Chicago O'Hare International Airport
By Nicholas Kralev
The Washington Times
January 26, 2009
Who is to blame for the recent series of frequent-flier-program “enhancements” that have made it increasingly difficult to redeem miles for “award” tickets and reduced membership benefits?
Many of us in the press and elsewhere have often attributed those changes to the troubles of the industry caused by fuel-price fluctuations and the global economic crisis.
However, a closer look at the activities of most major U.S. carriers’ loyalty schemes by airline experts suggests that the main reason for those programs’ need to tighten their belts is the way they have been run for years.
“Frequent-flier programs are major businesses, but unfortunately, in most cases, they haven’t been run as businesses,” said Jay Sorensen, president of IdeaWorks, an airline consulting firm. “There is fiscal recklessness, and the outcome for the consumer is not attractive.”
U.S. airline programs are subsidiaries or divisions of the companies that own the respective carriers. They are usually profitable, even if the rest of the company is not, and their profitability is due in large part to their co-branded credit cards, Mr. Sorensen said.
This is where the problems began years ago, he added. The airline programs “have had a windfall of cash that has landed in their laps. With that comes a tremendous amount of responsibility, and that’s what the carriers have forgotten.”
They receive billions of dollars from selling miles to credit-card issuers, but they don’t use enough of that money for the loyalty schemes’ benefit, choosing instead to “spread the wealth” and help out other parts of the company. Sometimes, the frequent-flier programs are left with insufficient funds to cover their own costs, such as mileage redemption for “award” tickets.
That’s the case with United Airlines, Mr. Sorensen said. Last year, its Mileage Plus program pre-sold miles worth about $1 billion to its credit-card partner Chase — a major chunk of its annual revenue.
As readers of this column might recall, United has been blocking access for Mileage Plus members to thousands of “award” seats made available by its partner-carriers in the global Star Alliance, making it difficult for many of the miles it sold to Chase to be redeemed for flights. United, which has to pay partners for “award” tickets, says the blocking was put in place because otherwise it would exceed the budget it has to cover those payments.
The airline hasn’t said why that budget hasn’t been increased, given the new miles it has encouraged its customers to amass — not only from Chase, but also through the recently invented “award accelerator,” which allows fliers to double and triple their miles for a fee.
Mr. Sorensen’s answer is that “the cash [from Chase] is gone — it’s been spent on fuel” and other expenses. “In a sane business, a good chunk of the cash should have been set aside for ‘award’ redemption,” he said. “There is a tsunami of miles on the books that can’t be used, and in difficult times, the consumer doesn’t always get served very well.”
Even though United increased the mileage required to redeem “awards” by as much as 40 percent earlier this month and halved the lifetime of unused miles to 18 months last year, the blocking of partner flights is still around.
All major U.S. carriers have either upped redemption requirements or are soon expected to do so. Some, such as Delta and Alaska Airlines, have created new “award” levels meant to mask the reduced availability of regular mileage seats and charge even more miles, and Delta has also introduced “award” booking fees.
While United is the only carrier known to block otherwise available “award” inventory to save money, Mr. Sorensen said he wouldn’t be surprised if other airlines did it on a smaller and less detectable scale.
Keith Jarett, a frequent traveler from Lafayette, Calif., likened that and other practices aimed at persuading customers to accumulate miles that can hardly be redeemed to a pyramid scheme.
“The trick is to keep the investors (members) thinking they can withdraw (spend) their miles at any time, even though this is increasingly not the case,” he said. “Frequent-flier programs have spent almost all their credibility already, and I doubt they would be able to recover even if they wanted to.”
Mr. Sorensen said the recipe for recovery may be spinning off the programs as separate companies, as Air Canada did recently and United has considered. Until then, it may be better to use credit cards linked to hotel chains, which have been run properly as businesses, he added.
This column was first published by The Washington Times
Tags: Air Canada, airlines, Alaska Airlines, Chase, credit cards, Delta Airlines, frequent-flier programs, IdeaWorks, loyalty, Mileage Plus, Travel, United Airlines
Frequent-flier programs are an obvious revenue source for an airline. Instead of charging lower fares, they put the difference, in the form of miles, into an account for you. They don’t pay interest and then they devalue the account either overtly through higher award redemption levels or covertly through difficulty in redemption of miles. If you don’t have activity for a while, they then take your miles.
Can you imagine a bank account like that? The fine print for the ad: We’ll charge you 12% more for every transaction and put 10% of that increase amount in an account. We won’t pay you any interest, charge you a fee to take money out (or various other transactions) or charge you 50-100% surcharge on any items you buy through the account and if we don’t hear from you for 18 months, you lose the money. How many folks want to sign up for that account? If so, let me know. I’ll create one for you.
I find it interesting that they spread the wealth, especially with money from credit card users. Those credit card users are likely to never have their miles expire because they keep on using the card and have activity every month. Since United’s credit cards all have annual fees, there probably aren’t many users who only earn a few miles with them. Most are probably heavy users who thus earn enough miles for a redemption quickly cutting down on the float United has on those miles. Like Sorensen says, not something a sane business would do.
If I ran United or one of the other airlines with an underfunded frequent-flier program, I’d be concerned about a class action lawsuit by either stockholders about reporting higher earnings and equity than they really were due to underfunding the frequent-flier program or the frequent fliers who are unable to redeem their miles as the airline had implied they could.
On the other hand, if I ran a competitor with a fully funded frequent-flier program, I would publish as many statistics as possible (how much we set aside per mile, how much our cost per mile was, miles earned, miles redeemed, dollars on both of those, miles expired, etc.) on the web and in my 10-Q and 10-Ks. I’d publicize our great transparency and have reporters like Nicholas do stories on how good we were versus those deceptive, underfunded plans. And how easy it is to use our awards on all our partners because we did place aside enough money for the frequent-flier program when we sold the miles or tickets that earned the miles. Create last minute discount award tickets/upgrades to fill the seats on the plane, raise the utilization rate and burn up our mileage liability cheaply.
Thanks for the articles and good luck on your seminar business!