Several readers emailed links to me today to Scott McCartney’s Middle Seat column that argues airlines would be better off without frequent flyer programs.
- By giving away 10% of their product, major U.S. airlines missed out on some $25 billion in revenue between 2000 to mid-2003, Mr. Beyer says, doing a back-of-the-napkin calculation assuming travelers would have paid for trips taken with awards. Those same airlines posted pretax losses of about $28 billion over the same period. He sees a connection: “There is a cost to these programs, and it’s massive.”
Of course this initial calculation is just silly. It makes little sense to add up the free trips and multiply by hypothetical fares.
First, the awards wouldn’t all have been revenue tickets without the miles.
Second, the bulk of the seats seats being taken up by award travelers wouldn’t otherwise have been sold. The airlines control capacity on each flight and work to ensure that each seat given away does not displace a paying passenger. While 8% of seats may go to awards, that’s not 8% on all flights. Some flights (likely to go empty) may be comprised of 20% award travelers while other flights never open up a single award seat.
Third, the awards themselves are not ‘free.’ Instead, they’re ‘prepaid’ with previous trips flown and with other activities that the airlines encourage. Airlines book revenue from the sale of frequent flyer programs and then book expenses for the tickets used.
Fourth, the programs themselves are fundamentally profitable. Not only do the frequent flyer programs have value in and of themselves — Air Canada was on the verge of selling 35% of theirs for $235 million before entering bankruptcy and United’s has been valued at in excess of $3 billion — but they make money. When United went into bankruptcy its frequent flyer program was the only profitable entity they had — they sell miles to credit card issuers, telephone companies, etc. etc.
Fifth and finally, the programs generate incremental traffic. Several studies show the they make business trips easier to swallow by the traveler and thus less resisted and so the total tickets sold increases. See for instance this article suggesting that programs generate substantial marginal trips or this recent post of mine suggesting that they influence as much as 35% of decisions about which airline to purchase from.
All of the above notwithstanding, the programs aren’t as well designed as some airlines would like and they probably do overreward some behaviours and underreward others and thus could use some tweaking. But the gist of the article is just silly silly silly.