Edition 3 (Dec 2005 – Feb 2006)

WHITE PAPER: Airline Customer Loyalty Management

Oracle Corporation

AIRLINE CUSTOMER LOYALTY MANAGEMENT

Changing Imperatives

submitted by Oracle Corporation

The airline industry globally is going through an exciting phase of growth and change. Airline fleet grew by 7% worldwide in 2005 and the five-year forecast from IATA shows rapid growth in Asia Pacific and Central Europe, with the global industry looking at an average growth rate of 5.6% across all international routes. Industry experts expect that by 2025 passenger numbers will grow from 2 billion to nearly 6 billion and cargo from 23 million tonnes to 72 million tonnes.

China and India are expected to continue demonstrating high growth rates over the next 5-10 years and could easily replace North America and Europe as key markets for Aviation.

Low Cost Airlines and Value based Airlines are driving the growth trend through new business models, especially across various parts of Asia Pacific.

However, despite the growth, bottom lines are under increasing pressure. Faced with myriad choices, airline customers have evolved to be more sophisticated, empowered and intelligent thus making it important for airlines to understand them even better and seek a share of their business. Competition has intensified and so has the pressure to keep costs under control. The real challenges are going to be in managing operational costs and meeting, and exceeding, customer expectations.

Airlines are seeking to gain a leadership position by investing in initiatives to give a fillip to their brand and image equity to drive customer loyalty, price premiums, revenue growth and enhanced stakeholder value. Customer management programs have become one of the key focus areas in these initiatives.

Rewarding Loyalty: Challenges

A loyalty program is central to an airline’s relationship marketing strategy and its overall

customer vision. It is a strategic initiative used to identify, attract, acquire, leverage and

retain the most profitable customers by fostering loyalty. It provides powerful means to influence and modify customer behavior. An effective loyalty program contributes to revenue and profitability growth.

Continuous innovation in program offerings, keeping in tune with target customer preferences and rapidly changing market dynamics, is a key success factor of customer loyalty programs. Speed to market through rapid deployment of the program offerings is the other.

Some of the key trends and associated challenges observed in airline customer loyalty programs include:

Customer Behavior

Increasingly sophisticated and urbane customers today are making informed choices to zero in on their preferred airline. Customer behavior is influencing the very design and constitution of airline loyalty programs be it in terms of earn & burn options, entitlements or choice of partners. Airlines understand that every customer is different and hence seek to ‘differentiate’ customers when it comes to service delivery at all touch-points. This not just within the bounds of the enterprise but also at the airports and even in the air to ensure that they offer an excellent journey experience to their most coveted customers. However, the biggest hurdle in achieving this lies in the lack of a single 360-degree view of the customer and the lack of integration between the loyalty system and other technology components of the enterprise (like Reservations, Inventory & Departure Control Systems).

Partnership Management

Airline loyalty programs are broad-basing their partner network (with a global spread) to be able to offer its existing members a broader choice of products and services. This enhances the value proposition of the program encouraging prospects to be members of the program. For the airline, a large partner base drives revenue and profitability.

However, the diversity and geographical spread of partners often pose operational challenges such as inability to standardize the file/data formats for activity reports received from them for accrual/redemption processing. The speed at which these transactions are processed accurately (incorrect transaction processing leads to costly delays culminating in a very dissatisfied member) facilitates timely rewarding of customers for their business activities.

Loyalty Operations

With increased competition, spiraling fuel costs and under-pressure margins, the focus is on managing cost of loyalty operations to ensure that the program is profitable to the airline. This necessitates airlines to continuously refine its loyalty strategy and modify program parameters. Loyalty programs should be nimble enough to accommodate such changes to reflect current loyalty strategy and be easy to implement in the shortest possible time. However, the problem most airlines need to address is the lack of configurability of existing legacy systems. Even where the programs can be modified, the cost of doing so is prohibitory. Further, airlines are exploring possibilities of spinning off their loyalty program operations as independent business units for greater autonomy and better operational efficiency. A loyalty program needs to able to support the model driven by business priorities.

Journey Management

Past and current loyalty solutions are focused primarily on the “travel-reward” business model – i.e. miles awarded for travel, redeemed for free future travel. In order to differentiate and retain those customers who provide the best source of revenue, airlines are increasingly recognising that they must manage and provide added value throughout a customer’s journey, rather than just provide a reward for travelling.

Airlines are now starting to provide premium sales service (e.g. preferential reservations, last seat availability), prioritised service (e.g. priority handling when service disruption occurs), and expedient problem resolution for their most valuable customers, throughout their entire journey. The airline that embraces these new processes needs a new generation of Loyalty application to support these new processes.

This may be especially true to the corporate travel or cargo executive who is not a member of the airlines frequent flyer program but is a key decision maker in determining the contract award for an entire company’s travel or cargo business. Having the process and tools to identify and manage the journey of these high impact individuals without relying on special services personnel allows for broader inclusion and greater cost efficiencies.

Accounting Practices

A loyalty program has strong accounting implications with rewards in loyalty units/points representing the liability or obligation, which the said loyalty program promises to honor. Further, proliferation of Partners providing incremental revenue streams have transformed Loyalty programs into sophisticated revenue generation platforms. With airlines coming under larger scrutiny of the regulators from the perspective of the financial management of their loyalty program, airlines are streamlining their accounting practices in line with what is deemed fair, acceptable and transparent. To facilitate this, the loyalty program needs to support recognized financial models with ease.

Next Generation Customer Loyalty Management Solution

With the will to invest and innovate on their loyalty solutions, airlines look forward to the Next generation Customer Loyalty Management solution that will be characterized by:

Integration of Loyalty with CRM

The next generation loyalty solution integrated with enterprise applications such as Marketing, Sales, and Service, would enable a ‘Single Customer view’, which in turn will leverage core CRM processes for higher effectiveness; e.g. Marketing campaigns, Sales promotions would be able to access pre-processed customer intelligence built within loyalty programs for higher impact and ROI. Service agents will be exposed to relevant customer information to ensure personalization of service delivery and management of overall ‘customer experience’.

Configurability

Based on the state-of-the-art Rules framework, the next generation loyalty solution will allow quick and easy composition and deployment of program offerings enabling airlines to respond to market dynamics and competition swiftly. The rules framework will allow the necessary configurability to uptake future innovations with consummate ease. The next generation loyalty program would allow various types of membership schemes for different classes of customers such as Corporates, Leisure, Cargo and Professionals as relevant to the airline’s strategic objectives.

Modeling & Measuring Capabilities

This will enable measurement of program effectiveness against the underlying business goals, through key performance indicators defined at various levels such as program offerings, promotions, customer segments/tiers, clubs offering various types of memberships, etc. This will allow airlines to analyze and initiate corrective steps promptly and establish a robust platform for knowledge management that can be leveraged to ascertain success of Loyalty strategies in future.

Superior Partnership Management

Partners have become an increasingly important part of airline Loyalty operations, mainly as a result of the revenue that is generated by the sale of loyalty points (or miles) to partners who then award these points to customers on the basis of their own sales. Through streamlined transaction processing and management of communication with partners (keeping in mind the fact that the efficiency of the same has a direct influence over the end-customer satisfaction), the next generation loyalty program would enable superior partnership management capabilities.

Ability to Support Various Business Models

In line with the trend of loyalty programs being spun off, the next generation loyalty solution will provide the flexibility to support various business models an airline might choose to follow. Airlines are finding it increasingly important that Loyalty solutions support a number of business models, including locally managed and run loyalty programs, the ability to support multiple programs within the business (which potentially incorporate different customer bases and rule-sets), and the ability of an organisation to run independent loyalty programs for partners.

Complete Financial Management of Program Operation

The next generation loyalty solution will have out-of-the-box integration with the financial system, driven by the fincancial benefits to be obtained through points sales to partners. By virtue of this seamless integration, the next generation loyalty solution will support complete financial management of the loyalty program operation in congruence with the evolving accounting standards on loyalty program management.

Integration with Reservations, Inventory & Departure Control Systems

Highly essential for operational delivery of airline’s CRM vision, the next generation loyalty program will fully integrate with Airline Inventory, Reservations & Departure Control (DCS) Systems to make mission critical, actionable customer information available at all customer touch points throughout the journey. This ensures the delivery of high impact customer differentiation, benefit award, and systematic rule-driven decision making with respect to key processes such as ticketing, waitlist clearance, upgrades, and re-accommodation.

Oracle Customer Loyalty for Airlines

Oracle presents an integrated and highly configurable next generation loyalty solution, based on a common customer data model and built-in analytical abilities. This can be leveraged effectively by all CRM processes and customer touch-points enabling airlines increase and sustain Customer Loyalty through:

• Information driven relationship management based on greater customer knowledge

• Quick and Easy implementation of Loyalty strategies

• Deployment of innovative & personalized programs

• Higher operational efficiency

• Greater Program ROI

Oracle has extensive experience in providing software technology and solutions to over 70% of the world’s leading airlines.

This experience is unparalleled within the I.T industry and has allowed Oracle to gain a deep understanding of the business issues facing airlines today. This in turn allows Oracle to provide solutions that are uniquely tuned to the needs of today’s airline industry. Oracle is working with leading providers of airline inventory, reservations and departure control solutions to ensure that the Loyalty solution is fully integrated with all of the operational customer points within an airline.

AboutOracle

Oracle (NASDAQ: ORCL) is the world's largest enterprise software company. For more information about Oracle, please visit our Web site at http://www.oracle.com.

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Copyright © Oracle Corporation 2005. All Rights Reserved.

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