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Why Frequent Flyer Programs Have Changed
July 7, 2016 -- If you read my Seat 2B column today, I hope you find the advice for the new world of frequent flyer programs useful.
But there is a mile-wide hole in the piece and it can be summarized with one word: Why?
Why have the rules changed?
Why are the airlines, according to their own statement before the Supreme Court, above the dictates of "good faith and fair dealing" with flyers?
Why are airlines turning their programs into afterthoughts that we can largely ignore without fear of losing any truly valuable perks or freebies?
I wasn't ducking these important questions. It's just that the format of Seat 2B doesn't allow for answering every possible question. But guess what? That's what the Brancatelli File is for. So here are answers to some of those very important "Why?" questions.
WHY ARE AIRLINES BEHAVING LIKE ASSHATS?
Because they can, of course. When American AAdvantage launched in May, 1981, and United responded with Mileage Plus 11 days later, the domestic commercial aviation landscape was dramatically different. United and American faced a mosaic of competition for our flying dollars: Eastern, Pan Am, Northwest, Delta, TWA, Ozark, US Air, Continental, Air Cal, PSA, Southwest, Piedmont and, yes, many more. And a raft of start-up carriers, more than 100 during the next 20 years, was beginning to take advantage of the Airline Deregulation Act of 1978.
Frequent flyer programs then were the primary differentiator between carriers and victory was an incremental thing. In 1986, in fact, an airline frequent flyer program manager told me he considered it a win if his plan convinced a flyer to wait two hours for the next flight. Without the program, he insisted, average flyers might not even wait 30 minutes and would fly some other carrier instead.
But that was then and this is now. Just six carriers control about 80 percent of today's domestic market. With competition neatly packed into such an oligarchy, the programs don't need to be nearly as generous as the old days.
WHY ARE REVENUE-BASED FREQUENCY PLANS SO CHINTZY?
They're not, they've just been made to look that way by the asshat airlines and bloggers who have trouble differentiating between devaluations and methodology.
When the frequent flyer programs launched, airfares were still evolving from the regulated days. A mile flown was a decent measure of your financial contribution to an airline because fares moved only in a very narrow range. Now mileage flown means nothing in terms of your financial importance to an airline. And why should a traveler paying $150 for a flight earn the same amount of miles as the person paying $1,500 for it?
The switch to revenue-based programs--where you receive credit based on the dollars you've spent--was long overdue. While that method isn't perfect, it is much fairer. It's how hotels do their frequency plans, how credit card companies run their programs and how Southwest, JetBlue and Virgin America have run their operations.
The "chintz" factor is a result of Delta, the first of the majors to switch to revenue-based programs, building a 20 percent devaluation into the transition. It decided it would reward travelers less and buried the devaluation in the transition from miles-based earnings. United promptly followed suit and American will match later this summer. But there is nothing inherent in revenue-based programs that makes them less rewarding than mileage-based plans. It's all in how asshat airlines rig the charts.
WHY ARE ELITE STATUS UPGRADES DISAPPEARING?
Simple answer: Airlines would prefer to sell first class seats instead of giving them away and, with limited competition, they can promise elite upgrades without delivering them. Since the Supreme Court has said airlines can do anything they want with their frequent flyer programs, there's no way to stop them from the upgrade bait-and-switch.
In 1984, airlines estimated as few as two percent of first class domestic seats were filled with paying customers. Of course, back in those days, there was no such thing as a discounted first class seat. That's not the case now. Discounted first class fares are an established part of the fare firmament. And then there are the paid upgrade sales. United Airlines is famous for its TOD (tens of dollars) upgrades at check-in and Delta Air Lines is boasting to security analysts that selling first class is its top priority. In 2011, it claimed 31 percent of first class flyers paid some sort of premium to be at the pointy end of the plane. Last year, nearly 60 percent of first class flyers were paying something to be there. Delta wants to sell 80 percent of its first class seats by 2018 and that will essentially mean the end of elite status upgrades for all but the super-duper elites.
WON'T AIRLINES PAY A PRICE FOR TREATING GOOD CUSTOMERS WITH CONTEMPT?
No evidence of it so far. Even with increased capacity, load factors are north of 80 percent and the carriers are raking in record profits. Twenty years ago, load factors were closer to 60 percent, airlines were losing tens of millions of dollars every quarter and even filling two-thirds of the seats they flew seemed like a pipe dream.
But there's another hard truth to understand: No matter how much we fly, we stopped being the airlines' best customers a long time ago. The banks who issue their credit cards are the airlines' best customers and have been for years.
Only about a third of the miles we earn these days is from flying-related activity. Almost all of the other two-thirds come from credit card spending. The credit card firms pay from a penny to nearly two cents for each mile they issue to us in exchange for our spend. (Amex's deal with Delta is worth about $2 billion annually to the airline.) So we're minnows compared to the credit card firms. If airlines are focused on keeping any customers happy, it's their bankers, not us.
ARE BANKS HAPPY WITH HOW PROGRAMS ARE WORKING? Short answer: no. Long answer: Boy, it is really complicated.
The fact of the matter is that the airlines don't treat the banks much better than they treat us. Banks are constantly dealing with the airlines' decision to restrict award availability. And while they like being able to offer cards with club access or perks once available only to elite members, they take the heat from us when airlines do something offensive. And, oh, yeah, they are truly concerned about the rising cost of the miles they buy. Which is why you are seeing an increased emphasis on their proprietary programs like Amex Membership Rewards and Chase Ultimate Rewards.
It's not for nothing that American Express walked away from the Costco credit card even though it represented 10 percent of Amex's charge volume. Amex decided Costco's demands were simply too much to bear. It also allowed itself to be outbid for the comparatively minuscule JetBlue Airlines credit card.
We may not be far from the day that one of the existing banks walks away from one of the major airlines. Watch the negotiations for American Airlines' credit card portfolio. American's current deal doesn't expire until the end of 2017, but negotiations have already started. A lot of the future of the frequent flyer programs will be decided then.
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