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 ….
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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