A 25-year-old named Ben Schlappig was in the news recently because he traveled around the world for an entire year — for free. People like Schlappig outsmart loyalty programs all the time, racking up frequent flyer and hotel reward points in mind-boggling volumes. And while this might sound neat, your business is probably subsidizing his travel.
For every travel “hacker” like Schlappig who flies free, dozens of businesses overspend on every flight, hotel and rental car. Indeed, loyalty programs are designed to make business travelers less cost sensitive, which creates a conflict of interest, because CFOs and travel managers obviously want to reduce expenses.
This is a big problem for tech startups, especially those with growing sales and implementation teams. Travel is typically a company’s third largest expense after rent and salaries. And while there seems to be more cash than water flowing in Silicon Valley, this will be short-lived.
As Marc Andreessen warned in one of his famous Twitter storms, “New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST … When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co’s will VAPORIZE.”
The sharing economy is disrupting the concept of loyalty.
To avoid vaporizing, startups are turning to the sharing economy to reduce travel costs. Airbnb, Uber, Lyft, RelayRides, etc. almost always cost less than their traditional competitors (though they can pose compliance issues, as I’ve discussed previously).
At my company Rocketrip, we find that travelers now choose Airbnb seven percent of the time, which is a sizeable share if you think of Airbnb as one hotel. Their program for businesses grew 700 percent in the last year alone.
However, unlike all the hotel groups, airlines and rental car companies that take a lion’s share of the $310 billion that U.S. businesses spend on travel, Airbnb and its kin don’t offer rewards programs. Why would they? With Airbnb’s revenue projected to climb 55 percent, from $423 million last year to $675 million in 2015, there is no need to woo guests.
Yet travel managers place a lot of weight in rewards programs. The Global Business Travel Association reports that “Two-thirds (66 percent) of Corporate Travel Managers agree hotel loyalty programs play at least a ‘slightly important’ role in their negotiations with hotels and one in five admit they play a ‘very important’ or ‘extremely important’ role.”
Loyalty programs can increase compliance with company travel policy and drive employees to preferred vendors (i.e., those with which the company has negotiated rates and perks).
Travel managers are right: Some perks matter to road warriors. VIP airport lounges, free room or cabin upgrades, dedicated customer service, priority security lines and late checkout do improve the quality of life on the road.
Thus, rewards programs should give hotels and airlines an edge against the sharing economy. However, there’s good news for Airbnb and a future “Uber of commercial airplanes” — airlines and hotels are making rewards programs less attractive for travelers and more expensive for businesses.
Back in 2013, The Points Guy reported that all the major hotel chains (Starwood, Marriot, Hilton, Hyatt, etc.) had devalued their rewards programs, meaning travelers had to spend more at the hotel or spend more with point-bearing credit cards before earning free nights.
Hilton, for instance, had raised the points-per-night on some hotels by as much as 90 percent. The best part: The Points Guy wrote the piece from a two-bedroom Los Angeles bungalow that he rented either on Airbnb or VRBO (he didn’t specify which) for less than a small standard room at one of the elite chains. The savings were worth more than the progress he’d make towards elite status and free nights.
Most of the airlines, too, have debased their rewards programs. Frequent-flyer earnings used to be based on the distance and frequency of travel.
The more you flew, the more you earned. This allowed road warriors to rack up points and earn elite status, even when they picked inexpensive flights. The incentive to be loyal was strong because the experience on airlines was always the same, unless they had elite status.
Unfortunately for businesses, most airlines have switched to a revenue-based system, just like the hotels. This means that the more you spend, the more points you earn; the amount of flying doesn’t matter.
The salesperson who travels from San Francisco to New York weekly at $350 a pop earns fewer miles in one month than someone who books one round-trip flight from Chicago to Moscow at $1,500, even though the salesperson commutes more than double the distance.
Airlines have also added more levels of elite status, while raising minimum eligibility requirements to reduce what The New York Times reporter Josh Barro calls “elite bloat.” As Delta put it, “When everyone’s an elite flier, no one is.”
If road warriors want to reach the top tiers of elite status, their incentive is to book more expensive flights — the exact opposite of what CFOs and travel managers want.
Airlines are effectively saying, “Max out your travel budget if you want to go Platinum.” And, unlike in the past when every reward flight was worth a flat amount of points, reward flights are now dynamically priced based on demand and dollar cost. Points are worth whatever airlines say they’re worth today.
Consider the full situation: All companies, and startups in particular, need to rein in travel costs. Free-flowing venture capital is going to disappear. But, airline and hotel rewards programs give travelers an incentive to spend as much as possible on the company’s dime, because they need more points to get elite status, free hotel nights and free flights.
At the same time, a lot of business people (Millennials, in particular) have shifted spending from hotel chains to Airbnb because they get a better experience at a better value, just like The Points Guy did in LA.
Elite status and saving money shouldn’t be mutually exclusive.
Two-thirds of travel managers deem rewards programs important, yet Airbnb has no rewards program and is still winning over business people in droves. Hotel rewards programs just aren’t good enough to keep travelers away from Airbnb.
In other words, the sharing economy is disrupting the concept of loyalty. There is no incentive to be loyal to a hotel group if Airbnb can get you a cheaper room in a better location with better amenities.
Ironically, a road warrior could save his company money, travel more comfortably and still amass free hotel nights by charging all his Airbnb stays to a Hilton credit card. Sharing economy travelers can still find ways to accrue points and perks.
However, in the airline arena, where all the players offer similar products, loyalty programs will be more resilient — at least until someone creates the “Uber of commercial airplanes.” Companies will only be able to reduce flight expenses if they make it more attractive for employees to save money than to book top-dollar flights in the pursuit of elite status perks.
Overall, turbulence in the travel and hospitality industry presents opportunities. To the extent that someone like Ben Schlappig can hack airline rewards programs, I think companies can “hack” travel management to provide better perks at a lower cost to the company.
The airlines, hotels and rental car companies seem insensitive to how much the current reward structure hurts their customers’ bottom line. Sharing economy businesses will force them to rethink this approach to loyalty. Elite status and saving money shouldn’t be mutually exclusive.