Jan 132011
 

Rapidrewardsb Many thanks to long time Travel Insider supporter, Kevin Morgan, for supplying this detailed analysis and commentary on Southwest and its new Rapid Rewards program.  Any errors or inconsistencies are from my very light edit and subheadings, all the good stuff is entirely his own.

Southwest has completely rewritten its frequent flier program.  On the face of it, 'points' are replacing the former 'credits' and there is a lot of similarity between the two programs.  But when we look beneath the surface, the changes massively outweigh the commonalities between the two programs.

Converting Between the Old and New Programs

For current members of their present program, there’s an official exchange rate of 1200 points per credit.  In the transition to the new program, members will have certain opportunities to move balances from one currency to the other (though as far as I can tell, only from “new” to “old”; I can’t find any way being offered, yet, to convert old “credits” into new “points”).

Per the rules, if you have unexpired, unused credits in the “old” program after March 1, 2011, you will be able (one time only) to take points accumulated in the new program and exchange them for credits at the afore-mentioned rate. You can only do this once, and you have to do it with enough points to bring your credit balance to 16, or enough for a “Standard Award”, which will then be issued to you.

This option is useful if you have several credits in the old program. A “Standard Award” is capacity-controlled and subject to blackout dates, but otherwise is good for any seat they make available to the program. It also means the “old” program won’t completely sunset until the last credits roll out of that system, which would be March 1, 2013.

Once the new program is fully implemented, as you noted, all things being equal, 10 roundtrip flights earns enough points for a “free” flight at the average points you earned for those 10 flights. If nothing else, that’s a slight devaluing of the program, because in the old system, 8 roundtrip flights earned a free one. But of course, all things are seldom equal.

Comparing the Old and New Program Rules – Who Wins and Who Loses

Each fare class earns 6, 10, or 12 points per dollar spent. Clearly, that tilts earning power in favor of business-class fliers – those who can afford not only the refundable anytime fares, but don’t mind paying (or having their company pay) for advance boarding, the free drink, and the priority security lane available with “Business Select”.

Moreover, since Southwest’s flight pricing structure is a lot more rational than most legacy airlines (as we see with $300 roundtrip transcontinental fares when walk-up roundtrip flights between Baton Rouge and Atlanta – less than 500 miles apart – on the same airline cost triple that), the points tilt in favor of longer flights as well. A businessperson who travels weekly on a longer-distance flight each week can rack up considerable numbers of points.

On the redeeming side, those same businesspeople are likely to “plan ahead” for leisure travel. They’ve got to make sure no one is going to need them, or else arrange coverage by others – so when it comes to redemption, they can probably do so at the lower, “Wanna Get Away” redemption rates.

This comes at the cost of one of the old program’s great benefits – Award Tickets used to be valid for ANY seat on ANY flight (except blackout dates), and even with capacity controls, you could expect to find a reward seat on most flights unless it was to a very popular destination during high season.

You still can – but now, it’s going to cost a lot more in terms of points for that last-minute seat. For people who were accustomed to building up to an Award seat, and then cashing it in on short notice, that’s a thing of the past without squandering a lot of points.

New – Non-expiring Points

Another big plus: finally, points don’t expire. Southwest’s original program credits expired in 12 months; that was extended several years ago to 24 months, but the underlying principle was the same: it was for frequent, not rare or occasional, flyers.

Airtran credits also expire after a fixed period, but presumably that’ll go away with the pending purchase; that puts a lot of pressure on the handful of other programs out there to end expiration dates as well.

Potential Changes to Partner Earnings Too

One change that’s gone largely unmentioned is that a point, being so much “smaller” in terms of value than a credit, becomes a much more usable currency in the “partners” game. In the past, hotel partners gave (typically) one-half or one credit per qualifying stay, regardless of the amount spent or the number of nights stayed. So a $65, one-night stay at a Quality Inn got the same credit as a five-night stay at a Renaissance or Hyatt resort costing ten times as much.

Points will allow partners to fine-tune that, the way miles are tuned for legacy carriers; a partner could offer 5 points per dollar spent, for instance. I think there will be some limited pressure on the higher-end properties to do just that (although, one wonders how many people fly Southwest and then stay at a Renaissance or Hyatt Regency or Waldorf Astoria).

And likewise, it allows for a lot more earning opportunities via retail and other partners. Assuming a point, like a mile, costs about a penny when bought in bulk by a retailer, a half-credit in the old system probably cost around $6.00. Purchases less than $60.000 would mean more than 10% of the gross sales price would go for the half credit – hardly a winning proposition. But at 3 points per dollar spent – typically for “mileage mall” type places – suddenly it’s feasible for smaller purchases.

More Opportunities to Redeem Points

Another change: for those who have the RapidRewards credit card, all points earned (not just those earned by the card) can be used for things other than Southwest flights. These things include international flights on other airlines, cruises, hotel stays, rental cars, and more, including non-travel options like gift cards and tickets.

Very little has been explained on this, but I imagine it operates something like the points system on Capital One and other “non-affiliated” reward cards; the card company purchases the item for you and then deducts the points from your account, with Southwest cutting them a check for the point value (at whatever rate has been negotiated).

And finally, like the miles-based programs, you’ll be able to purchase points in blocks of 1,000 with a 2,000 point minimum. There’s no posted “cost” for the points but I’m guessing it will be somewhere around 2 cents per point.

For someone who has, say, four credits on the old system, if that price guess is accurate, it might be worth it to purchase 15,000 points (at a cost of $300) to add to his existing credits for a free ticket – if the “free” flight he has in mind would cost more than $300.

So – The Winners and Losers Are?

Net winners, then, are business travelers and other people who purchase refundable fares, and really anyone who travels on short notice with any regularity, who can (when it suits them) redeem for free flights at advance-purchase leisure rates. Those people come out well ahead in the new system. Also, people who only fly occasionally, and had trouble reaching 16 credits within a 24-month window, but who want to be able to take a free trip eventually, will gain from the fact points don’t expire.

On the flip side, those who only fly on the “Wanna Get Away” rates will find they will have to fly slightly more to get a free flight, and those who want a free flight on short notice will have to have flown even more.

Implications Behind the New Program Design

Other thoughts: I know the old program was “simple”, and served Southwest well for many years. However, changing the program is not a sign of them becoming more like legacy carriers. The old program was kind of irrational in its earning/award structure (I could take 8 cheap round trips to Orlando in the off-season when flights are $75 each way (total cost of $1200), and have a free ticket I could use to fly to Seattle (which would normally run about $400 or more).

Legacy programs are tied to miles flown, which is even less rational (I’d get six times as many miles for a $300 roundtrip advance purchase transcontinental flight on Delta as I got for an $800 walk-up roundtrip to Atlanta).

I see the old program as a kind of promotion, designed to lure people to try Southwest. For a long time, they used the program as a lure to book online, by offering double credits for online bookings (free flight in four round-trips). The old program having served its purposes well, the new program seems to be an effort to reward its most profitable customers – those who buy higher-priced tickets shortly before travel.

Some Thoughts About Southwest's 717s and Possible New Routes

After all, when Southwest decided to get into fuel hedging (which, admittedly, has sometimes worked against it, but overall it’s been a huge profit-maker), no one cried “over-complication”, nor should they have. Nor do I see their purchase of Airtran as a hugely complicating factor, even with the addition of 717’s into the fleet. Most of the fleet will still be 737’s, and there still will be a lot of flexibility in terms of shifting similar planes from one route to another in the event of mechanical issues. The 717’s will allow them to serve some smaller markets, since Southwest likes to have at least four or more departures in every new market.

In places where Southwest and Airtran were already both flying, it allows for fine-tuning of load balances when the systems are combined (ie a 75% full SW 737 and a 75% full Airtran 737 could translate into a nearly all full 737 and a nearly all full 717). This is the sort of thing Southwest has proven really good at over the years: a fanatic attention to detail in keeping the thing running right.

And on another side note, I have a feeling Southwest’s new 737-800’s may also be useful (beyond the Hawaii market) if they want to expand transcontinental non-stop service. By moving aggressively into the New York market, they may be prepping to attack the NY-LA and NY-SF runs. I don’t know if those would be cost-effective in 737’s, even the 737-800, but I can’t imagine Southwest hasn’t looked at every single market segment out there as a possible mode of expansion. Some may work, some may not, but I bet even the ones that don’t work get re-examined on a regular basis for new ideas.

The Non-Secret of Southwest's Success

After all, those famous 20-minute turnarounds are no industry secret; I’m sure the legacy carriers could see the benefits of getting planes in and out of the gate as fast as possible. But what made Southwest different is they figured out how to do them: precise coordination, giving employees the power to get things done, and rewarding workers for doing a good job.

I think Southwest has realized that while it has a lot of room to grow into new markets, it’s achieved pretty close to maximum efficiency in terms of flight operations. What they will need to do, to remain profitable, is to gradually increase the revenue per seat mile–since seat mile costs will rise with increasing fuel prices and slower increases in labor costs.

Rather than hike prices across the board, which might cut more into demand, it seems Southwest has decided to try to get more money out of customers who are willing to pay more for what is, in effect, the same service – by offering a bunch of low-cost but higher-value enhancements for paying the higher fare, and the new RR program seems to be part of that. That way, few people are affected negatively – instead of charging more for things people formerly got for free, Southwest has hit on the idea of offering new things people may want in exchange for more money. Psychologically, I think it’s brilliant.

That’s not to say they’re immune to bad ideas, and as we’ve seen with, say, Google, it’s easy for a widely admired company to do some bone-headed things and squander a lot of that goodwill. But thus far, at least, they seem to be keeping the right approach to keeping their public perception good.

 

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