Why – financially – hotel loyalty programmes are different to airline schemes

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I am in Washington at the moment meeting with the Hilton Honors team – I even got to meet Hilton’s CEO, Chris Nassetta, yesterday.  A few articles from this trip will follow over the next week.

One of the interesting points that came up during a discussion on Monday was about the funding of hotel loyalty schemes vs airline ones.

Frequent flyer schemes are generally seen as the greatest marketing invention of the last 30 years.  As well as being hugely successful, they are also hugely profitable.  Avios Group is approaching an operating profit of £200m per year which would value it at around £3bn as a stand-alone business – although in the post-Aeroplan world it would be close to impossible to float a frequent flyer scheme.

(Aer Canada sold off its frequent flyer scheme, Aeroplan, and pocketed a substantial amount of money.  A few years down the line, it announced that it was dumping Aeroplan and starting a new loyalty scheme, leaving Aeroplan – now Aimia – a financial wreck.)

Back to the point ….

Graphic illustration ©2012 by Brian Cohen of The Gate

You might think that hotel loyalty schemes are also a licence to print money.  You might be surprised to find that they are not.  You may be even more surprised to find that they are not allowed to make money.

This is how it works.  Virtually all branded hotels these days operate as franchises or management contracts.  The operator of the hotel pays various fees to the brand owner – in this case Hilton Worldwide – for the use of the brand, the use of the reservation system and for marketing.

The money paid for marketing is ring-fenced.  It can only be used for promotional activity, including running the loyalty scheme, and cannot be pocketed by Hilton.  Obviously there will be management charges etc etc but fundamentally what comes in must go out.

In theory, whilst there will always be changes to the way hotel loyalty schemes operate, they should be cost neutral at the end of the day.  The last round of Hilton Honors changes, for example, shifted the balance towards greater rewards for heavy stayers with Blue members receiving fewer points.

Devaluations are often driven by the need to pay more to hotel owners for redemption rooms.  Most hotel loyalty schemes have to pay something close to the standard daily rate for reward nights when a hotel is over 95% full.  As global hotel occupancy improves – as it has done annually for some time – there will be more nights when the scheme has to effectively pay the standard rate to the hotel, and this money may need to be clawed back by raising the points cost of some hotels.  Hotels also have to be compensated for funding elite benefits.

At the end of the day, Avios and the other major global frequent flyer schemes are there to make a profit – something they do very well.  The hotel loyalty schemes are not.

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Comments

  1. Informative article, thanks. But this:

    “Hotels also have to be compensated for funding elite benefits.”

    Isn’t this open to abuse whereby the hotel gains and both the customer and loyalty scheme get screwed? Also, how does it explain vast differences, say between the standard of lounges within and across Hilton brands?

    • Alex W says:

      It certainly explains why the main benefits for IHG Elites are bonus points, and virtually nothing at the hotel.

  2. Interesting insights Rob, explains why hotels tend to treat guests on a redemption booking roughly the same as paid stays (although I do believe those on paid stays get preferred treatment for upgrades?)

    Looking forward to hearing from the rest of your trip/meetings, particularly if there’s mention of new Hilton group developments.

    • Might not be representative because it is only a handful of hotels and I am known to them as a returning guest, but they have treated me the same on points or cash.

  3. Would have been better to have asked why elite members are treated so poorly in so many locations and why companies like Hilton give away top tier membership freely.

    This second strategy must increase their costs which speeds up devaluation for everyone.

    • But I assume those costs will be outweighed by higher occupancy?

    • Down the Back says:

      I have a Diamond card with Hilton and I’ve never been treated poorly by Hilton anywhere in Europe and UK, the US is a bit hit and miss. If you want to know what being treated poorly is get IHG Spire Status and enjoy your 300-600 points or 1 drink, exception is CP who consistently offer a choice of lounge access or the 300-600.

      • Mark2 says:

        +1

      • AlanC says:

        I’m both Spire and Diamond and the CP lounge access is often a front desk fight whereas Hilton is Guaranteed..

      • Half of CPs *don’t* offer lounge access (and I only include those which actually have a lounge) so it’s very inconsistent.

    • I’m staying in the CP in Plymouth now. I’m Spire status, got upgraded to their top category room and given lounge access.. Sounds great but the lounge is dreadful and the room is terrible. The wallpaper is peeling off the walls, the window doesn’t close properly and there’s a huge wet patch on the carpet.

      • Andrew25 says:

        I bet you’re staying in one of those horrible rebranded Holiday Inn’s. Why do IHG take these bad decisions? Me thinks until IHG sort out their top management who make these decisions IHG’s name will continue to be cheapened.

      • Dmitri says:

        Thank you for your comment! I was considering booking one next week!

    • They are aware of this and there are plans to do ‘something’ about it – although of course Diamond now comes with an Amex credit card in the US. The current status match promo is working really well because it is getting a lot of SPG people coming across so it will remain for a while but it will NOT be a permanent feature.

      • Nick Burch says:

        Front Desk staff at Hiltons can see how often you stay with the chain, but don’t often click through to find it. I’m a Hilton Diamond by stays mostly, sometimes also nights (and could also have it for free via BA GGL…). In Asia I’m always treated excellently, in Europe normally. In the US they’re normally so swamped with elite guests that they don’t really do much, but every so often someone checking me in says something like “wow, you actually stay with us rather than having our credit card, I’ll give you one of the nicer rooms”. (Sadly even the nicer rooms aren’t a patch on what you’d get in an Asian Hilton though!)

    • I’ve used my PP gained through Amex Plat at least 300 times this calendar year for lounge access and have never been turned away. In fact I’m currently in the Aviator lounge in CPH (easily the worst I’ve ever been to). Although it’s usually just me on many occasions at it’s been whole family (Two adults and two kids).

      I am a Gatwick-centric and early morning flyer though – I wonder if this makes a difference.

      Getting my AMEX for PP access has been incredible value for me.

      • Eek! At least 150 times. Too many bad lounge wines

      • the real harry1 says:

        Do a couple of referrals & it damn near pays for itself, lounge visits & insurance on top

        18,000 + 11,000 + 18,000 + 11,000 = 58,000 or £580 in many people’s books

  4. xcalx says:

    As Rob reminds us, he puts no value on any perk which is not guaranteed. I feel the same way so when staying at IHG properties I expect nothing and that’s what I usually get.

    As Priority Pass is arguably the main perk of the Plat card I think we need an article from Rob regarding the Priority Pass and the increasing reports on here of folk being turned away due to the large amount of reserved seats for one off purchasers.
    I look at it in football terms “a season ticket holder getting turned away in favour of a one match wonder for the big game”

    • +1. I’ve just cancelled my Platinum card, mainly to avoid the fee but if I was guaranteed lounge access at my usual departure point (MAN T3) I would have considered holding onto it. However this seems to be the worst terminal for getting into a lounge unles pre-booked (not worth it when there are usually 3/4 of us travelling and only 1 drinking alcohol!) or flying CE (so BA lounge access guaranteed).

      • xcalx says:

        I was in MAN T3 a week last Monday arrived at 1200 for a 1430 flight, no problem getting in but did notice a large percentage of reserved tables all with 3 hour timeframes. Amex needs to up the game and allow a free spend allowance on card if PP guests are refused entry. If it wasn’t for the referral bonus I would consider dropping the card that I have had for many years.

        • That would be a superb and sensible development.

          On the upside at T3 I managed to get into both PP lounges as well as 5 others when flying with BA to Lisbon on Friday 😀

        • Lady London says:

          This problem is more for PP to solve. Noting that in many airports around the world there is now a credit option at a an eating place in the airport such as LGW=Granary.

      • david says:

        Nope Leeds Bradford definitely the worst on a Plat Priority Pass.

    • Mummy55 says:

      This happened to us at Newcastle last week.we were told that the lounge was fully booked out by Tui for three hours between 8.00 -11.00 a.m. for their twice weekly Florida flight. This was at 8.20 and the lounge was still empty. It seems that Aspire value the customers who like to drink the bar dry for three hours to Priority Pass customers who want to nip in for 20mins for tea and a bacon sandwich.
      We were told that it was Priority Pass at fault for not explaining the policy to its customers!! , and that we were free to return after the Tui flight left at 11.00 am .( our flight boarded at 9.00)
      The attitude of the very young girl on the desk was that these Tui customers had paid and we were trying to get in for free.
      It seems now that a lot of regional Aspire prefer to operate as package tour lounges rather than “Business Lounges”.

    • The comments on here about lounge access not being guaranteed is the one thing that stops me getting the amex plat as the lounge access would be where I made most of my money back on the annual fee.

      Fair enough if they’re full with individual customers but if it’s because of block bookings that sounds like a total joke.

      • Lady London says:

        It means there needs to be more lounges allowed to operate at a number of busy airports or busy seasons – to create competition between lounges. Luton and Stansted, I’m looking at you.

        • Stansted is owned by Manchester Airports and their current strategy is to control all of the lounges themselves. You might get a premium 1903 which some of the airlines would presumably take.

    • The Lord says:

      Had the same over the weekend at Birmingham. Tried No. 1 Lounge and was turned away so had to use the Aspire Lounge. Average at best, full of people wanting to get their moneys worth of booze despite it being 7.30am and people being quite rude to the staff about not replenishing breakfast ingredients fast enough. Give me Galleries over these paid access lounges any day.

      • Aspire at Manchester T2 was also full on Sunday AM when I was there.

        • xcalx says:

          Any chance you could use your Amex contacts to put pressure on PP or allow a card spend at airports and drop PP altogether. Would like to know what Amex pays PP for lounge visits. The PP card should be renamed as there is no priority and it’s getting worse.

        • The lounges are booked out by airlines. All that will happen if you put pressure on PP is that they will drop these lounges entirely, and then you have zero options even at quiet times when you would usually get in.

        • xcalx says:

          So where would that leave PP, with no lounges to offer they have no business. I like you Rob prefer guaranteed benefits and this falls well short of that. PP collecting money upfront for yearly passes then having it’s customers turned away from the lounges can only have a detrimental effect on the business model.

    • Tom Cook says:

      Had the same issue at LBA at the weekend. Two of us have PP, so we were going to sign two mates in, two others in the group pre-booked so paid for access.

      Those of us with the passes were initially denied access on the basis that they’d sold the tables to those who had paid. We were advised we could return in 2 3/4 hours! Utter joke so we pressed the case and were let in, only to see two other people I the lounge. It stayed at worst half full for 2 hours.

      PP need to jump on this as clearly if they can sell single access and refuse those of us who walk up then the benefit is worthless.

      • They usually HAVE sold the seats because they have guaranteed deals to provide space for x people flying Qatar / Virgin etc that day. If there are fewer Business or status passengers on those flights than usual, or passengers arrive late, the lounge doesn’t get used – but it is still paid by the airline.

        If you ran a business with a high fixed cost base but with low variable costs – which is what a lounge is – you would be desperate to get Priority Pass people in IF YOU COULD under your capacity rules.

        • I emailed PP and told them that they were the one of the reasons for me cancelling my Platinum Amex. I got a very swift callback but couldn’t be bothered speaking to them as I’d already cancelled the card!

      • guesswho2000 says:

        I rarely had an issue, though do remember using Lounge Club once when flying VS from LGW (only oneworld status and flying in Y) they wouldn’t have allowed walk up access had I not paid £5 online the day before to guarantee the entry.

        The lounge was busy, but there were queues of people being turned away. I think this was just after BA had started using the lounge at LGW after theirs closed, so it was rammed all the time, but I had a 5 hour delay and was damned if I was sitting in the terminal. To their credit, they didn’t boot us out after our two hours (or whatever) were up.

        • guesswho2000 says:

          That was the Lounge Club card issued with the PRG for clarity. Also got refused entry to No1 somewhere (LHR T3 I think) using PP from the Platinum card, but that was a day I was bored and just touring lounges anyway, CX, BA, AA and Swissport had to do.

  5. Doug M says:

    Rob. The marketing money being rung fenced, surely that’s the way the contract is structured, rather than any law? Have hotel chains just backed themselves into a corner with their operating structure? Personally I find all this stuff really interesting and hope there’s more to come.

    • It is US franchise law apparently.

      • Better By Design says:

        Franchise law in the US is complex, but has come about largely because of the huge number of historical scams in selling franchisees crap “businesses” causing a need for greater regulation.

        Because of this, it is well defined, and the ring-fencing of marketing funds is certainly one of those areas. Otherwise you’d have franchisors taking marketing fees and not actually producing and running TV/radio/internet ads, and pocketing the profits.

        As pointed out, totally different than with airlines, where they own the product being operated and redeemed. No reason to expect them to not devalue their points beyond consumers getting upset.

  6. William Wood says:

    Why does the number of hotel points earned via credit card spending differ so markedly from country to country? In the UK we seem to have the poorest earning capacity when it comes to Hilton points.

    • RussellH says:

      My UK Hilton Visa has no fee, pays me 2 points per £1 spent on non Hilton expenditure, 3 points per £1 at Hilton.

      A German Hilton costs €48 per year, pay just 1 point per €1 on non Hilton expenditure, 2 points per €1 at Hilton. OK, debit interest is only 8,56%, and you get 0.2% credit interest on credit balances under €100 000.

      I much prefer the UK deal!

      • RussellH says:

        Sorry, I should add:- sign up bonus is only 5 000 points, but you get Gold status rather than silver as in the UK

        • Andrew25 says:

          Yes, but as long as you spend £10,000 a year on the Hilton Visa then you get Gold status in the UK too.

    • guesswho2000 says:

      I disagree, Amex MR in the UK is 2:1 Hilton, it’s 1:1 a lot of other places. Although the Aussie card I have earns 2x MR/$1.

      The Hilton Barclaycard is still good though, compared to the Hilton Macquarie Visa here. High annual fee ($349 IIRC), 1xHH/$1 (4x/$1 at Hiltons) though you do get Gold with it, Diamond when spending $40k. I still think the UK one is a better deal (or was, since it’s no longer available).

  7. sunguy says:

    Rob,

    I dont suppose you have broached the topic of the Hilton Honors credit card in the UK yet ?

    • I broached it with their global head of credit cards, a Scottish guy (slightly oddly, given we were in Virginia at the time) but he was non-committal. Long chat about market dynamics though. Apparently Hong Kong is trialling 0% interchange fees for a month this year!

  8. Michael Jennings says:

    He has but either they didn’t tell him anything or they can’t tell us, would be my guess.

  9. doesn’t the Aeroplan example demonstrate that the declared profits of Avios (and others) are an accounting fiction ?!

    • Mark2 says:

      would you care to elaborate?

      • There are plenty of companies with one customer (pretty much) but which are profitable. The profit is not a fiction but the company has a higher systematic risk. Look at the businesses which Apple effectively bankrupts each time it announces it will start making a key component in-house.

        • but the price that Avios Ltd pays to BA/IB/EI for a seat is the main factor behind whether Avios is a profitable business. and it’s hardly as if the purchase of seats is a open market transaction. if IAG decides to set a high price, then profit is reported in Avios Ltd, if IAG decides on a low price, then profit is reported in BA Ltd / IB Ltd etc.

          and if you pay your accountants enough, they will come up with a justification for whatever price you want to set !

        • Aeroplan was virtually identical though – a set number of guaranteed seats plus others on quiet days. The frequent flyer scheme is a way of quietly dumping seats at a low price without starting a price war – same as with BA Holidays where BA also dumps inventory.

        • and if Avios lost their contract with the rest of the IAG companies (like Aeroplan did), then they too would cease to exist as a viable business. so the idea that Avios is a profitable company if false. it’s just a choice that IAG makes as to where to report their profit.

        • Yes and no. You are talking to a guy who was a partner at a major buy-out house for many years 🙂

        • even former major buy-out house partners can fall for a shibboleth !

  10. Slightly O/T Hilton Honors got a pop bar in Boxpark, Shoreditch, London tomorrow at 4pm..

    See their FB feed..
    https://m.facebook.com/events/266657697214127

    • Weird. No-one told us! Given that only 7 people say they are coming it looks like it could have done with some HFP promotion 🙂

  11. Sarah says:

    True! Anybody knows if there are loyalty programs for certain travel agencies? That would be good to know! We booked a a china rundreise with YOLO (https://www.yolo-reisen.de/) but would be good to get some discount on it or payback for our nextrip. Cheers!

  12. O/T Rob – Just got an email from TravellingConnect that Hilton will not longer be a partner from 1st July 2018.

  13. Andy F says:

    I think both the hotel and airlines rewards programs need to actually look at what their customers really want, no matter how it’s paid for by them, and what they can afford to offer and offer flexible rewards to folks at all levels of membership.
    When I’m flying business I want two things [A] more legroom / lie flat seat and [B] a business class lounge to do some work / maybe have a drink – I want to use my points flexibly to get those. When I’m staying at a hotel on business I want an upgraded room and free breakfast.

    That’s about it, it’s not rocket science or particularly expensive, and most of the business travellers I know want the same thing…. My choice of airline, credit card or hotel group reflect those simple requirements but every single bleemin company seems to waste money on nonsense that no one really wants in the name of rewards.

    @BA I don’t want that damn magazine you keep emailing me, I don’t want a better meal in premium econ, I don’t care about more luggage, I don’t care about ‘priority boarding’, I don’t care about being able to spend my points on wine or an ‘experience day’, I don’t care about seat selection, I don’t care about dedicate phone lines, … just offer me more legroom and lounge access or let me buy those individually with avios.

    Same with @IHG, I do not want three ebooks (I mean WTF) every quarter, nor your letter I get each time I stay, nor my amenity gift, you can stick your Hertz membership and you physical card option. I don’t want accelerate programs or whatever gimmick it is every month to encourage me to stay more – I want a room upgrade and I want free breakfast / parking….. Can’t offer me free breakfast, fine let me pay in points, can’t upgrade my room – fine let me pay in points, can’t offer free parking – fine let me pay in points – but oh no, that’s impossible :/

    Rant over! lol

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