United’s Frequent-Flier Program Gets Some Game Theory

(Bloomberg Opinion) -- The big news last week out of United Airlines was that the company's longtime chief executive officer, Oscar Munoz, will step down in May. But many of the company's most loyal customers were focused on a different transition: On Dec. 4, United made the most substantial changes to its frequent-flier upgrade program in years.

Flight upgrades are mostly a problem of the 1% (or those who amass way too many frequent-flier miles). Even so, they can serve as a great case study of how marketplace design works.

In United’s old program, those who reached top frequent-flier status were given a number of upgrade certificates that could be used to boost tickets from one class of service to another, typically from economy to business.  Some of these upgrades were regional, meaning that they could only be used on a select set of flights -- mostly all within North America -- whereas others could be used globally. To obtain an upgrade, customers often had to join waiting lists, where priority was determined by a mixture of flier status, ticket type and request date. As a result, plenty of fliers didn’t get the upgrades they wanted.

The new program replaces the fixed-format upgrades with a currency-like system called PlusPoints, which, like the old certificates, are awarded to those with top status. Different types of flight upgrades now have different PlusPoints costs, at an exchange rate corresponding to the old upgrade format. Many upgrade requests will still be placed on waiting lists, but there's a new option to skip the waiting list if you're willing to pay a large PlusPoints premium.

At the moment, the changes are mostly good news for customers. PlusPoints can be used more flexibly than the old upgrades; this means that frequent fliers can more effectively tailor their upgrades to their flying habits. As a consequence, the change is also likely to reduce congestion in the upgrade market; under the old system, transnational long-haul flights such as those from Boston to San Francisco were frequently glutted with upgrade requests, because they were among the longest flights that qualified for regional upgrades.

That said, there's a chance that we'll see what economists call price discrimination down the road: At the moment, upgrading a ticket from San Francisco to Paris costs the same number of PlusPoints as upgrading a ticket to Australia, even though the latter flight is roughly 2,000 miles farther. But United might easily justify charging more PlusPoints for upgrades on longer or more popular flights. Indeed, the company made this sort of change to its system for buying award tickets last year.

There’s also some funny game theory around the option to skip the waiting list. Whereas before everyone ended up on the same upgrade waiting lists, now some people will skip the line. But that means fewer upgraded seats will be available for those on the waiting list, which in turn creates more incentive to jump ahead. So we might see some customers buying the option of skipping the waiting list just to preempt others.

That’s what economists call a prisoner’s dilemma, and it means frequent fliers might burn through their PlusPoints faster. Before, the opportunity to engage in a bidding war or race to be at the front of the line simply didn't exist.

That said, at present, skipping the waiting list costs so many PlusPoints that the possible prisoner’s dilemma might not be such a big deal in practice. Paradoxically, if United lowered the PlusPoints cost for skipping the waiting list, the airline might get frequent fliers to spend their PlusPoints much more aggressively.

So for now, at least, the switch to PlusPoints is better for flyers and relative to the old system, it looks like a real upgrade.

That's not to say that the CEO doesn't impact frequent flyers' welfare -- see, for example Kyle Stewart's recent commentary at Live and Let Fly.

Status, in turn, is based on who flies and spends the most. This past year, for example, qualifying for United's 1K status (think of 1K as in "one carat," rather than "1,000") required at least $15,000 in spending, plus either 100,000 flight miles or 120 flight segments.

New CEO, please do NOT take note!

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Scott Duke Kominers is the MBA Class of 1960 Associate Professor of Business Administration at Harvard Business School, and a faculty affiliate of the Harvard Department of Economics. Previously, he was a junior fellow at the Harvard Society of Fellows and the inaugural research scholar at the Becker Friedman Institute for Research in Economics at the University of Chicago.

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