It’s time to rethink frequent flier programs
As much as I fly, I’d never had “status” in a frequent flier program. That’s because I fly on whatever airline has the cheapest fares. But last year, I received a tempting offer from American Airlines: Fly a set number of miles, reduced from the normal level, within a given time, and they’d give me “platinum” status. I took the bait and for a while enjoyed what I consider to be the main (and only) benefit of loyalty: free upgrades to business or first class. But it looks like I wasn’t the only one to get this offer, because soon I noticed there were 20 or more people on the “free” upgrade lists at the airport and on many flights no one was upgraded at all.
Now I feel like I was suckered in, and I’m not alone. A recent poll on Airfarewatchdog.com tells the story: When asked if airline loyalty still pays, almost 80% of more than 1,500 respondents said “no.” What’s going on here? Upgrades are harder to find these days because airlines have slashed first and business class domestic fares, enticing more people to buy them rather than play upgrade roulette. And airlines are offering cheap last minute “buy ups” to first and business class when you buy an economy airfare.
By 2018, Delta, for example, plans to sell 70% of its business and first class seats rather than give them away; in 2011 they sold only 31% and gave away the other 69% to elite fliers. Ditto for its premium economy, with more seats sold and fewer upgrades.
Not only are free upgrades harder to find, but airlines have increased the number of miles/ points needed to obtain award seats. Plus they’re awarding fewer miles for flights, and they’ve added fees and surcharges to what were truly free awards.
Originally, there was just one award seat redemption level (typically 20,000 or 25,000 miles). Now there are at least two and it’s increasingly hard to find seats at the lower ones. A 2015 audit by the Transportation Department of 660 flights on Delta and American found that slightly less than two-thirds had award seats at the lowest award level. That may not sound so bad, but what the study didn’t control for was whether the seats were available for a morning nonstop or a red-eye with a tight connection, nor whether they were in economy, business or first class.
In August, American announced it would follow United and Delta by awarding as few as 25% of miles flown on alliance partner airlines (it used to be 100%); “status” is harder to earn now that airlines require minimum annual “spends” (before, you could get status simply by flying a required number of miles each year, no matter what the ticket cost); and many airlines add fees and surcharges as high as $700 per passenger to more exotic destinations.
Not only are the programs worth less, but their hidden costs are going up and being paid for not just by airline customers but even by those who don’t fly at all.
One of their most obvious but insidious aspects is the incentive to pay more for airfares. If one airline has a $400 round-trip but another has it for $230, will a flier ask the corporate travel agency to book the flight that helps enhance his or her status? The temptation is real, and although it’s impossible to quantify, it is probably costing consumers and corporate travel budgets. Even those who don’t fly pay for these programs. Credit card issuers pay airlines billions to buy miles, which they award to customers using the cards. Stores award miles for purchases made through the airlines’ shopping malls; consumers may pay for those miles in higher merchandise costs.
By one estimate reported on Forbes.com, it costs a bank about $250 to acquire a new credit card customer, $100 of which goes to buy the bonus miles airlines award, and perhaps as much as $50 per card in commissions to websites that tout the cards. Many consumers get the bonus miles and quickly cancel the cards. Who pays for this? We all do in the form of higher credit card fees and interest rates. The programs remind me of S&H Green Stamps, which were once awarded by grocery stores and gas stations. When I was a kid, I would help my Aunt Freda paste these stamps into booklets, which she then traded in for housewares and other items. Sometimes a supermarket would be offering double Green Stamps, so she’d shop there, even if its prices were higher.
Like Green Stamps, frequent flier programs generate hidden costs. Back when they started (Texas International Airlines launched the first in 1979, followed by American in 1981), airlines were operating with load factors of about 58%. So it cost them little to fill those empty seats with award fliers. Today, most U.S. airlines report load factors of 85% or more, so they’re giving away seats that they could otherwise sell at the right price point. Airlines make up the lost sales opportunity one way or another, mainly in higher fares and fees.
As frequent flier programs approach their fourth decade, it’s time to rethink them. They were a great idea before the four major U.S. airlines controlled 80% of domestic travel, but today they’re a shadow of their former selves, and involve too many hidden costs. Perhaps there are better reasons for being loyal than collecting miles, such as rewarding those airlines that provide good service and lower airfares. George Hobica is the founder of airfarewatchdog.com.