Is It Time to Regulate Frequent Flyer Programs?

I’m not sure I’ve ever seen anything as egregious as Delta over the past few weeks.

  1. Delta eliminated their award charts — just pulled them off the website — without telling anyone. When asked they said that members now get all they need to know from the award calendar. That suggests pricing could change and change rapidly, or at least they’re preparing for it to.

  2. Delta now has 21 day advance purchase requirements for the lowest award prices in many (most) markets. They’ve made your miles less valuable, without notice or even acknowledgment, for one of the only strong uses for domestic coach awards.

One candidate for ‘worst action by an airline frequent flyer program against its members’ as noted by a commenter on the blog is fuel surcharges, especially the continued charging of these fees as the price of fuel has come down.

Delta believes it can do whatever it wishes, whenever it wishes — no need for respect or transparency for members, they simply aren’t required to. That’s the position they explicitly took in front of the Supreme Court.

Airlines Are Strongly Pro-Government

Though airlines often complain about security and other aviation taxes, airlines aren’t pro-free market and anti-government, they just don’t like competition and do like subsidies.

Delta may complain about the Export-Import bank — and I think the arguments have merit — but they’re in favor of state fuel tax credits and bestow elite status on Georgia’s politicians.

United ran air service at the behest of the Governor of New Jersey and the Chairman of the Port Authority of NY/NJ in exchange for support of using state tax dollars to bring better public transit to Newark.

They love state aid when it benefits them, they work with state carriers as partners, but they’re shocked – shocked! – when the state subsidies can be a hammer to use against Middle East carriers.

And Delta scapegoats government regulators as the reason they have to obfuscate changes and ensure that their customers are surprised to learn that the awards they’ve been saving up to redeem for have gotten more expensive.

Airline Behavior, and Changes in Legal Options for Travelers, Make the Case for Regulatoin

As free market as I am (and I’m a strong libertarian), I’m open to regulation of frequent flyer programs, which is to say I’m not in a position to oppose it on any fundamental grounds given:

  • Legal options taken away from members
  • Facts on the ground, how programs are behaving in light of the lack of common law restraint on their actions.

Last year the Supreme Court, in Northwest v. Ginsberg essentially took away any common law avenue of suit against a frequent flyer program.

The court concluded that:

  • Frequent flyer programs are part and parcel to running an airline.
  • State contract claims like those based on an implied covenant of good faith and fair dealing are tantamount to states regulating the airlines
  • These claims are pre-empted by the Airline Deregulation Act.

The Supreme Court has basically said the courts are closed to consumers with respect to claims about frequent flyer programs. I think the analysis is flawed — these programs aren’t merely rebates for travel, they are all-purpose marketing programs. These programs aren’t just a mechanism to use points for travel, non-travel redemption options are available. And just because the programs (may be, but aren’t always) owned by an airline, that isn’t sufficient to exempt them from regulation. Delta after all owns an oil refinery.

As it stands, you basically can’t sue a frequent flyer program unless they directly violate language in their own t&c which say they can do as they wish.

To the extent that common law claims are pre-empted, and the Court’s and airlines’ position is basically that it’s up to the DOT to regulate them then it’s hard to suggest that the DOT position that it doesn’t regulate frequent flyer programs ought to be immutable.

Regulation May Still Be a Bad Idea

That doesn’t make all, most, or even any given regulation a good idea. I remain skeptical it could be done well. I remain skeptical that any regulation wouldn’t be subject to regulatory capture. But until Northwest v. Ginsberg is overturned (and I think that would be a better path), it’s hard to have any sort of fundamental objection to regulation as a second-best.

But ‘Just Fly Someone Else’ Isn’t Sufficient

Accumulating miles in a given program is 100% voluntary.

An airline might posit that two parties come to a meeting of the minds, consumers get points that an airline (Delta, say) makes clear upfront via their program terms are of indeterminate value and 100% at risk at the sole discretion of one of the parties to the agreement.

Under that scenario it sure sounds like a rigged game, but that no consumer is required to participate in.

Here’s the rub: That’s not the game that airlines were describing in the past. There were clear inducements, and often even promises (like Delta taking out a Superbowl ad years ago saying miles would never expire before introducing expiring miles, or United explicitly promising that million miler benefits like upgrades wouldn’t change two months before taking away those upgrades) that are broken.

Furthermore, I’ve yet to hear an airline spokesperson declare the game is rigged. They want members to believe it’s not. So I wouldn’t accept the argument that we all know it is as an ‘out’.

And we aren’t just talking about the prospective earning of miles, we’re talking about changes to the value proposition of already hard-earned points. The changes are effectively retroactive to past activities.

What do you think? Have airlines gone a step too far with their programs? Are we left with no other options but regulation to enforce our contracts with frequent flyer programs?


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 »

More articles by Gary Leff »

Comments

  1. The Airlines are already too heavily regulated by government. ObamaCare eats the bottom lines of airlines (and hotels); in fact, Delta, was the first airline to drop 75% of their employees because of it. Also, the airlines have consolidated — there are less legacy carriers now, they merged, refinanced.

    The free market must decide. If Delta screws up their FF program, don’t fly them. I don’t. I don’t fly Delta; i.e., Obama Airlines.

    The fuel surcharges are still there because of hedging 2+ years ago. No doubt, the airlines have renegotiated their plans — in 2 years from now, airfares will be at their lowest again for a very long time. My opinion.

  2. I too am a strong libertarian, and deeply suspicious that government involvement can make any problem better. That being said, the ability of a company to enter a contract which effectively includes a clause allowing them to change the terms of the contract at will and with no notice is madness. I think two simple rules could fix the problem without creating a scenario where a government agency was assigning values to miles (which would certainly be followed by taxation) or causing other such problems.
    Rule #1: Points/Miles programs must set rules for each calendar year, which may not be changed until the next calendar year.
    Rule #2: Points/Miles earned in each calendar year are subject to the rules/values/redemptions from the calendar year in which they were earned.
    These two simple rules would allow programs to change and adapt as their markets evolve, while giving customers the confidence that if they chose to earn points/miles with a certain program, they will get what they believe they are earning. Thoughts?

  3. The Supreme Court only exacerbated the problem of over consolidation by effectively giving license for the remaining airlines to treat their customers however they choose. As you pointed out, they now have the unfettered legal power to do so retroactively. When the only control is self control, it tends to bring out what I refer to as The Scumbag Effect. Relying on the goodwill and altruism of a corporation to honor publicly made promises seems a less than ideal tactic. This one way accountability just isn’t working. Regulation per se may not be necessary, but the airlines should required to do what they said.

  4. @ED – Brought your soap box, huh? I didn’t realize that Delta had fired 3/4 of their entire staff.
    @Doug – Excelent ideas. That would fix the biggest problems in a hurry.

  5. @Doug

    Your rule #2 isn’t simple at all. In a given year, I don’t earn miles in multiples of free tickets, there’s always “leftovers.” I.e, I’ve got 130,000 AA miles. That’s good for a CX J R/T to Asia 2 with 20,000 miles left over.

    Which award chart are they going to apply to? It’s pretty easy to imagine a scenario where I have 20k from 2013, 20k from 2014, and gasp, 20k from 2015. That spans three programs years! Talk about a headache in terms of communicating with members.

  6. @Doug, this is a logically satisfactory way of operating, however, operationally a nightmare. If I earned 12,000 miles 4 years ago, 16000 3 years ago, 8000 two years ago and 14000 this year, and the redemption was 30,000 three years ago, 40,000 last year and 50,000 this year, what would I have to pay to take my trip this year? Devil if I know?!
    I think that it would be very simple, just overturn the ridiculous court decision and allow people to sue the FF programs under common law precepts. I don’t think that there is likely any effective way to regulate them otherwise.

  7. @Doug – the calendar year regulation could become difficult to keep track of for airlines. Example: You have 40,000 Delta miles earned in 2014 with stopovers allowed but one-ways are not. Additionally, you have 30,000 DL miles earned in 2015 with one-ways allowed but free stopovers are not. It’s time to redeem your USA-CDG(Stopover)-AMS-USA ticket for 60,000 miles. You can’t book a stopover as you don’t have enough 2014 miles. You can’t book it as USA-CDG / CDG-AMS / AMS-USA as you don’t have enough 2015 miles.

    What I would like to see that should be even easier is a 30-90 day notice requirement for frequent flyer program changes with a prominent link on the site’s homepage (similar to how they have to link to baggage charges) that directs to a page detailing the changes that are being made. Additionally, a regularly updated (i.e. monthly/quarterly) publishing of the percentage of that airline’s seats that were ticketed to ‘low-tier’ frequent flyer awards in Coach/Business/First.

  8. Although, forcing them to change their rules no more than one in a given period (a year, two years, whatever) and forcing them to publish their changes at least 3 months (6 months?) in advance would get rid of many of the issues that people have with them.

  9. @Gary

    Can you find some lawyer and get him to explain to me how these one sided contracts of adhesion are legally binding?

    I mean, basic contract law requires a meeting of the minds. The minute a program stipulates “we can change the T&C with or without notice” exactly what was agreed to?

    Frankly, the airlines could save themselves some legal expenses and have a one sentence contract — “the rules are whatever we want them to be, and we can change them when we feel like it.” The rest of it makes little sense to me, since they can change it whenever they want anyway.

  10. This is kind of detailed, insightful, and mature article that keeps me coming back to View From the Wing. Not that I don’t also read the immature stuff! 🙂

  11. “I’m a libertarian except about things I know or care about. Then I recognize the obvious flaws in entirely deregulated systems.”

    Sounds pretty typical.

  12. @dan

    Just so happens that IAAL. The issue would require more consideration, but, at bottom, I do not know that what you characterize as a “contract of adhesion” is a contract at all.

    Given that the terms and conditions typically identify that the miles are not property and that the programs are subject to change at any time, at first blush it strikes me that this is an “illusory contract”. That is, it may look like a contract, but it is not one at all.

    Other lawyers may have their own takes.

  13. @Gary,

    Why do you think overturning Ginsberg is preferable? I cannot fathom that happening in < 30 years. While I don't share your libertarian perspective, I'd think it was government intervention either way – whether judicial or legislative changes are made to the law after Ginsberg. The problem with overturning Ginsberg is that courts aren't really comfortable creating principle-based rules anymore. Judge-made law is entirely disfavored, but I think more and more lawyers are starting to question the wisdom behind endless regulations. And airlines would hate those sorts of judge-made rules because of the lack of clarify. But sometimes, a rule based on a principle is better than a rule based on whether it conforms to a specific regulation.

  14. One form of regulation I’m eager to see crafted and implemented would be expanded and advance disclosure requirements by the programs.

  15. I believe that government regulation of the programs is exactly what an airline like Delta is looking for as an excuse to end the entire thing. “Hey, it wasn’t us, blame your legislators.”

  16. @Ed – “I don’t fly Delta; i.e., Obama Airlines.”

    I have seen cases of ODS (Obama Derangement Syndrome) but yours stands out as the oddest and most ridiculous…

  17. @Rob Ginsberg was merely a statuatory interpretation case, and they ruled that frequent flyer programs were part and parcel to running an airline so state court claims were off limits (pre-empted by the airline deregulation act). I don’t think that’s an accurate view of the programs, which are all-purpose marketing vehicles in some places not even wholly owned anymore by their related airlines. I think access to the courts is preferable to administrative regulation. And the mere threat of suit is a better incentive to act reasonably on the part of the programs.

  18. @Mike the problem here is simply that the government shut down access to the courts, which are part and parcel of any market systems. (Consistent with the beliefs I’ve held for years, see for instance John Hasnas “The Myth of the Rule of Law” and “What’s Wrong With a Little Tort Reform?”)

  19. @Gary It sounds like what you would really like to see is legislative action correcting the SC’s error in Ginsberg in the form of amending the ADA to specifically allow breach of contract claims under FF programs, or some similar (perhaps broader) provision. I worry about Ginsberg because it has tremendous potential for misinterpretation. Remember, it didn’t bar all claims of breach of contract (Ginsberg failed to appeal this at the trial court level), it barred claims of implied good faith and fair dealing as preempted under the ADA. A lot of trial courts might miss this distinction.

  20. What we need is for the DOJ and FAA to step in and take a good hard look at the monstrosities that they created when they approved the DL+NW, UA+CO, and AA+US mega-mergers. This has now turned into an oligopoly that’s run by the Big 3, sharply decreasing competition (by a factor of 2) and consumer benefits. It is time to do to the airline industry what was done to the telecom industry in the 1980s…break’em up!

  21. DCS beat me to it.

    This was one of the many reasons many frequent flyers wanted the government to stop the mega mergers.

    This was always going to happen when competition got reduced so dramatically.

    No amount of regulation is going to put the toothpaste back in the tube.

  22. I hate the idea of government getting MORE involved in ANYTHING. That said, the largest improvement that I would like to see implemented is a US equivalent of “Passenger rights in case of denied boarding, downgrading, cancellation or long delay of their flight
    under Regulation (EC) 261”. This would end the scheduling insanity and hold airlines accountable for delivering on their ticket contracts!

  23. @Gary To be fair, Gary, didn’t the courts shut down access to the court? You can’t want to trust their judgment and then not go with them when they say they’re not relevant.

    You will respond that they’re just interpreting the law, and law can be changed. True. But to change to a more regulated, ie, contractual setup, with clear regulated value for both sides, is to invite all sorts of things you don’t want. That value might be taxable, for instance.

  24. I think you’re a complete hypocrite.

    You couldn’t have been more wrong in taking hte airline’s position in http://viewfromthewing.boardingarea.com/2014/12/27/new-yorker-wants-believe-airlines-making-coach-worse-can-gouge-fees/

    To paraphrase, “Bashing Airline Frequent Flyer Program Devaluations is Mood Affiliation, Not Logic”. Or, in other words, it’s OK for the airline to screw the little guy with fees (how dare the New Yorker tell the truth), but once it’s you who gets screwed, you want the government to INTERVENE. NOW. Hypocrite.

  25. @Good service – My issue here is that there’s no court OR regulatory authority to appeal to with frequent flyer miles. The DOT regulates air travel but not miles, and you can’t sue over miles with a state contract claim under Ginsberg. In one case you can hold an airline accountable (and they’re delivering what they promise) and in another you have no avenue to hold them accountable (and they’re reneging on their promises). I still don’t think regulation will work out well, likely make things worse, but i have no principled objection when the government takes away common law remedies.

  26. @Mike – it was a statuatory interpretation case, the courts believe federal legislation says that state courts can’t interpret state law in contract disputes. So federal court interprets federal law to take away state claims. In any case, common law claims are historically part of market systems.

  27. Maybe it’s time to simplify things and bring back regulation of the airlines. In the “good old days” of flying the airlines all had the same pricing. Therefore, they had to compete with service, comfort and food. Flying around the world in economy was just fine until deregulation kicked in. Now it’s Hell.

  28. Nobody wants the prices that would go along with regulation. The price of an advanced purchase midcon such as ORD-SFO has stayed the same over the last 25 years, in the $230-$310 range depending on sales and peak periods. BA Premium Economy US-Europe is half the price now than UA J was 20 years ago, and the latter was 40 inch pitch recliners with minimal IFE – BA 787 in PE is arguably equal overall.

Leave a Reply

Your email address will not be published. Required fields are marked *