I love that consumer ombudsmen like Chrstopher Elliott exist. They can get attention for people that are trapped in bizarre bureaucracies, out real cash after trips have gone awry and who are getting nothing but runaround.
What frustrates me is that he seems to think that everything travel providers do is inherently ridiculous and unreasonable, and that consumers ought to be entitled to pretty much anything they wish.
He reminds me of the Saturday Night Live fake commercial for a personal injury law firm that featured Phil Hartman — “Sure the sign said no trespassing, but how much did that really mean when you were as drunk as I was?”
And Elliott makes crazy, over-the-top claims that even he can’t possibly believe, presumably to get clicks and generate controversy. That’s often how online writers get paid.
His new column is shocked to find that airlines sell lots of miles and they don’t even have to spend money to redeem them all, since some miles wind up expiring. And that makes them a scam.
I do think there are unfair practices like devaluing miles without notice (:cough: Delta :cough:).
But there’s nothing especially novel here, and in making the magnitude of the dollars sound really scary, Elliott shows that he doesn’t know how to read an airline financial statement.
Make no mistake — Elliott’s big example, United’s MileagePlus, is a multi-billion dollar business. They sell miles:
- To themselves (when a member of the program buys a ticket, a portion of the ticket revenue is attributed to the loyalty program for the miles)
- To their partners (partner airlines buy miles from them when frequent flyers credit travel on those partners to a United account)
- To their credit card partner, a plurality of miles earned come from credit card spending
- To other partners, such as hotel chains, rental car companies, insurance companies, floral vendors, even sites like Milepoint of which I’m a co-founder (United miles were part of the most recent Milepoint premium offering).
The cost they charge partners for their miles, which varies by partner, is the basis they use to attribute how much revenue goes to miles versus other activities when the sale of multiple things are bundled together. Chase, which issues the United co-brand credit card products, doesn’t just buy miles. They buy checked bag fees for their card holders, they buy lounge access, and other services. The cost of miles to their partners is also a metric used for internal pricing of miles between the loyalty program and the airline. That’s a number that will change somewhat as they gain and lose partners (like US Airways which is dropping out of Star Alliance in a couple of months).
United sells miles, takes in revenue. And it redeems miles and those redemptions cost money.
83% of miles redeemed in 2012 – 4.7 million awards – were for travel or upgrades on United (this represented 7.4% of United’s revenue passenger miles for the year).
1.6 million awards were issued in 2012 for travel on other airlines, for United lounge memberships, for hotel and car awards, and for merchandise.
So while Chris Elliot says,
A look at United Airline’s latest annual report shows why it’s no longer entirely accurate to call it an airline. In 2012, it sold $5.1 billion worth of frequent flier miles to credit cards and other third parties.
You can find United’s 10-K filings on its website.
On page 92 of the 2012 10-K filing we see the amount United brought in from the sale of miles — and a lower figure representing the sale of miles (“other revenue recognized during the period from the sale of miles to third parties, representing the marketing services component of the sale” meaning the portion of a deal not counting checked baggage, lounge access, etc). The chart is in millions of dollars.
The figure that Chris sees in United’s annual report as $5.1 billion is actually less than $1 billion.
Others have mistaken numbers like the total liability of unredeemed miles outstanding at the end of a year for the number of miles sold during a year. I won’t speculate on whether he’s reading the financials wrong, or not actually reading them as he says and taking someone else’s mistaken read for what they say.
United MileagePlus is a multi-billion dollar business, but they didn’t sell $5 billion worth of miles to third parties in 2012. That’s just plain wrong.