"Upmarket passengers are our bread and butter"

Lior Tanner / Photo: Jonathan Bloom , Globes

El Al frequent flyer club CEO Lior Tanner explains the long-term thinking behind recent controversial changes in the program.

The most special of the 2.25 million members in El Al Airlines' frequent flyer club is a cello. An orchestral cellist who regularly flies to Israel takes her expensive cello with her in a business class seat. The cello accumulates its own frequent flyer points, and has achieved platinum status. It is unclear whether the cello has taken advantage of its points for a bonus flight to take a rest from the orchestra and its flights around the world. Human passengers share the status of the cello, and a dog has also attained membership in the club.

The Matmid frequent flyer of club El Al, which does not belong to a global aviation alliance, has undergone a series of changes in recent years. In the latest of them, which is taking place now, a dedicated website has been launched, and options for utilizing points in the club have been expanded beyond aviation.

Five years ago, Adv. Lior Tanner was appointed CEO of EL Al's frequent flyer program. "I'm a person for special missions," he describes himself. "They call me up for crises or deep changes. This gets me going. It's also the place I started at in Fly Card," he told "Globes."

The club is run as a unit independent of El Al. Why did you choose to operate this way?

Tanner: "When I joined El Al, the CEO was Eliezer Shkedy, who believed that there was no point in reinventing the wheel, because there are many smart people you can learn from. We took our inspiration from the club of Australian airline Qantas Airways, which is run separately, and decided to operate that way. We're a kind of startup from Or Yehuda. The clubs are growth engines, and this reflects the sector's model of not relying just on airplanes. The purpose of the club is to get El Al involved in the daily lives of customers through the value it provides for them. We're run separately, but in the end, we're part of El Al.

"When we decided to issue our own credit cards, the consultants we spoke to told us that it would fail, because the market was saturated and people wouldn't put another credit card in their wallet. They asked us, 'What do you have to offer?' This dismissive attitude made me think that the opposite was true. Maybe there wasn't room for another ordinary credit card, but Fly Card is a different product. We created a digital coin in the form of points accumulated in purchases. We told consumers to carry on with their usual shopping habits, and the points would turn into flights. Even today, at a time when a flight long ago became a commodity, it's still a desirable product."

Average monthly Fly Card spending - NIS 7,300

When Fly Card was launched five years ago, the number of members in El Al's frequent flyers club was 1.3 million. The club now has 2.25 million members. The club is divided into five levels according to the frequency of flights: frequent is the basic status, followed by silver, gold, platinum, and top platinum. It costs nothing to join the club.

330,000 of these members hold Fly Card credit cards, for which they pay NIS 20-40 a month. 75% of the cards are basic cards, while the rest are premium cards. The average volume of monthly spending is NIS 4,500 for basic cards and NIS 20,000 for premium cards, which account for two thirds of the turnover on Fly Cards. When these two extremes are averaged, the result is NIS 7,300 in average monthly spending. Tanner says that this figure is high in comparison with other credit cards: a monthly average of NIS 3,700 for bank credit cards and NIS 2,200 for non-bank credit cards.

The fees that you charge for the cards are high in comparison with the rest of the market.

"We had no hesitation about whether to charge money - not in a world in which the cross-commission is being eroded. Clearance profit has fallen from 1.5% to 0.6-0.7%, and will go down to 0.5%. The market is changing for the worse for the credit card companies, so their sources of revenue are changing. The policy of exemption from card fees poses two problems: the first is damage to the credit card company's revenue, and the second lies in the concept - if you believe that you're giving high value to customers, you will believe that they will be willing to pay for it."

Despite Tanner's insistence that charging card fees is justified, El Al's frequent flyers club is launching something today that contradicts his agenda - customers in the highest category will receive an exemption from fees for their credit cards. "The club's high-end customers are our bread and butter, and this is a way of strengthening the connection with them," Tanner says. The exemption from card fees is for new, upgraded, and existing gold, platinum and top platinum customers, who pay NIS 40 a month in card fees. "This is giving up a lot of money, and the credit card company is absorbing the loss. "There is a small proportion of high-end customers who do not hold Fly Cards, and this is a way to reach them," he explains.

98% of El Al's customers have the basic status. The high-end customers, which the airline wants to hold on to - those who fly the most frequently - constitute a small proportion of El Al's passengers.

9% of the clearance turnover in Israel

In December 2018, Fly Card announced that it would extend its agreement with ICC-Cal for 10 years through the Diners and Mastercard (non-bank) credit card brands. Leumi Card (now Max) and ICC-Cal reached the final stages of the tender, with ICC-Cal being declared the winner. "We were sought after," Tanner says, and explains why: "We will finish 2019 with a NIS 30 billion turnover, NIS 5 billion more than the total turnover in 2018. This is substantially higher than other clubs. Since Fly Card was launched, our turnover has been NIS 100 billion, 9% of Israel's total clearance turnover. 12% of purchases by Israelis become frequent flyer point." This calculation includes accumulation of points in the aviation tracks in the benefits mechanisms of other credit cards.

Isracard withdrew from the game when it negotiated with Turkish Airlines, which set the scene for the recent launch of a joint credit card. At the same time, the club continues to work with American Express, which issues 10% of Fly Card's credit cards.

Cooperation between credit card companies and airlines is on the rise.

"We're in a period in which overseas travel and the aviation industry are booming. More parties are entering; the pie is growing, and will bring more customers in. In comparison with the competitors, the player with the deepest value proposition is Fly Card, so I'm not so worried."

The following numbers show how important the frequent flyers revenue instrument is to El Al. In bidding against Max-Visa, the winners, ICC-Cal-Mastercard, undertook to pay El Al a NIS 125 million bonus. El Al also obtained a "phantom" option for monetary bonuses if ICC-Cal or Diners Club is sold. ICC-Cal-Mastercard share revenue with El Al on cross-commissions, card fees, a commission on conversion of foreign currency, and revenue from the loans taken with the club's credit cards. The club is currently promoting such loans (with interest payments made in the form of frequent flyer points). When the agreement between the parties was signed, El Al received NIS 60 million on account of future royalty payments.

"We can't state the extents of usage, but we can say that since 2015, it has increased by 50%. Allocation of flights for bonus cards are a function of usage. This is no longer matter of a Tuesday flight to Warsaw during the winter. El Al has revised its policy. (El Al CEO) Gonen (Usishkin) is one of the club's biggest supporters. He enabled us to go ahead with measures for substantial expansion of flight allocations," Tanner says.

But your interests are different. He wouldn't care if not a single bonus flight was used.

"That's not true. That's thinking for the short term, not the long term. It's a bubble that will eventually burst. It's a matter of relations with the passengers, not flights. If we don't invest in a value proposition, this relationship will be damaged. Outside of the flight tickets, which is the mostly frequently used bonus, there are peripheral products, such as insurance and car rentals. For example, using points to buy at duty free on a flight amounts to tens of millions of points a year. El Al employees also use their points like this."

El Al's points expire after three years. United Airlines, one of your strongest competitors on routes to the US, recently announced that passengers would retain their miles throughout their lives.

"We examine the subject of expiring points from time to time, and offer new ways of using points in aviation and outside it."

The figures indicate the scale of the challenge that you face. Passenger traffic to and from Israel is increasing by over 10% annually, while El Al's market share at Ben Gurion Airport is headed for 26%.

"El Al has been renewing its air fleet in recent years and introducing new routes, such as Tokyo, Dublin, Chicago, and San Francisco. Competition is making El Al more focused. I can say that El Al is leaving no stone unturned in its effort to streamline and improve."

"No pressure was exerted on us, but no one is immune to mistakes"

A change in the model for accumulating and using Fly Card points went into effect in April 2019. The new mechanism aroused protest among platinum and top platinum customers. "The accumulation method became simpler, with a direct proportion to spending," Tanner says. "The change included a different calculation for switching to a different status, and a small number of members were negatively affected. We handled these cases individually. After the change, we also improved the accumulation ratio. No pressure was exerted on us, but no one is immune to mistakes. Dialogue with the customers is important to us, but we can't agree to everything. In the end, El Al is a commercial company. I'm proud that we could say that we're changing things."

The club is now taking steps that include innovations such as a website for buying various products with points, or with a combination of points and cash including duty free products, electrical appliances, electronic devices, sporting goods, etc. Tanner promises that the products will be offered at a realistic market price.

Another measure is expanded options for using the bonus cards. Every plane has 26 virtual seat allocation sections with changing prices according to demand. Club members can use points for all sections of the plane, so that all of the tickets will be also be priced in points, with an option for payment partly in cash and partly in points (using a slider that will highlight the pricing in this division), including dates with the highest demand, "if they reserve long enough in advance." "The conversion ratio is an average of 2-3 points per dollar, so that using 300 points is equivalent to $100 of the ticket price," Tanner says.

Here, too, your interest is the opposite of that of El Al's CEO, who will prefer selling tickets in August for cash, not points.

"Part of the insight that led to success is that El Al should be indifferent about the use of points, because El Al gets money from the club for each bonus ticket. It therefore makes no difference who buys the ticket."

There are websites offering Matmid frequent flyers club members cash for their points. Does that bother you?

"Trading in points is something that ostensibly violates the company bylaws. It is something that takes place on a marginal scale, so it doesn't bother us."

Three alliances dominate civil aviation: the Star Alliance, One World, and SkyTeam. El Al is a member of none of them. Has this affected your status?

"This situation is mostly political. El Al did not decide against belonging to any alliance. We're trying to compensate for this disadvantage through code-sharing agreements with companies such as American Airlines, JetBlue Airways, Air China, Air Mexico, and others. Accumulated points can also be used with these airlines."

El Al arouses many emotions. Reports about the company attract a lot of talkbacks and critical responses. On the other hand, El Al leads "Globes'" index of brands in the civil aviation sector.

"Every year, the number of complimentary letters that El Al receives is larger than the number of complaints. El Al is a company to which you can't be indifferent. It has been intertwined with Israel's life and culture for 70 years. Its first passenger was Chaim Weizmann, who nationalized an airplane from the army so that he could travel to Europe. There are brands that go back to when things are remembered in 'black and white', to which you are emotionally attached, which makes events involving them more significant, for better or worse. El Al isn't perfect. It needs work and improvement. In the end, however, the feeling of being 'the most at home in the world' (El Al's Hebrew slogan) has many aspects, in what passengers feel free to do on flights, and what they write in talkbacks. For me, the deep emotional connection to El Al causes more deeply rooted loyalty to this brand than damage. Although it's not pleasant, we also read the mudslinging."

Published by Globes, Israel business news - en.globes.co.il - on November 14, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Lior Tanner / Photo: Jonathan Bloom , Globes
Lior Tanner / Photo: Jonathan Bloom , Globes
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