Why Revenue-Based Programs are Bad for You — and Why You Should Jump Ship Now

Joe Brancatelli offers mostly sound frequent flyer advice but has a real soft spot for revenue-based frequent flyer programs that seems undeserved.

When Delta Air Lines announced plans to reward miles based on dollars spent, not the number of miles flown, critics immediately decided that so-called “revenue-based” plans were bad for business travelers. The cries got louder when United Airlines mimicked Delta and adopted the same strategy.

Unfortunately, the complaints conflated two unrelated factors. Delta and United consciously used the switch to revenue-based accrual to mask devaluations of their programs’ total value. Revenue plans, by nature, should be better for business travelers because they recognize that we spend more than leisure travelers.

…In the longer term, the smartest airlines and hotels will reward our superior revenue contribution with superior rewards. We should be ready to move our business to those companies.


Joe thinks that revenue-based frequent flyer programs should be guide for business travelers who spend more than leisure travelers. As though it’s a coincidence that Delta’s and United’s move to being revenue-based next year also reduces value overall.

Now, granted, United just copied what Delta did. And Delta thinks it is attractive enough in the current environment that it doesn’t need to be especially rewarding in order to fill incremental seats. They may be right. But don’t get confused by the “revenue-based programs are more rewarding than mileage-based ones for customers who spend more eeme. We simply are not seeing that.

United and Delta have both suggested that they are going to give out just as many miles next year. But they set the “break-even” point where flyers will earn as many miles next year as they do under the current program at 20 cents per mile flown. Since their actual revenue per seat is only about 75% of that, the math doesn’t work.

I don’t like revenue-based programs because there’s an inherent conflict of interest between employee and employer interests that these programs bring to an intolerable level.

Furthermore, the customer spending more money doesn’t always deserve to be rewarded with more miles. In many cases the lower revenue flyer is the more profitable one to incentivize through the loyalty program.

There’s also a meme that customers who don’t fly much will benefit — fewer miles earned via flying, miles from other sources don’t pull back, those credit card miles face less competition. At best that’s only true if you believe:

Remember, these programs are huge money makers now. There’s no desperate need to up-end them.

We shouldn’t just accept the changes. Making our own travel decisions wisely, based on how well treated we are and how well rewarded for our business, makes sense — and is exactly what has influenced these decisions by programs in the past.

Delta took a risk with their new program. United is managing by doing what Delta does. It could well work out for Delta, but don’t just throw up your arms. Even if you think another airline could follow suit doesn’t mean you should not fly the other airline while they are more rewarding. And if you do, that’s exactly how you’ll incentivize their continuing to be more rewarding.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. As soon as they can American will be revenue based. That will mean United, Delta and American “the majors) will all be revenue based. So what ship do you jump to? I think they upended the programs because they could. Its a simple as that. Who will fight back? Nobody. If American thought they could get more business by not going revenue based, they would not change their program and market that benefit.

  2. How absurd. Most consumers choose carriers based on price and schedule, which are rarely identical in a given market. Even more delusional is your view that consumers have power to influence program terms by moving their business. That ship sailed years ago. Enjoy the AA gravy train because it has about 2 years max before it runs out. Finally you fail to note that the new revenue-based programs work very well for certain travelers – those who pay high fares to travel short distances and those who travel paid C/F international or full fare coach.

  3. this quote :
    “I don’t like revenue-based programs because there’s an inherent conflict of interest between employee and employer interests that these programs bring to an intolerable level.”
    is flawed; since all, and especially upper level management, is bound by a code of ethics. Most companies are quite clear about this concept these days. Straying “ethically” can cost you your job. It’s the same with any (non-airline) purchasing. Sure, there will always be some who break the rules (believe me, people make a LOT MORE off of office-supply kick-backs at some companies); but overall most value their jobs too much. Overspending for airline tickets is no different than overspending in any other (corporate) purchasing area. There have, and always will be, numerous conflicts of interest whenever purchasing and vendors are involved.

  4. There is just too many variables, to make a prediction as to how this will work out. For all the players, each airline, their airline partners, etc. and the flyers. The overall shadow caster is the world economy. There are those that argue that airline execs played all the scenarios and this is how they decided to play their hands. I can argue that only more changes will probably be happening. Because no one can predict the future.

  5. You can see the people who churn from MS will soon be out. While the airlines may make money from the FF programs, the CC companies make money by retaining customers.
    .
    Folks who sign up for a bonus and cancel before renewal will soon be SOL – look at how AMEX has restricted signup bonuses and is clamping down on retention bonuses.
    .
    Others will follow suit once they see that what they are paying the airlines for the co-brand is not worth it to keep churners who spend either the minimum to qualify for the bonus or MS Because there is no real money in it for the CC companies.
    .
    This will thin the herd of the “elites” who never set foot on a plane, except for the “free” trips. And it cannot happen too soon.

  6. Wow, it seems like there are some advocates for revenue-based. I must admit, I don’t quite get it. Not me. I’m just some ordinary guy who has to take a plane sometimes. Maybe I’m on a plane 8 – 10 times per year max. You can bet that I would choose an airline that is non-revenue based over one that is, because I have the hopes of earning a free flight for less money. I’d even choose a layover flight (non-revenue based carrier) over revenue-based if I knew I could get a certain amount of miles. It’s not simply price and schedule. That is somewhat of an infantile analysis of why and how people fly.

  7. @Nick, you say “It’s not simply price and schedule. That is somewhat of an infantile analysis of why and how people fly.”

    Actually, it is ALL ABOUT SCHEDULE (and direct/nonstop flights). Those of us who travel globally and long-haul have a desire to maximize our weekend and family time. Adding hours (often many hours) by taking less direct connections has a severe impact on quality of life.

  8. It’s pretty easy to come up with an excuse to wait a week or two more before booking flights. Now you get rewarded for it. Completely a conflict of interest. I bet we will see flights get even more expensive the closer travel date.

  9. @Nick@Milepoint,
    and, it’s “pretty easy,” for your boss to realize you are doing this, when everyone else’s ticket on your team is less money. And, perhaps, after 2-3 times of this being the case; you get called out on it. People can make excuses for “stealing” or “over-spending’ in dozen of situations in a corporate environment. People also happen to put their jobs (or promotions) at risk. Would you risk it, personally?

  10. @baccarat_guy Different people fly for different reasons and choose different things. You are putting everyone in the same box.

  11. I always enjoy Darth Chocolate’s holier than thou comments. We get it; you’re awesome because your employer pays for your flights. You are very, very special!

  12. There is nothing good for anyone who reads this blog about revenue-based systems: Gary is 100% right. His entire world revolves around getting something extremely valuable (first class travel) for a tiny fraction of what it actually costs.

    The issue about unethical employees is a red herring, although true: what Gary knows is going to happen is revenue redemption. So a $25k first class ticket is going to cost a ton more miles. Earning miles isn’t the issue, the issue is total devaluation of miles.

    As other posters have pointed out, give me a break on the individual employee gaming the system. This is not Mad Men, we all have to answer to budget. Either the cash is pouring in hand over fist, and tickets are not relevant, or someone is watching every single dollar. Maybe in the ivory tower of academia no one bothers to look at the price of tickets, but in the real world someone is checking from time to time. I can pick United more often when it’s a few percent higher, but I can’t pick the $1k fare over the $350. No way that doesn’t get noticed (unless you’re Gary testifying in a case about the overseeing fleecing his employer).

  13. I rarely criticize a blog post on a blog that I enjoy as much as yours. But your contentions that “the customer spending more money doesn’t always deserve to be rewarded with more miles” and “In many cases the lower revenue flyer is the more profitable one to incentivize through the loyalty program” are inherently ridiculous. The rest of your analysis is pure crap. Airlines should incentivize more for those who spend less? That is nonsense. You might not like it, but it’s still nonsense.

  14. @Nick:
    .
    Sometimes we don’t have a choice except to wait for approvals before we purchase a ticket. Earlier this year, I had checked costs for a ticket and the approval process was unexpectedly slow (someone forgot to forward the approval to me). The ticket cost almost $2K more because of the delay.
    .
    And then there is the short/no notice issue. Like having to stay an extra 12 days (change penalty), and come back 5 days later. I bought the ticket on the expectation that I would get approval (I did).
    .
    Just so we are clear, my employer is happy to pay long haul Business Class. Because if he didn’t, he knows he would not be able to get people to fly half way around the world for weeks at a time if he did not.
    .
    Personally, I had 8 trips this year, and I was below average for the department.

  15. How many people actually have a choice? I live near EWR, which is dominated by Continental, now United. They have a direct route for 95% of my travel needs. I am a moderate traveler (just barely miss platinum most years, so 70,000 ish miles a year) so I’m not going to split my business. And I have a family and young kids, so I’m not going to unnecessarily waste time on layovers if I have a direct option. So I’m beholden to the monopolies that the airlines have built in most major markets. But I don’t think that’s much different for anyone…if you live near Dallas you’re inevitably tied to American, Atlanta and it’s delta, etc… unless you travel enough to maintain status with multiple airlines, does anyone stray from their local monopoly unless they absolutely have to?? Personally it works take a LOT worse than revenue based award miles for me to even consider the inconvenience of not flying the local monopoly.

  16. I am looking forward to this change. I would have earned more miles on every single flight I took on DL this year and last had the new scheme been in place.

  17. @Bill – if you’re going to call something inherently ridiculous, you might say why. You might even engage the argument — which is not that airlines “should incentivize those who spend less.” Those statements in the post are linked to where I lay out careful arguments to back up the claims.

  18. @Bill
    Your naivete is on full display. Do the concepts of demand elasticity and marginal returns mean nothing to you? Either the world is more complex than you appreciate or you are not trying hard enough to veil your rent-seeking behavior.

  19. When Southwest moved to the revenue “type” model a few years ago I left that program. I think I’ve flown them maybe twice since out of route and time needs. I think we are at the mercy of what the airlines do. I agree that AA will follow and only delayed due to the current merger that is taking up time. If I was AA I would hold off and see what happens to the program. They could gain ground. Can you imagine a market share gain because the other guys switched the award programs?

  20. This change only reflects the broader change in American society where the rich get richer and all the spoils and the middle class is squeezed further, where mobility has dropped to well below that enjoyed in European countries, and wages have been flat for decades and benefits diminished year after year for most workers. Those employed by companies that can afford high fares and tolerate last minute bookings are now going to benefit greatly from the Spend-based programs, while those who exercise fiscal responsibility (along with those so-called leisure fliers, but who actually are the core of FlyerTalk and MilePoint participants, are tossed into the ditch. And credit card spend becomes a greater generator of miles than actually flying. (Yes, DL and UA have not touched the mileage based criteria for elite tier status…yet.)

    The irony is that those who will now earn more miles from flying tend to not use their miles for award flights since they can afford to purchase their family and vacation trips (FF redemptions being notorious for being impossible during desired vacation periods and destinations, particularly in premium cabins). This will significantly increase the outstanding miles available for redemption…albeit unlikely to be ever be redeemed. (Which in the end could pose a major accounting issue for the airlines who have a huge liability on paper from these accounts…whereas the low-spending FFer tends to use his/her miles regularly to get premium cabin awards, and thus is less of an accounting liability.)

  21. this quote :
    “I don’t like revenue-based programs because there’s an inherent conflict of interest between employee and employer interests that these programs bring to an intolerable level.”

    I’m not even allowed to buy my own tickets for work. I fill out a travel request form and email it to a person who buys all the tickets for my company. That persons instructions are to buy whatever ticket is cheapest that will get the employee to where they are going by the date and time they are to be there. That’s it.

  22. DavidB, this is probably the funniest miles+points rant I’ve read in year “This change only reflects the broader change in American society where the rich get richer and all the spoils and the middle class is squeezed further, where mobility has dropped to well below that enjoyed in European countries, and wages have been flat for decades and benefits diminished year after year for most workers. Those employed by companies that can afford high fares and tolerate last minute bookings are now going to benefit greatly from the Spend-based programs, while those who exercise fiscal responsibility (along with those so-called leisure fliers, but who actually are the core of FlyerTalk and MilePoint participants, are tossed into the ditch. ”

    DavidB, is CX first class supposed to be a “right of the people?” Perhaps, your jealously about the “above middle class” is getting to you. Seems, you could focus your energy in a more positive direction. Jealousy never gets anyone anywhere. Embrace, the opportunities, and seize the day… instead of complaining about what is “owed to you!” Oh, and as one who lives in a “European country” — believe me, it isn’t all that it’s cracked up to be. This is far from a utopia.

  23. I’ve been flying mostly Delta since TWA tanked (and made me a multi-Million Miler on AA). I fly for business at my clients expense, and I usually make Diamond by mid-year (and with roll-over, I have several years in the bank right now). It’s hard work. If it was easy, everyone would do it. And my kids are all grown up – so I know of from experience, but don’t have anymore the work/family balancing act. Domestically, I get upgraded all the time, but internationally I’ve been burned too often buying M-fare and not getting upgraded (usually on KLM heading to/from the ME in my case). Here’s my point: If the revenue based program will clear out the CC gamers/hobbyists and make room for me up front, then I’m all for it. (For what it’s worth, I got upgraded on both KLM segments today flying JFK-AMS-IST, my lucky day!)

    And for the record, this is a terrific blog! Thank you Gary!

  24. @SE Rob:
    .
    “Here’s my point: If the revenue based program will clear out the CC gamers/hobbyists and make room for me up front, then I’m all for it.”
    .
    +1E6

  25. Darth you have a lot of nerve criticising the MS’ers when you yourself admit to booking flights for friends with your miles. Booking for family is one thing. But I guess it never occurred to you that by booking free flights for your deadbeat friends you are quite likely taking away award seats from someone that earned their miles butt in seat.

  26. I wasn’t implying that one employee in particular would overspend. Often I have been happy to take a later, earlier or indirect flight to both save the company money and earn miles in the program of my choice. Not sure I will be quite so willing to consider those options in a revenue based world. It’s pretty subtle and I don’t think it’s anything anyone could raise red flags about but overall travel spend may increase.

  27. Note to Goverment officials in charge of approving Airline mergers
    Mergers are in the best interest of the flying public
    They create more competition ,more jobs and lower prices on airfares for the traveling public
    This will also help help lower fees and surcharges across the board due to the merger cost savings
    Well done its worked brilliantly! 🙂 😉

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