Sometimes loyalty programs work so well they are viewed as anti-competitive. Just ask Scandinavian Airlines or SAS (short for Scandinavian Airlines System), the flagship carrier airline of Denmark, Norway, and Sweden.
Loyalty consultants and strategists alike have been fascinated by the tumultuous history of the SAS EuroBonus program in Norway, a prime example of a loyalty program that was not just successful, but ‘too’ successful.
Its journey, including a period when SAS EuroBonus was banned on domestic routes in Norway, offers valuable insights into the effectiveness and impact of loyalty programs on competition and consumer behavior.
The story of SAS EuroBonus in Norway sheds light on the complex interplay between loyalty strategies and market dynamics. From inception to the controversial ban and subsequent reinstatement, this program has been at the center of debates about fair competition and customer loyalty. Delving into the history and impact of SAS EuroBonus, inevitably leads to an exploration of the broader implications for loyalty program design, the role of loyalty experts in shaping these strategies, and the lessons learned from this unique case study in the airline industry.
SAS EuroBonus inception
The SAS EuroBonus program was launched in 1992 as a strategic initiative by SAS to enhance customer loyalty and strengthen its market position. The program was designed to reward frequent flyers with points that could be redeemed for a variety of benefits, including free flights, upgrades, and other travel-related perks. This initiative was part of a broader trend among airlines to leverage loyalty programs as an acquisition and retention tool in the increasingly competitive airline industry.
EuroBonus was the Nordic regions first cult-followed loyalty program with 400,000 members registered soon after inception.
Deregulation of the Norwegian airline industry (1994)
By 1994, the SAS EuroBonus program was already a well-established and influential frequent flyer program within the Scandinavian airline market. Much like the frequent flyer programs of today, the program was designed to reward customer loyalty by offering points for flights and other services, which could be redeemed for various benefits such as free flights, upgrades, and other travel-related perks.
During this period, EuroBonus was instrumental in maintaining SAS’s competitive edge, particularly as the Norwegian government moved to deregulate the airline industry. The deregulation marked a significant shift in the country’s aviation sector, aligning with broader trends in Europe towards market liberalization, pricing flexibility and route and schedule autonomy. This move was intended to foster competition, improve service quality, and reduce airfares by allowing more players to enter the market.
The EuroBonus program’s ability to lock in customers through accumulated rewards made it a significant factor in SAS’s continued dominance during this time. EuroBonus created substantial switching costs for travelers, who were reluctant to leave the benefits they had accrued.
The effectiveness of EuroBonus deterred new entrants and maintained customer loyalty, even as the market opened up. This loyalty was a key reason why new airlines struggled to gain a foothold in the Norwegian market, as they could not easily replicate the extensive network and benefits offered by SAS through EuroBonus. This situation highlighted the program’s role as a strategic tool for SAS, leveraging customer loyalty to sustain its market position amidst regulatory changes.
Color Air’s failed entry- 1998
Low-cost carrier, Color Air‘s entry into the Norwegian airline market in 1998 was a bold attempt to challenge the dominance of established carriers like SAS and Braathens following the 1994 deregulation. However, its venture was short-lived, lasting only 13 months. Several factors contributed to Color Air‘s failure, highlighting the challenges new entrants faced in the deregulated market.
Both SAS and Braathens, had well-established operations and customer bases and the advantage of brand recognition and customer loyalty, making it difficult for Color Air to attract and retain passengers.
SAS’s EuroBonus program was a significant barrier for Color Air, given the airline had simply neglected to form a differentiating loyalty strategy that would support entry into the market.
The Norwegian ban on domestic frequent flyer programs
Reasons for the 2002 ban
In 2002, Norway took a bold step to promote airline competition by banning the earning of points domestically through loyalty programs [2]. The Competition Authority intervened against the frequent flyer programs of SAS and its subsidiaries Braathens and Widerøe, with the decision initially limited to 5 years [12]. This move aimed to address concerns about loyalty effects locking in customers and creating barriers to entry for new competitors.
2003, A key entrant: Norwegian Air Shuttle (NAS)
In 2003, Norwegian Air Shuttle (NAS) began operating on four domestic routes in Norway, shortly after the prohibition on earning frequent flyer points was implemented. NAS claimed that the ban on EuroBonus was a crucial factor in its decision to enter the Norwegian market. By 2011, the Norwegian Competition Authority conducted an evaluation to determine if the ban on frequent flyer points should remain. Their findings indicated that the loyalty incentives provided by frequent flyer programs were still substantial, encouraging customers to consolidate their purchases with a single airline. The Authority expressed concerns that reintroducing loyalty programs could weaken competition in the Norwegian domestic airline sector, as business travelers might gravitate towards airlines offering the most appealing loyalty benefits.
Extension in 2007
On August 1, 2007, Norway extended the general ban on domestic frequent flyer points [13]. The Competition Authority assisted the Ministry in assessing the continuation of the prohibition, recommending a general ban on earning loyalty points [12]. However, this decision faced scrutiny from the EFTA Surveillance Authority, which viewed it as a potential breach of the EEA agreement and the Directive on unfair commercial practices [13].
Economic analysis in 2011-2012
The Competition Authority conducted a thorough assessment of the ban’s economic effects in 2011-2012 [12]. The review revealed significant changes in the competitive environment, with increased competition contributing to a decline in average prices for domestic air transport [12]. Despite these changes, the loyalty-building effect of bonus programs remained significant, although somewhat diminished [12].
The analysis showed that the value of bonus travel increased with an airline’s route network [12]. SAS’s business model as a network company and its Star Alliance membership
made its EuroBonus program more attractive than Norwegian’s bonus program [12]. The Authority expressed concern that reintroducing loyalty programs could weaken competition, potentially forcing smaller carriers to reduce capacity on less profitable routes [12]. Therefore it was decided that the lifting of the ban would be premature and thus detrimental.
The lifting of the ban in 2013
Government’s decision
In 2013, Norway faced pressure to lift the ban on domestic frequent flyer programs. The EFTA Surveillance Authority concluded that the regulation breached the EEA agreement [14]. The Authority viewed the ban as an unjustified restriction on the freedom to provide services and the freedom of establishment for air carriers [14]. Norway was given two months to align its national law with EEA rules or face potential legal action in the EFTA Court [14].
Separately, it is worthwhile to note that by 2013 NAS had expanded its operations to cover a nationwide network, increasing its market share on domestic routes from 12% in 2003 to 36% in 2011 thus indicating that competitive landscape was more balanced.
Market monitoring
Following the lifting of the ban, loyalty experts closely monitored the market’s response. The reintroduction of loyalty programs had significant implications for competition and consumer behavior in the Norwegian airline industry. SAS EuroBonus, with its extensive network and Star Alliance membership, was poised to benefit from the change.
Impact on SAS
The lifting of the ban had a substantial impact on SAS. The airline could once again offer its EuroBonus program on domestic routes, potentially strengthening its market position. This development allowed SAS to leverage its loyalty strategy more effectively, influencing customer behavior and potentially affecting competition dynamics in the Norwegian aviation sector.
Conclusion: Do loyalty programs work? Sometimes too well.
The journey of SAS EuroBonus in Norway offers valuable insights into the impact of loyalty programs on competition and consumer behavior in the airline industry. From its initial ban on domestic routes to its eventual reinstatement, this program, now with over 7 million members, has been at the center of debates about fair competition and customer loyalty. The case study highlights the complex interplay between loyalty strategies and market dynamics, showcasing how these programs can shape the competitive landscape.
Looking ahead, the SAS EuroBonus story serves as a reminder of the ongoing challenges in balancing consumer benefits with market fairness. It underscores the need for continuous monitoring and adaptation of loyalty strategies to ensure they align with evolving market conditions and regulatory frameworks. As the airline industry continues to evolve, the lessons learned from the Norwegian experience will undoubtedly inform future discussions on the role and design of frequent flyer programs in competitive markets.
References
[1] – https://www.chase.com/personal/credit-cards/education/rewards-benefits/frequent-flyer-programs
[2] – https://en.wikipedia.org/wiki/Frequent-flyer_program
[3] – https://simpleflying.com/why-airlines-spend-so-much-on-frequent-flyer-programs/
[4] – https://loyaltyrewardco.com/the-psychology-behind-loyalty-programs-part-1/
[5] – https://www.saasquatch.com/blog/psychology-behind-loyalty-programs/
[6] – https://www.mdpi.com/2071-1050/12/7/2814 https://www.mdpi.com/2071-1050/12/7/2814
[7] – https://clutejournals.com/index.php/JBER/article/download/753/738/2967
[8] – https://www.law.berkeley.edu/files/Airline_Network_Effects_and_Consumer_Welfare.pdf
[9] – https://economics.ucr.edu/wp-content/uploads/2019/11/TomRoss.pdf https://economics.ucr.edu/wp-content/uploads/2019/11/TomRoss.pdf
[10] – https://openaccess.nhh.no/nhh-xmlui/bitstream/handle/11250/163012/dp1998-18.pdf?sequence=1&isAllowed=y
[11] – https://qz.com/1688156/why-is-norwegian-air-failing
[12] – https://konkurransetilsynet.no/wp-content/uploads/2018/08/Bidrag-fra-Norge-Competition-issues-in-airline-services.pdf
[13] – https://www.eftasurv.int/newsroom/updates/internal-market-norwegian-ban-frequent-flyer-points-breach-eea-rules
[14] – https://www.eftasurv.int/newsroom/updates/internal-market-norwegian-ban-frequent-flyer-points-breach-eea-rules-0
