Frequent Flyer Marketing Scheme – Killing the Goose That Laid the Golden Egg
By “The Herminator”
When American Airlines implemented the first frequent flyer program back in 1981 the idea was to reward loyal customers while increasing business. Within months of this event, all of the major airlines developed their own frequent flyer programs based on the original American Airlines model. At the time, they did not realize that this would morph into perhaps the most brilliant collective marketing strategies ever devised. This "cash cow" is the only thing standing between many of the largest airlines and insolvency as operating costs have soared.
In the early stages the airlines were perhaps too generous in allocating mileage for flights and providing free travel awards. Capacity controls were essentially nonexistent thereby making frequent flyer reservations easy to procure. The carriers viewed frequent flyer miles as a way of increasing traffic and promoting customer loyalty – nothing more. The frequent flyer programs were “loss centers”. In the early 1990’s the airlines credited 1,000 miles for each segment flown. Then they tripled that amount with a long-running promotion. Add in plateau bonuses and other mileage inducements and it is easy to see that frequent flyer mileage liabilities were getting dangerously high.
The carriers addressed their mileage proliferation problem by tightening up frequent flyer capacity controls whereby only a limited amount of seats were made available. They also eliminated the 1,000 mile segment minimums, triple mileage, plateau bonuses, 2-for-1 reduced mileage awards and other mileage promotions. At the same time, the carriers raised mileage requirements for award travel. This trend of pecking away at the intrinsic value of frequent flyer mileage continues to this day. The airlines want to print up the mileage with absolutely no restraints. To add insult to injury, their mindset is "how dare you be so presumptuous as to attempt to use your earned mileage for a free ticket".
At some point the major airlines started selling frequent flyer miles to customers who might need additional mileage to add to their accounts in order to reach a particular award level. Then some marketing genius figured out a way to sell mileage to third parties such as credit card companies, rental car agencies, telephone companies, etc., who used the miles to promote their own businesses. The cash flow from these third party mileage sales has been astonishing. It has been estimated that American Airlines sells about $1,000,000,000 in miles a year to their program partners/vendors. That is correct – one billion dollars in annual frequent flyer mileage sales. This mileage is priced at about 2 cents per mile. The cost to American Airlines is minimal as most people do not accrue enough mileage for an award and if they do, the incremental cost of carriage is well less than $50 for a domestic ticket.
For example, if a member of American’s frequent flyer program did nothing but earn miles through their Citibank affiliated credit card and accumulated 45,000 miles for a domestic first class ticket, American might have been paid $900 by Citicorp for the mileage. The cost to American for providing this ticket would be minimal. Throw in the fact that large amounts of mileage will go unused and it is easy to see the incredible profit machine that the frequent flyer programs represent for the airlines. This example refers to American Airlines frequent flyer program because they are the largest with about 45 million members. However, all of the major carriers with the exception of Southwest Airlines operate their own programs in essentially the same manner. It would be difficult to envision another industry department with such an astronomical profit margin.
In addition to mileage sales, the airlines have a litany of “junk fees” to further enhance their frequent flyer program's profitability. The $50-$75 expediting fees as charged by most carriers for issuing frequent flyer tickets less than 14–21 days before flying is an example. How about the $50-100 redeposit fees and the $50-$150 change fees? Perhaps the most egregious example of pure greed is the $500 co-payment for roundtrip upgrades to Europe, South America and Japan as recently instituted by American Airlines. The flyer pays for a coach or business class ticket, then uses 50,000 frequent flyer miles to upgrade and then pays $500.00 for the privilege of using the miles to upgrade. Where is the love?
The net effect has been a serious devaluation of frequent flyer mileage. The math is simple. There was approximately 14 trillion frequent flyer miles outstanding as of December 31, 2004 as opposed to 4 trillion miles in 1999-2000. It is estimated that in excess of 50% of all new mileage is now being generated from sources other than flying. This glut of mileage is continuing to grow with no end in sight. Capacity has remained fairly constant over the past 5 years and there has been little effort to increase the availability of frequent flyer seats. Stated in simplistic terms, “There is no way the airlines can honor their commitments to provide a reasonable level of frequent flyer seats given their their present mileage liabilities". They will continue to increase mileage award requirements and to decrease seat availability”.
The problem is that the airlines wrote the frequent flyer programs to reflect the fact that they can change the rules at any time without notice and can restrict mileage use in any way they see fit. Like a third world country, they can print as much “currency” as they wish with no accountability as to devaluation. Reserving a frequent flyer seat is getting to be like a lottery. Just try to get seats to Hawaii or Europe at normal mileage levels. Perhaps the airlines should be required to publish the “odds” of getting frequent flyer seats like other games of chance.
The scenario described so far in this article indicates a rather bleak prognosis for the frequent flyer programs. This does not have to be the case. At some point the pendulum will swing back in favor of the frequent flyer members. When mileage proliferates to the point that it has little value, it will no longer be a hot commodity to be sold to every credit card company, hotel chain or phone company in the civilized world. These sources of capital will find other ways to promote their businesses. The wonderful thing about capitalism is that consumers can vote with their feet. When frequent flyer members collectively decide that they are being ripped off by the airlines in terms of the inability to get award seats and the steadily increasing award mileage requirements, they will lose interest in accumulating mileage. This in turn will cost the airlines substantial revenues because they will no longer be able to sell frequent flyer mileage at current rates and volume. The large buyers of frequent flyer mileage will find alternate ways of promoting business. Will the airlines come to their senses and avoid this disaster? I think not.
It is time for the airlines to “come clean” about their frequent flyer programs. Mileage is a currency and should be recognized as such. The carriers sell miles but their rules prohibit frequent flyer members from selling the mileage they have lawfully accrued. The airline's rebuttal is that you do not have to join their frequent flyer programs and if you do you have to abide by their rules. Is this not a contract of adhesion where the terms are so onerous and one-sided as to render them patently unfair? This is a matter that the airlines do not want litigated. District Court Judges Anderson, Birch and Carnes, (11th Circuit Court of Appeals), stated that when you purchase a plane ticket the price includes payment for the frequent flyer miles. In a 1997 ruling they stated "The frequent flyer account which is accumulated in the name of any airline passenger is part and parcel of the services which the passenger buys when he or she buys an airline ticket. The price of the ticket pays for any addition to a frequent flyer account just as it pays for the air transportation and other services purchased". Frequent flyer seats are not free and classifying these seats as non-revenue is downright un-American.
If common sense prevailed the airlines would realize that they are on the verge of killing the goose that laid the golden egg. Instead, they view their frequent flyer programs as vehicles to subsidize their failing operations. Sadly, airline management does not have a stellar record in making wise strategic decisions. Somewhat analogous to the fable in which the child tugged on his mother's sleeve and said "Momma the emperor does not have any clothes", this same child might state "Momma, the airlines are selling frequent flyer miles but have no award seats". The message is clear - spend your miles before they lose more value and become more difficult to redeem.
Send e-mail to: unc@frequentflyertickets.com
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