How We Loved Frequent-Flyer Programs to Death

(Bloomberg Businessweek) -- In 2013, I redeemed 70,000 United MileagePlus miles to fly Lufthansa from New York to Frankfurt, then on to Bangkok on Thai Airways—all first class.

My Lufthansa seat, one of just eight on the top deck of a Boeing 747-400, included a spacious armchair and separate bed. On Thai, I remember being handed a glass of 2004 Dom Pérignon before I’d even settled into my seat. Had I paid for it, the ticket would have cost me almost $10,000.

Today a similar ticket still costs about $10,000, but I would need 140,000 United MileagePlus miles to book it. Did my miles simply lose half their value in six years? In a way, yes. But the answer will soon be irrelevant.

To optimize revenue, airlines continue to restructure their loyalty programs to focus on the highest-value customers, i.e., the ones who spend the most cash, divorcing the idea of a “mile” from actual travel. We can trace the beginning of the end to 2009, when the New York-based JetBlue Airways Corp. joined the upstart San Francisco carrier Virgin America (R.I.P.) in putting into wider practice a unique type of loyalty program: Flyers earned a set number of points per dollar spent on airfare, then could redeem them at a fixed rate, also based on airfare, rather than on distances flown or regions visited.

On other airlines at the time, passengers would usually earn miles based on the distance of their flight and could redeem them at set rates according to a printed award chart—for example, 12,500 within North America on Delta or United, or 67,500 American AAdvantage miles from the U.S. to Asia in first class. (The same international award can now range from 110,000 to 235,000 miles.) If you found an award ticket, you could redeem cheaply earned miles for it, no matter what the paid airfare was that day.

Now, though some frequent-flyer programs are making more award seats available, they have also begun pricing redemption rates dynamically, more closely pegged to the price of airfare; Delta Air Lines Inc. and Air France-KLM don’t even have award charts anymore. Sometimes this works out for the consumer, like a Delta SkyMiles “flash sale” in January that halved the price of a round-trip economy award from the U.S. to Asia to 30,000 miles. But mostly it means that not only is it more expensive to earn miles, it’s also more expensive to redeem them; some awards cost triple or even quadruple what they used to.

Credit card companies have also had their part to play in this inflation, minting miles with every dollar spent, whether on travel or not, and flooding the market with flashy sign-up bonuses that have caused an arms race.

While a mixed bag for consumers (everybody it seems, even people who don’t fly regularly, is sitting on mountains of miles), this has been unequivocally great for airlines. Today, American Airlines Group Inc. profits more from its co-branded credit card deals with Citibank NA and Barclays Plc than from flying jets.

Likewise, in a mid-2000s deal, American Express Co. helped bail out Delta by purchasing hundreds of millions of dollars of SkyMiles that AmEx could offer to potential cardholders as incentives. Renewed in April, the partnership is expected to generate $7 billion in revenue a year for the airline by 2023.

Couple this with the massive consolidation in the air industry happening over more than a decade—leading to fewer frequent-flyer programs and fewer available seats to book—and it’s no surprise the era of bragging about award tickets is mostly over.

An estimated 4.6 billion passengers will fly in 2019, up from 2.5 billion in 2009, according to the International Air Transport Association. If the frequent-flyer program trends continue, and there’s no reason to think they won’t, airline miles will simply become a glorified form of cash-back currency where each type of airline mile has an (almost) precise cash value: about 1¢, sometimes less.

On the other hand, flyers will know exactly how much value to expect out of any miles they earn, and airlines will probably make more ways of redeeming them available. “Our ultimate goal is for SkyMiles members to have the choice to use miles anywhere they can use cash with Delta,” the airline’s senior vice president for loyalty, Sandeep Dube, tells Bloomberg.

But as airline pricing models tie the value of miles directly to airfares, those aspirational premium awards—like flying in one of Singapore Airlines’ Suites or Etihad Airways’ First Apartments—will retreat as far out of reach for most consumers as paying cash for them. The great frequent-flyer dream is crashing. Put on your own mask before helping others.

To contact the editor responsible for this story: Justin Ocean at jocean1@bloomberg.net, Chris Rovzar

©2019 Bloomberg L.P.