The Travel Adviser: Frequent flyer programs: What goes around comes around

Unlike modern myths of popular pastimes, frequent flyer programs did not begin in someone’s garage, nor were they scribbled out on a napkin in some visionary’s kitchen

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January 17, 2015 22:24
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Airplane [illustrative]. (photo credit: INGIMAGE)

 
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We will approach, in a few months, the quarter-century anniversary of a system.

When initiated, it simply tried to brand loyalty among its fliers; unexpectedly, it then became a financial behemoth to several dozen companies.

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Unlike modern myths of popular pastimes, frequent flyer programs did not begin in someone’s garage, nor were they scribbled out on a napkin in some visionary’s kitchen. The fact is that these programs, which will be celebrating their 25th anniversary on May 1, are not anything they started out to be – except one thing: SUCCESSFUL!!! Credit goes to a now-massive advertising agency, Doyle Dane Bernbach, known more commonly in the ad business as DDB. The company’s CEO, Bill Bernbach, who had the advertising account for American Airlines, made a proposal to the airline that DDB could do something special for its best customers.

Those were the days when US banks were offering toasters and electric blankets to their important customers, and to new customers for simply opening up accounts. They were enjoying great success with the promotion, and DDB took it one step further for American.

The agency’s idea was to offer AA’s best customers a special “loyalty fare.” AA marketing experts rejected the proposal, coming to the conclusion that frequent travelers would not likely feel rewarded by a special fare. They were supported in their conclusion by AA’s fare revenue department, which deduced that a loyalty fare would likely be matched by any other airline – and American would likely lose revenue from decreased yield.

Fast-forward 25 years and I am consistently baffled when one airline proudly touts those lower fares, only to see them matched by most of their competitors in a few minutes. Consumers may benefit from the lower fares, but the airlines do not.

Despite rejecting DDB’s proposal, marketing personnel at AA were given the assignment to see if they could salvage something from the variety of opinions and research that had been done. After some ideas were kicked around, the AA marketing group agreed that a free trip would mean a lot to a frequent traveler, if it included a deal for a companion and a first class upgrade.



Remember that at the time, first class was a relative unknown for the frequent traveler; the seats were usually occupied solely by VIPS and movie stars. AA started promoting Hawaii as some type of symbolic destination, because most US business travelers would not have flown there on business and would find it an attractive incentive.

The early rules of the program included such caveats as: • Awards would not be transferable to anyone; • Accumulation had to occur in the 12-month period beginning with the first trip; and • Actual flown miles between origin and destination would be credited.

Financial justification for the program was based on incremental tickets purchased by award redeemers for their companions, plus “stretch,” a word used to define extra trips generated by the program. The research done by AA in this period indicated that all costs of the initial program would be covered if each traveler in the program took a quarter of an extra trip per year. Later on, it was discovered that the induced “stretch” was actually more like six extra trips on AA per traveler, per year.

What about the United Airlines’s Mileage Plus Program? Launched just six days after the AAdvantage program, this program deserves equal attention – as it forced AAdvantage to change direction early on. United had the Mileage Plus program all mapped out and sitting on a dusty shelf with airline deregulation in full force. The United team believed it would only be a matter of time before some sort of rewards program became a reality.

It wasn’t until United and TWA got involved that the program became liberalized. In autumn 1981, United offered a deal where six trips would qualify any traveler in its program to receive a free trip. However, the rules did not restrict it to members only, so AA matched United, worried what might happen as people earned, then sold free trips to friends and strangers. That behavior, of course, would cut deeply into the risk factor because now any free trip might deprive AA of fullfare revenue from anyone who used a scalper.

Today, miles are bought and sold like any commodity – and the airlines have little ability nor desire to stop it.

Visit a site like The Miles Hub (www.themiles.hub), which loudly touts: “Get cash for your miles.” They explain it quite succinctly: “The Miles Hub was founded in order to help you receive the highest value possible for your unused frequent flyer miles and credit card points. We offer significantly more money than if you were to redeem your points and miles through your rewards program.”

There are several competitors and while one should be wary of fraud, this secondhand market is thriving and I’ve had many clients who have utilized their services with great success.

As the years progressed since its inception, airlines found that having partners in their frequent flier program strengthened their brand loyalty. Most of the largest passenger airlines worldwide are members of one of the three major alliances: the Star Alliance, Oneworld or SkyTeam. A few glaring exceptions do exist: El Al, Emirates and Etihad airlines have all shunned or been shunned from any of these three groups.

Frequent fliers strive to earn miles and do their flying on an airline in the alliance. Asserting that most airlines tend to match each other’s fares and levels of service, passengers try to make their travel plans based on factors of price and schedule convenience, also sticking with one specific airline and its alliance.

Turkish Airlines, for example, has seen tremendous passenger growth over the last few years, not just because of its prices and strong levels of service, but because it belongs to the Star Alliance. Airlines in this alliance include United and Lufthansa, and members of either airline’s program receive full mileage benefit when they fly Turkish. This pattern is similar to US Airways, which is now merging with American. Frequent fliers with AA can fly any of their partners, be it Royal Jordanian or British Airways, and accumulate miles.

El Al, blocked from joining any of the alliances, created a far different loyalty program. Eschewing the concept of distance flown, El Al created a point system for its fliers. At Israel’s airline, points are given not solely based on length of flight, but how much paid for it.

For example, that same economy class flight to New York will earn passengers anywhere from 100-200 points per direction based on the price of the ticket.

With 1,400 points required to earn a bonus ticket to New York, you will need a lot of loyalty toward El Al if you purchasing the lowest-priced tickets before earning enough points.

The major airlines, though, have now realized they need to put the tiger back in the cage. Originally planned to benefit their most frequent fliers, competition got out of hand and miles could be accumulated via a myriad of options ranging from opening up a new credit card to booking a specific rental car or hotel chain. Savvy consumers scour the Web, seeking out offers to add to their frequent flier miles. Internet models have been created to instruct consumers how to rack up their miles, creating a huge surplus of this valuable commodity.

On January 1, Delta Airlines radically changed its frequent flier program, and on March 1, United will follow suit. Forget the simple calculation that you earned one mile for every mile you flew, and start brushing up on your basic math. Miles for Delta flights will be earned based on the ticket price instead of the distance flown.

Moreover, ticket prices used to calculate miles include only the basic fare and fuel surcharge, but not government-imposed taxes. These taxes, more commonly called airport taxes, add up to sizable sums.

To add one more wrinkle to the puzzle, while miles for Delta – and United – flights as of March 1 will be earned based on the ticket price, your frequent flier status will determine the calculation used! To compare how many miles one will earn, selects your status and plug in the distance: • General members earn 5 miles per $1 • Silver Medallion members earn 7 miles per $1 • Gold Medallion members earn 8 miles per $1 • Platinum Medallion members earn 9 miles per $1 • Diamond Medallion members earn 11 miles per $1 UNITED’S PROGRAM uses the same multiplier based on their frequent flier members’ level as well.

Delta flies a Boeing 777 every night from Tel Aviv nonstop to JFK. Flying 5,666 miles one way or 11,332 miles round trip, the journey last year would have earned you 11,332 miles. This year, let’s say you purchased their least expensive fare to the Big Apple, priced this winter at $994, from your travel consultant or online at their site. Reading the small print you noticed that $104 in taxes were collected by Delta on behalf of JFK and Ben-Gurion Airports. So now you have $800 as your mileage calculator.

Francis only flies once a year, so she’s a General member – she earned a whopping 4,000 miles. Reuven flies twice a year to New York, enjoys Delta’s fine service and is a Silver Medallion member – he’ll earn 6,300 miles. Even Ken, a Diamond Medallion member, earning 11 miles per $1, will only rack up 8,800 miles.

As you can see, price-conscious clients will never reach those same 11,332 miles they earned in the past.

This is what Delta and United want; they carry far too much debt on their books with your unused frequent flier miles. They know that while you may be loyal, the fact that you can earn the miles so easily means you don’t always insist upon flying with them.

In fact, they’ve noticed that inside the US, you fly more often with Southwest Airlines. They see the phenomenal growth of Turkish Airlines in Europe and the Middle East, and realize your loyalty can be bought.

So forget about free upgrades and extra bags, they say. If you want to earn frequent flier miles, then pay more money for your ticket. Without stating the obvious, they are foregoing the leisure traveler and reverting all the way back to the origins of the program – rewarding their frequent fliers – and today, those frequent fliers had better be willing to spend more! Yet while Delta and United have the ability to radically alter their frequent flier programs, they hold no sway over their alliance partners. So if you are a Global Services member on United’s frequent flier program and you decide to purchase a very inexpensive ticket flying one way on United but returning on Air Canada, you’ll earn the complete miles on the Air Canada portion regardless of what you paid for the ticket.

I’m confident that far wiser individuals than me will find a way to fully investigate these programs and find loopholes in the system, but for now the die has been cast: What goes around comes around, and it’s back to square one.

The writer is CEO of Ziontours, Jerusalem. Questions

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