequent-flier program. "In my opinion, the airlines are in the technological Middle Ages when it comes to frequent-flier award processing. . . . The process to get a certificate is far more cumbersome than it needs to be."

Cynics insist that the airlines deliberately make their frequent-flier plans cumbersome to discourage extensive use. While there may be a particle of truth to that, the fact is that the risk of alienating your best customers is hardly a brilliant business practice, and running deliberately inefficient systems has a cost too. The issue is as much cultural and sociological as technical or financial. Part of the problem is that the airlines are so obsessed with the idea of fraud that they build in system safeguards that are even more stringent than what you'd find in a commercial bank.

"The security people are not as technologically informed, and therefore they're worried about loopholes," Schellenberger says. "They really ought to go to Switzerland and see how the Swiss banks work."

But the deeper reason for this systems slippage is that airlines are prisoners of a paper mentality. Unlike the banks, which now treat paper as a nuisance, airlines feel culturally lost without it. There are paper schedules, paper tickets, paper certificates, paper stickers. Whereas banks are completely comfortable managing money as a sequence of electronic blips on a video screen, airline systems managers get nervous if there isn't a palpable paper trail. So, for example, one of Delta's biggest expenses in its 15-million-member Medallion frequent-flier program is postage, says systems manager Caroline Rak.

In fact, even though all of Delta's frequent-flier data is stored directly in its customer reservations system, members actually have to mail in requests for upgrades and tickets. What's mailed back is a paper certificate that is turned in to the ticket agent and ultimately reconciled back in Atlanta. It's not unlike clearing a check. Members can buy a ticket by phone, but they can't finalize an upgrade that way.

The cost of printing, mailing and reconciling all that paper is outrageous. Rak promises "significant enhancements" to Delta's frequent-flier programs soon; she notes that Delta's membership cards have the same magnetic stripes that ATM cards do.

Similarly, United Airlines prints and mails its coupons every 20,000 miles its members fly. American Airlines, perhaps the technologically cleverest, will sell you upgrade stickers at the airport--but won't exchange your frequent-flier miles for stickers or tickets on-site. (American does allow frequent-flier transactions by phone.)

American's George Goetz, who manages the airline's program, says his systems are older and that customer reservations and frequent-flier administration are on different computers: "Bridging them is the way of the future."

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