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Paying for Status? - The effect of frequent flier program member status on air fare choice

Author

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  • Nathalie C. McCaughey
  • Christiaan Behrens

Abstract

Frequent flier programs (FFPs) are said to affect airline customer behaviour such that revenue of sponsoring airlines increases. To this end prior research relies on assumptions of competition, lock-in effects and variations in scale and scope of FFPs. Whether a FFP by itself induces a price premium remains unanswered. In an effort to shine some light on this question, we apply discrete choice analysis to a new proprietary data set of actual frequent flier member flight behaviour (fares paid, FFP points received) over a 12-months period. We take advantage of the variations in the structure of FFPs (Gold, Silver and Bronze tier levels), to assess both the existence of a FFP price premium and the price premiums average monetary value in US$ per FFP member. Our findings suggest that FFP members are willing to pay a price premium of up to six percent, which is directly attributable to the FFP.

Suggested Citation

  • Nathalie C. McCaughey & Christiaan Behrens, 2011. "Paying for Status? - The effect of frequent flier program member status on air fare choice," Monash Economics Working Papers 04-11, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2011-04
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2011/0411payingmccaugheybehrens.pdf
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    Cited by:

    1. So Yeon Chun & Dan A. Iancu & Nikolaos Trichakis, 2020. "Loyalty Program Liabilities and Point Values," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 257-272, March.
    2. Guo, Xingchen & Jiang, Changmin & Jiang, Siming & Guo, Huanxiu, 2023. "Making airline coalition frequent-flyer programs profitable: An analytical investigation," Transport Policy, Elsevier, vol. 141(C), pages 245-262.
    3. Santos, Luca J. & Oliveira, Alessandro V.M. & Aldrighi, Dante Mendes, 2021. "Testing the differentiated impact of the COVID-19 pandemic on air travel demand considering social inclusion," Journal of Air Transport Management, Elsevier, vol. 94(C).
    4. So Yeon Chun & Anton Ovchinnikov, 2019. "Strategic Consumers, Revenue Management, and the Design of Loyalty Programs," Management Science, INFORMS, vol. 65(9), pages 3969-3987, September.
    5. Seelhorst, Michael & Liu, Yi, 2015. "Latent air travel preferences: Understanding the role of frequent flyer programs on itinerary choice," Transportation Research Part A: Policy and Practice, Elsevier, vol. 80(C), pages 49-61.
    6. de Boer, Evert R. & Gudmundsson, Sveinn Vidar, 2012. "30 years of frequent flyer programs," Journal of Air Transport Management, Elsevier, vol. 24(C), pages 18-24.

    More about this item

    Keywords

    discrete choice analysis; loyalty programs; relationship marketing; price premium; frequent flier program; CRM;
    All these keywords.

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