Frequent flyer miles bring profits to airlines, but can cause consternation for travelers.
Alaska Airlines employees have long received bonuses for helping reach on-time arrival goals and improve passenger satisfaction scores. And they recently got a new way to earn a pay bump: if more travelers sign up for the carrier’s frequent flyer program.
For good reason. Airline loyalty programs, which began nearly 40 years ago as a promotional gimmick, are becoming increasingly lucrative for carriers.
Such programs can bring in as much money as all those fees that passengers complain about, including charges for checked bags and onboard food and drinks. Some analysts estimate that as much as half of all airline profits come from frequent flyer programs.
But the programs are a growing source of frustration for airline passengers.
In the last few years, most airlines have dramatically overhauled their frequent flyer programs. The latest is United Airlines, which as of Nov. 1 will require more mileage points to fly some of its most popular routes.
For many flyers, the industrywide changes have sharply reduced the value of reward points and made them harder to redeem.
Samuel Engel, head of aviation at the management consultant ICF, compared the devaluation of frequent flyer reward miles to extreme inflation.
“It really looks like the hyper-inflation of Zimbabwe or Venezuela,” he said.
Kerry Welsh, a retired entrepreneur from Rancho Palos Verdes, Calif., is a member of several airlines’ frequent flyer programs but said he is frustrated by the extra cost and lack of available seats when he tries to redeem his miles.
“Many frequent flyers are like me,” he said. “We have millions of miles, but we don’t use them, because using the miles is a big ripoff. So instead we accumulate more miles.”
Frequent flyer programs began in several forms in the late 1970s and early ’80s as a way to give incentives to keep flyers loyal. American Airlines launched what many consider to be the first airline loyalty program in 1982.
Since then, the programs have surged in membership and revenues thanks to mergers and acquisitions in the last few decades that created a handful of giant carriers that dominate the industry.
American Airlines’ AAdvantage program is now the world’s largest frequent flyer program, with about 100 million members.
The program generated $2.1 billion in revenue last year, and accounted for much of the 3.9 percent growth in “other revenue” not derived from carrying passengers and cargo, according to the airline. During the same period, overall revenue fell 2 percent to $40.2 billion.
It is difficult to gauge the exact value of the loyalty programs because airline executives won’t discuss the deals they have signed with the banks and credit card companies that buy and distribute the airline miles to members.
In earnings reports, airlines combine revenue from frequent flyer programs with other funds under categories titled “other revenue” or “ancillary.”
When United Airlines filed for bankruptcy in 2002, it was forced to disclose that its mileage program at the time posted profit margins as high as 45 percent. Since the airline emerged from bankruptcy, United has stopped reporting such financial details.
Jay Sorenson, president of IdeaWorks Co., a consultant on boosting airline revenue, called frequent flyer programs a “tremendous cash cow” for the airlines.
In a recent report, Sorenson estimated that the nation’s top four airlines — American, United, Delta and Southwest — generated a combined $9.5 billion in revenue last year from frequent flyer programs.
“The programs have a huge impact on the bottom line for airlines,” he said. “They simply can’t do without them.”
Frequent flyer members earn reward miles or points either by flying or by spending with a credit card that has partnered with an airline. The miles or points can be redeemed for airline tickets or for seat upgrades, and airlines dictate the value of the miles or points.
Sometimes airlines devalue the miles with little warning to members, and many now vary the rewards based on demand.
A study by financial research site WalletHub found that six of 10 U.S. airlines’ reward programs lost value for members in 2017 compared with the year before.
Hawaiian, Alaska and Virgin America airlines increased the rewards value by an average of 40 percent, while Delta was unchanged. American, United, Southwest, JetBlue, Frontier and Spirit all reduced the value of points passengers could earn.
Starting Nov. 1, United is changing its rewards program so that on some popular domestic routes a one-way ticket would require up to 32,500 miles to redeem, up from 25,000 miles now.
Flyersrights.org, a passenger rights group, has lobbied Congress to adopt legislation to give passengers “reasonable” warning before miles or points are devalued.
“Passengers view these points as something they have earned,” said Paul Hudson, president of the group.
Frequent flyer programs are hugely profitable because airlines charge credit card companies up to three times more for the miles or points than it costs the carriers to redeem them, according to estimates by industry experts.
And when the mile rewards expire or go unused, the airlines can pocket the revenue without the expense of flying the frequent flyer member anywhere. At least 15 percent of all reward miles expire without being used, industry experts say.
Also, some airlines don’t make it easy to redeem the reward miles for seats.
At American Airlines, the world’s largest carrier, seats are available for redemption by frequent flier members only 54 percent of the time, according a study by Sorenson. Redeeming seats on long-haul flights is even more difficult, the report said.
Frequent flyer programs are so profitable they can help an airline overcome strong financial head winds.
In the three months that ended June 30, Delta Air Lines reported a highly profitable quarter despite foul weather at the carrier’s Atlanta hub. The airline has a partnership with American Express, which doles out reward miles to card holders for spending on flights or other expenses.