MPR: Frequent-Flyer Miles Bring Airlines Smiles

Frequent-Flyer Miles Bring Airlines Smiles
By Bill Catlin
November 11, 1998

When Northwest Airlines tried to win back customers after a walkout by its pilot's union, the airline offered double and triple frequent-flyer miles for travel. That strategy was testimony to the popularity of frequent-flyer miles, which have been called the most powerful marketing programs in history. But with their popularity is coming criticism that frequent-flyer plans promise more than they deliver.

FREQUENT-FLYER PLANS WERE DESIGNED TO PROMOTE AIRLINE customer loyalty. They were so successful companies in other industries, ranging from banks to veterinarians, now buy airline frequent-flyer credits to hand out to their own customers as rewards. Some 57 million consumers participate in frequent-flyer programs, and have 3 trillion frequent-flyer miles saved up.

Randy Petersen: They've become a new currency out there.

Randy Petersen is editor of the trade magazine InsideFlyer. He says airlines sell mileage credits to non-airline partners at a cost ranging from a penny to two cents a mile. That's as much as four times the going rate just five years ago. Petersen says when the airlines figured out they could sell mileage credits, frequent-flyer programs turned into what he calls a marvelous money machine.

Petersen: These programs pump out a serious amount of money. In fact, in 1997, I estimate that airlines earned $1.5 billion by selling miles to their various partners.

Petersen estimates that airlines handed out 15 million free travel awards last year. The going "price" for a free round trip domestic ticket subject to black-out dates and other restrictions is generally 25,000 miles; 40,000 for unrestricted seats.

Jeff Blyskal: They're promising you Paris and whatnot, but what they're actually giving you is leftovers.

Jeff Blyskal wrote a report on frequent-flyer programs for Consumer Reports magazine earlier this year. He found the number of free tickets the major airlines awarded on popular routes dropped by 152,000 last year compared to the year before. Blyskal contends the programs are not delivering what they promise.

Blyskal: They say, "Oh, you can cash it in for a ticket to Paris or to wherever." And then, when the people say, "I can't get a ticket to Paris actually. What's the problem here? This is not what I bargained for." Then the airlines will say, "Well it's a freebie, what do you want? Beggars can't be choosers."

Blyskal's study found that Northwest Airlines' WorldPerks program was better than average and improving, with nearly eight percent of seats handed out as frequent-flyer freebies. However, it also ranked Northwest consistently at or near the bottom for free travel to popular overseas destinations like London or Paris. Northwest spokesman Jon Austin says the supply of free seats depends on demand for paying seats, and there was heavy demand for international flights last year.

Austin: What we promise is free travel, and it's available. But we don't promise that "free travel" means "any time, any place, anywhere, under any circumstances," and I think most people know that.

But last year the U.S. Department of Transportation said airlines may not be giving consumers enough information about limits on seats available for frequent-flyer awards. Northwest and Continental say their planned alliance will allow frequent-flyer members to redeem miles for free travel on either airline.

At least one critic of the alliance contends it's likely to make free travel harder to come by. Kevin Mitchell of the Business Travel Coalition says the number of people competing for seats on each airline will increase dramatically. He says the airlines will face an ugly choice: make more seats available at the risk of hurting the bottom line.

Mitchell: Or else, they're going to have to raise the number of points required to redeem tickets for travel from what it is to 50, 60, 70,000 miles. And that's going to have the effect of really, really further annoying the consumer who has these frequent-flyer miles accrued.

Northwest disputes that, saying the alliance will make more destinations available and probably cancel out the added demand. But frequent-flyer programs have got the attention of government regulators. The U.S. Department of Transportation is reviewing them. The General Accounting Office says they are one of several marketing practices that make it harder for low-fare airlines to lure customers from the major carriers based on price alone. Again, Northwest's Jon Austin.

Austin: If there is any concerns about frequent-flyer programs, I think they're misplaced, but even if there are [concerns], I think, you know, frequent-flyer programs are a minor point of airline economics and airline competition, and wouldn't warrant this neutron bomb response of regulation.

The General Accounting Office doesn't dispute that, saying its experts felt there's little to be done short of banning frequent-flyer programs - which would kill free-travel benefits and do little to fuel competition.

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