ContextLoyalty transfer pricing between airlines and loyalty programs is often suboptimal due to inaccurate understanding of the cost of a redemption seat, which can vary greatly flight-to-flight due to the dynamic nature of flight demand and revenue optimization. This often leads to an over-scarcity of redemption availability, which is a major pain point for members, and the suboptimization of revenue, either from losing out on a high revenue passenger or from failing to recognize the redemption revenue out of the liability.

Optimizing decisions on award redemption availability levels requires an assessment of the incremental value of a redemption seat versus its true cost, which can be approximated in real time based on the displacement cost. Then programs must fairly compensate the airline by covering this economically-valued costs in the transfer price.

Setting transfer pricing appropriately allows for revenue-maximizing decisions within the same construct as revenue fares. Achieving proper visibility into the tradeoffs between seat availability and margin will enable mutual value creation for airlines and their loyalty programs.

Revenue SolutionOliver Wyman’s innovative transfer pricing platform uses displacement cost to quantify the true cost of a redemption seat, enabling optimized value versus cost decisions. This platform integrates numerous databases (including bid price, historical seat availability, and historical redemption data) to enable the tracking and monitoring of key elements of loyalty program performance, including redemption patterns and trends, margin performance, seat availability, and program P&L. Our clients can effectively leverage the transfer pricing platform to streamline their data, optimize transfer pricing, make targeted redemption availability adjustments, and strengthen the value proposition of their program overall.
ImpactInstances of deployment demonstrate incremental benefits to users of 3%, with additional benefits realized by the loyalty program as well.