How should revenue management feel about frequent flyer programs?

Frequent Flyer Programs (FFPs) were invented to encourage customer loyalty by rewarding loyalists with free travel later for paid travel now. There is a persistent question in the literature and at most airlines whether the formula continues to be economically remunerative. Within airlines, FFPs are particularly controversial in the opinion of most Revenue Management (RM) departments, which dislike allocating ‘free’ reward seats. In this article, we propose and actualize a methodology for analyzing short‐term FFP economics, and, perhaps for the first time, prove that FFPs do result in enhanced short‐term revenue, and calculate by how much. We find that Elite customers choose to pay between 2 and 12 per cent more for similar itineraries, and that that effect is not diminishing over time. These findings include new empirical data that could enhance the FFP profitability model and could logically be incorporated into RM optimization models to allocate free seats more appropriately among frequent flyer categories.