Daily Archives: May 23, 2006

Tom’s Comment on Frequent Flyer Programs

Frequent Flyer programs are what are generically referred to as “loyalty programs.” Their primary purpose is to stimulate customer loyalty, that is, to keep customers coming back to make subsequent purchases rather than going to a competitor. These programs typically provide the customer with some sort of rebate on purchases. These rebates are seldom in cash, and most often are in the form of vouchers that can be used as partial or full payment on subsequent purchases. Ideally, a voucher credit should be acceptable in payment on a par with cash, without restriction, but that is usually not the case. In an effort to maximize their loyalty effect and minimize their costs, the issuer of loyalty points, such as frequent flyer miles, will typically impose many restrictions as to when and how vouchers may be redeemed.

In the case of frequent flyer programs, only a certain number of seats are made available for frequent flyer awards on each flight, and often the number of seats so available will be based on the number of seats that are available as the departure date approaches. It is my experience that on some airlines booking must be made more than two months in advance in order to assure an award flight. If you desire a less restricted reservation, at least one airline, Delta, is increasing the number of miles required for an award flight. The normal number of miles for a domestic flight is 25,000, but few flights are available at this rate. If, however, you are willing o pay 50,000 miles, you can probably get the flights you want.

Considering the vast number of miles that the airlines have issued, it is probably safe to bet that this kind of “credit inflation” will only get worse as time goes on. The problem may be mitigated to some degree as the airlines recruit “partner” businesses to not only issue miles, but to redeem them, as well. But any such program that depends upon continual growth is a “Ponzi scheme.” Is that in fact the case with frequent flyer programs? It’s hard to say without detailed figures for each airline. The key question is, how long would it take the airline to fully redeem its outstanding issue of frequent flyer miles? The numbers that need to be looked at are (1) the number of miles outstanding in relation to (2) the number of round trip flights flown monthly or annually.

Another factor that bodes ill for FF programs is the fact that the competitive advantage that loyalty schemes are supposed to provide disappears when everybody starts doing it. Such was the case in years past with supermarket stamp programs like S&H Green Stamps, Top Value Stamps, etc.

One further point: is it proper to refer to frequent flyer miles or loyalty points as “currency?” Well, that depends on how you define “currency.” While they are to some extent transferable, they are not generally spendable. On the other hand, value can be obtained for them, but only from a limited number of entities, and only with restrictions. The technical and narrow definition of currency is “anything that is commonly accepted in payment.” On that basis, loyalty points, including frequent flyer miles, do not qualify. I would prefer to not muddy the waters with loose terminology, and would urge that frequent flyer miles be categorized as loyalty vouchers, not currencies.

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The Status of Frequent Flyer "Currencies"

From the desk of Bob Meyer at Barter News… 05/23/06

The World’s Largest Private Currency Continues To Soar!

Airline frequent flier miles (FFM) are without doubt the largest private currency in the world. Here’s a quick update on the ever-evolving currency and some of their future challenges ahead. (For a look at other type of private currencies see our Secondary Capital Section, http://www.barternews.com/secondary_capital.htm.)

It was in May 1981, 25 years ago, that American Airlines introduced the first frequent flier program—a program designed to build loyalty among its passengers. No one envisioned what would eventually result from such a marketing idea.

Today more than 130 airlines issue FFM and 120 million travelers worldwide have accumulated 14.2 trillion frequent flier miles, according to editor and publisher of Inside Flyer magazine Randy Peterson. That’s enough FFM for 568,000,000 flights.

According to the U.K.s Business Guardian publication, a frequent flier mile has a value between 1-cent and 6-cents each. At 3-cents each, the 14.2 trillion miles have a value of $420 billion!

Frequent flier miles are major sources of revenue for the airlines. In the U.S., carriers annually sell about $2 billion FFM to other businesses to use as customer rewards. Thus, people who rarely fly have the ability to earn miles when using credit cards, taking out a mortgage, eating in restaurants, or buying flowers.

Interestingly—disconcerting if you really think about it—the sale of FFM is the most-profitable part of many airlines. Yet the actual cost of fulfilling these “free” tickets is minimal…less than $15 on average, according to an article the April Harvard Business Review titled “Your Loyalty Program is Betraying You.”

Joseph C. Nunes, associate professor of marketing at the University of Southern California’s Marshall School of Business and co-author of the Harvard Business Review piece, says in the short term the frequent flier mile programs are in good shape.

Longer term, however, could be a different story as credit cards and/or mortgage companies may one day wake up and say, “To heck with enticing customers with FFM. They’re costing us too much and consumers aren’t as attracted to them as they once were. We’re going to compete on price instead.” (That’s what happened years ago to the Green-Stamps-for-products redemption program.)

Additionally, fulfillment could become a major problem as airline fleets are decreasing in size. The legacy carriers of the world—such as United or American—had a combined fleet that was 22% smaller at the end of 2005 than in mid-2001, according to industry trade group Air Transport Association.

While there is little chance of fulfilling on 586 million flights as long as the industry continues selling $2 billion of FFM annually, the following story shows United is taking a small step in the right direction.

“Choices” Air Currency Launched By United

In an effort to make FFM more attractive, United Air Lines has launched a separate new form of air currency it calls Choices miles. The new program offers complete transparency in that there is no waiting, no black-out dates, and no seat restrictions or other conditions attached.

Choices can only be earned by using a Chase United Mileage Plus credit card. Although the miles can be used for flights on United, or hotel and car rentals, they must be booked online at http://www.united.com.

The Choice miles can also be used, at a penny-per-mile, toward payment of a previously purchased flight made at http://www.united.com. It’s only a matter of logging into the web site and transferring Choice miles against the billed airfare, i.e. the credit card balance is reduced when miles are credited against it.

Example: A ticket is purchased using a Chase Mileage Plus credit card via United’s web site for $299. When the bill comes you log on to united.com and transfer 20,000 of your Choice miles to apply against the $299, reducing your bill and ticket payment to $99. (Unlike a regular award ticket, you also earn FFM on the transaction.)