Who Really Benefits from Frequent Flyer Programs?

Reading Peter Greenberg requires a certain amount of schadenfreude. And Fisking Peter Greenberg is almost novice sport for a blogger. See, for instance, last week’s The Best Time to Book Airline Tickets is Wednesday at 1am.

Now Peter Greenberg asks, Who Really Benefits from Frequent Flyer Programs?

And of course the answer is “anyone who accrues miles for little or no incremental cost, and redeems them for something of value.”

That’s in addition to the mileage program that’s issuing and selling the miles.

And the program partner that is using those miles to incentivize incremental business, such as a co-brand credit card partner, a rental car company, or a bank account.

This isn’t Peter Greenberg’s answer.

Instead we’re given a non-sensical tour through class envy (“1%” references) and rehashed conventional wisdom.

Frequent flyer miles are a great source of profit for the airlines, but they have no incentive to make miles easier to redeem.

Actually, the incentive to make miles easier to redeem is that airlines want consumers to see the value proposition in their programs and incentive future earnings.

Earning rates go up after a member has redeemed points.

That’s why programs do worry about redemptions, and why they cement partnerships to allow redemptions on other airlines and for non-travel items as well (whether or not those are good deals, the reason they do it is to give members options so they value their points and keep earning).

Airfares are already up 14 percent over last year and showing no signs of slowing. So, why displace a revenue passenger for miles redemption?

There’s both truth and misdirection here.

When the economy is good and planes are full, it’s harder to obtain saver awards because there are fewer seats that are going to go unsold. Unquestionably 2009-2010 was a truly special time for redemptions even as it wasn’t a great time for the world economy.

But make no mistake, rising airfares aren’t the bogeyman Greenberg would make them out to be, or else we’d all be rejoicing about availability relative to the past.

Here are inflation-adjusted airfares for the largest metropolitan domestic air travel markets, showing both the rate of change for 2012-2013 but also 2000-2013. And airfares are materially lower than they were at the beginning of the last decade.

Clearly real airfares aren’t the sole driver here. Causality is more closely aligned with load factors, and a growing stash of miles chasing those constrained seats.

It all comes down to yield (i.e. how much an airline can get for each individual seat). At major legacy carriers, about 70 percent of revenue comes from the top 20 percent of customers. Plus, Delta Air Lines has now changed its frequent flyer mile program to favor premium travelers. Reward miles are earned on ticket prices, not on distance flown—with flyers earning 60 percent fewer points with the policy change. Members are now incentivized to opt for the higher airfare.

Huh?

The most valuable customers are the most valuable for the airline. And Delta is gutting their frequent flyer mileage-earning. And that creates bad incentives. Or something. But it’s never explained how any of this ties to frustrations redeeming your existing stash of miles, or to ‘who benefits’ from your participation in the program.

Even if we can somehow make sense out of what appear on the surface to be non-sequiturs, at most I think Greenberg is saying (but hardly demonstrating) that some people get more rewarded than other people.

For those who pay the premium, there are premium perks. Select first class airlines offer private suites on the plane, private terminals in the airport, and private car escorts to and from the airport. Airlines are catering for the one percent because that is the highest yield.

Actually, with respect to frequent flyer programs, I think this gets it exactly backwards. Because even if airlines are increasingly competing to offer valuable products to attract high yield paid passengers, it’s precisely these perks that are available at a deep discount to the rest of us when we redeem our miles for premium cabin international awards on the better world carriers.

Furthermore, the generalizations here are not helpful. No U.S. airline offers private suites or private terminals on their aircraft. And though Delta and United have very limited tarmac transfer services, U.S. airlines don’t generally offer “private car escorts to and from the airport.”

So I’m not sure how these examples are relevant to the bulk of Greenberg’s readers, nor is it clear how this speaks to ‘who benefits’ from frequent flyer programs.

The bottom line: airlines have made their core product so distasteful that passengers are almost forced to go for the upsell, but even that no longer rewards them.

It was probably much more pleasant to be a coach passenger when my business travel career started, largely because flights weren’t very full. I would often have an empty seat next to me, and that meant more room. With flights full, I don’t have that, and it also makes redemptions harder.

But I’m not sure it’s fair to say that airlines have made their core product so distasteful. Part of the travel experience is security, which has been made distasteful… but not by the airlines (although Precheck makes it better, but the TSA seems to be ruining that, too).

And the airport experience in many cases has gotten better, not just lounges but the terminals themselves with many offering free wifi, better restaurants, and power sources to recharge.

As far as airlines go, we can romanticize about a past when food was free but it also used to be a bad joke. Now it is frequently sold onboard, and usually isn’t great, but may still be better than the food that used to be complimentary.

Sure, there are upsells for extra legroom but 34 inch pitch wasn’t really an option at all in the 1980s or 1990s.

None of which, of course, says a darned thing about ‘who benefits’ from frequent flyer programs — and the answer is decidedly not the “1%’.

It’s the frequent traveler that benefits, not just from accrued miles but from elite status. Many of the “1%” don’t have to fly, or if there are meetings oftentimes people will come to them. Middle manager road warriors rack up miles and are rewarded with a better travel experience even though their companies pay for coach.

And who benefits? The entire underlying premise is that if someone wins someone else must lose.

But when I buy a gallon of milk at the grocery store, I get milk and the grocery store gets money. We both benefit. And so does the distributor of the milk. And the company that owns the cow. Maybe the cow loses, but probably not for awhile until they’re sold off to McDonald’s.

Not every transaction is zero sum in fact most are not. Frequent flyer programs can actually be value-added. But that’s not a great populist message.


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. Gary, speaking only for myself, I read your blog because I already know the other guys are bogus. Spending time and resources tearing them down is like preaching to the choir while beating a dead horse that is draped across the pulpit. Just keep doing what you do and don’t worry about the other guys!

  2. He begins his post with “We’re a nation of addicted frequent flyers who will do anything for those miles,”

    *Furrows brow*. No we’re really, really not. Probably 1 out of, what, 1000 people in America meets that statement? That’s like saying on a movies blog “We’re a nation of addicted cinephiles who all own Criterion Collection releases”

  3. I know a lot of people don’t like your rebuttals to the nonsense out there, but I do.

    You’re like the “Donald J. Boudreaux” of the airline industry. You should even start writing in letter form, and make it more succinct 😉

  4. The real answer of who benefits from frequent flyer programs is “Friends of Randy Petersen”………I started reading Inside Flyer in the early 80’s when he was way ahead of the pack and now I read his bloggers and attend FTU……….as a slightly upper middle class flyer I fly FC all the time and I owe the entire experience to Randy and his disciples…………it’s not what you know it’s who you know!

  5. Peter Greenberg is clearly unfamiliar with the accounting rules behind frequent flyer programs. Outside the USA where the International Accounting Standards Board accounting rules apply, under the “IFRIC 13” regulation, unredeemed miles on the books have to be accounted for at “fair market value” – which is basically the price they were sold to banks for. And to realize the profit from those miles, they have to be redeemed (or possibly expired). In the next couple of years GAAP Accounting in the USA will be aligning with the IASB rules for mileage liability. And any U.S. carrier that’s been through bankruptcy in recent years had to more or less match the IASB rule. Bankruptcy lawyers did not like U.S. carriers cooking the books of selling miles for X cents a piece and putting the liability on the books at the “nominal value” of delivering a redemption ticket. So, the long story short is Peter Greenberg is wrong that airlines have no incentive for customers to redeem. Many can’t realize the profit from their programs until miles are redeemed. (Although this does depend on the mileage expiry policy of the airline of which Spirit, with 90-day expiration, comes to mind!)

  6. You really don’t like Greenberg. I actually find his commentary thoughtful. He just is not speaking to our limited world of card churning mileage consumers. That is your audience. That audience is much more limited than the general public that Greenberg speaks to. So honestly your blog rebuke of Greenberg seems out of place to me. Both of you are accurate. You audience is just much smaller. His much bigger. And these two audiences are different and deserving of the different messages.

  7. @Mike – Saying “both of you are accurate” is wrong, because he is actually wrong, and he seems to be wrong more than he is right. Did you read my post earlier in the week on his advice that the best time to buy airline tickets is Wednesday 1am? His piece was utterly incoherent. You are right about one thing: he has a bigger audience than I do. But I would argue that his audience is deserving of better than he gives them.

    Best,
    Gary

  8. Lol OK, we get it – you don’t like Greenberg! I’ve never heard of the bloke anyway and never read any of his articles so am not sure it’s really worth dissecting to the nth degree everything he writes…

  9. I’m not sure if the airlines benefit from me – but I clearly benefit from them. I just finished booking my RTW trip from Dfw-lax-hkg-mle-auh-Dfw with 5 nights at the Conrad rangali and first class all the way (business where F wasn’t on the plane) on Cathay Pacific and Etihad for about $350 out of pocket – retail value was $40k-50k

  10. To be fair, the program partners only benefit if they get the incremental business they’re trying to incentivize. They lose out when people do the whole earn/burn/churn thing.

  11. But Gary it’s almost like coming out of church and sneering at the prostitute who is outside begging………they are who they are and to point it out with such vigor makes the critic less classy…….we don’t read his crap and if we see it it probably just makes us scratch our head and say “huh?”……….just be happy with your hommies…………

  12. Having read all of the posts above, I must comment back. I, as some of you also, have never read Peter G and am not familiar with his work product. However, in Gary’s defence, if you see something that is inherently incorrect, I for one, would need to speak up & say that it is wrong. Its nothing to do with prostitutes outside church – if you have the moral conviction you are right – then speak up. To be slated for saying that someone else is wrong, and speaking up for yourself is crazy. The facts represent themselves.

  13. Question: What percentage of the American flying public ever redeem miles for a premium cabin overseas ticket? I’m willing to bet it really is less than 1%. True, it’s not the _same_ 1% referred to by the phrase “the one percent” but if a random person asks “Who really benefits from frequent flier programs” Greenberg’s answer (“Not you”) is more likely than not to be correct.

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