How Will COVID-19 Impact Loyalty Programs?

The COVID-19 outbreak has now proven to be a global problem. It is no longer confined to China or Asia but has reached every continent except Antarctica and is disrupting travel around the world. Fairly quickly into this crisis Hyatt announced they were extending free night certificates, lounge and suite upgrade rewards, as well renewing status for one additional year for all World of Hyatt members in Asia-Pacific. Other chains soon followed suit, demonstrating the importance of loyalty programs.

As part of their announcement, Hyatt also said that they were evaluating what to do with guests from other regions who travel regularly to Asia. As of this time it is unclear what Hyatt is actually doing. Some reports indicate that some elite members are getting emails saying they’ve been offered this same courtesy, although we know many who have not heard anything as of yet.

Now that COVD-19 has become a truly global problem, airlines and hotels have the unenviable task of trying to predict the future and manage through a very unpredictable crisis. 

All this leads to the question, will COVID-19 improve or kill loyalty programs? After 9/11 airlines and hotels boosted benefits and offered deep sales to get people back flying and staying in hotels. During the 2008 financial crisis, they did the same. Will they follow this path again, or will they use this as turning point to pare back programs or pivot to an entirely spend-based scheme? It’s complicated because of credit card tie ups which are quite lucrative and encourage airlines and hotels to view their loyalty programs as a business and NOT just a marketing or customer retention strategy.

Sources in the hotel industry tell us there are big differences of opinions on what to do next. In most chains there are competing forces with one side who feel this is the time to protect their best customers by being generous and flexible, versus those who’d prefer to use this crises as a reason to cut costs, jettison benefits and deploy the savings for operations. Of course we see the latter as being very short term thinking, but who knows how the industry will react?

Ultimately they face multiple issues. The traveling public either can’t travel because of travel bans, won’t travel because of fears, or simply have no reason to travel as business is slowing down around the world. This leads to desperately vacant hotels and empty planes, which puts many companies under severe economic stress. The temptation to cut costs is evident, but the benefits to increase goodwill and protect an existing loyal base, should be of primary concern. At least that’s how we see it.

Further, this crisis is now going global and that means every region is being impacted. Hopefully countries outside of Asia will be spared the medical burdens of China and Korea, but there seems to be more than enough pain to go around. And of course, China is still not even close to being back to work. The real economic cost and shock to the global supply chain  has yet to be truly felt, although signs indicate that Europe and North America are starting to feel a similar economic contraction. In light of this, it seems certain that hotel chains will have to forego 2020’s re-qualification criteria and simply grant all members a year extension. We suspect the first chain to make this call will get a lot of positive press and generate goodwill among their most loyal customers, even if owners and managers worry that this decision will cut into revenue.

On the airline front, every indication is that they will first strategically focus on sales for economy tickets and not business class. There will be an initial hope that businesses will have pent up demand for travel and thus return to the skies. The thinking is why discount business class fares when business travelers will have to get back on the road, while leisure travelers who have a choice when it comes to vacations, will have to be incentivized to return to the air. We don’t expect this will work.

In the end we think airlines will also have to renew status for their best customers and cut prices across the board.

Technology has changed a lot since 2008. Many business travelers are quite happy to do a video conference and avoid the hassles of flying, so to avoid a significant change in attitudes, we think airlines will have to be flexible and generous. Fortunately, with oil costs dropping they should have a little breathing room, but nothing will help airlines return to profitability if they can’t get people back onto planes; especially paid business class travelers and their most loyal, high revenue fliers. 2020 will probably be the first year since the great recession where the total number of people flying actually drops. The industry will do everything they can to reverse this in 2021.

No one has a crystal ball and no company can predict the future, but unfortunately for the travel industry, they are now forced to make decisions based on very imperfect data. No one knows how severe this crisis will become and what the medical, social and economic ramifications actually will be. One thing is certain though, it has already decimated global travel and it is likely to wreak far more havoc in the weeks and probably months to come.

Will COVID-19 cause major bankruptcies in the airline and hotel industry? Possibly, but fortunately most airlines and hotels are in a far better position now than they were prior to 2008. Will it eventually lead to big sales, generous offers and more incentives for frequent travelers or will it lead to the end of loyalty programs as travel providers look to shed costs and go into survival mode? We can’t be sure, but the fact that loyalty programs emerged as a big asset for airlines during the bankruptcies that resulted after 2008, we’re pretty sure they will remain as a core business strategy for airlines and hotels. The ultimate question will be how do airlines and hotels balance incentivizing people to travel once again with their bottomline? Right now the answers are not clear. But stay tuned as we will be constantly monitoring and updating the situation.

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