The Most Exquisite Commercial Bribery System Ever
This week marks the 25th anniversary of the frequent-flier programs, which are the largest, and most brazen, commercial bribery systems ever --- rewarding a deep-pocket elite and neglecting, overcharging, and abusing most everyone else.
Ironically, the elite who benefit the most are being defrauded by the airlines with a "bait and switch" scheme, which effectively devalues the frequent-flyer currency. Instead of being able to redeem flights for the normal points (25,000), airlines are forcing frequent-flyers to pay double points (50,000) for almost all flights.
American Airlines started its successful program in secret in 1981 with 150,000 of its best customers. They didn't want to advertise and the plan's author admitted "we didn't want the great unwashed to be a part of it." They deliberately cobbled together a complicated new class system to pay off their favored customers.
This ingenious loyalty scheme succeeded beyond the airline's wildest dreams. AAdvantage now boasts 50 million members and the total membership of all airlines approaches 180 million members. American, Delta, and United will be staging an orgy of self-congratulation this summer to celebrate this 25th anniversary with massive mileage sweepstakes and much fanfare.
Today more miles are earned from non-flight activity than from flying. American sells more than one billion dollars worth of miles to credit cards and other partners.
In this new class system, VIP flyers are rewarded with special favors and treatment including: free flights, expensive vacations, upgrades to First and Business Class, distinctive 'select' check-in lines, priority seating on sold-out flights, early boarding, special seats, and other goodies that the rest of us can only dream about.
It starts when they want to book a flight. There are secret phone numbers for "Gold" and "Platinum" and "Infinite Elite" members. They are blessed. The rest of us have to deal with constant busy signals, impersonal computer voices telling us to punch an endless series of different buttons, one after another, only to be left on infinite hold or, worse, looped back to where we started.
Elite members, on the other hand, get their calls answered right away by human beings. For the blessed, flights are never sold out. These upper castes always get their reservations booked, even if more seats are sold than exist on the plane. Somebody else can get bumped. They never get squeezed into a middle seat. American, for example, saves 10-20 aisle seats per flight for its premium flyers and, on many flights, upgrades them to First Class for a nominal fee or for free.
Continental and other airlines send upgrades to all their frequent flyers and many airlines block off adjoining seats so that the elite are not forced to rub shoulders with the masses.
At any gate or check-in line, frequent flyers wave around their platinum, gold or premier cards that distinguish them from the hoi polloi. If flights are cancelled or delayed, as is happening more and more, the airline gods -- sophisticated mainframe computers -- identify the "chosen people" according to carefully calibrated mileage totals. Road warriors always get first crack on the next available flight. Everyone else has to wait.
The admitted goal is to build loyalty among customers in a business where the products are almost indistinguishable. The hidden agenda is to personally pay off the business traveler into spending the boss's money with one airline rather than with another. According to Randy Peterson about a million trips are taken each year just to add miles to one's account.
If the purchasing agent of a firm were to accept a free vacation in return for selecting a certain vendor for a large purchase, he would go to jail for commercial bribery.
But ethical niceties don't apply when 180 million people are on the take. More than 20 million frequent-flyer tickets were issued last year. We have become a nation of frequent-flyer junkies. Nearly fifty percent of households participate in one or more of these loyalty programs. With billions of dollars at stake, no one wants to give up even one frequent-flier mile -- used to be worth about two cents per mile, but declining quickly. People choose their breakfast cereal based on what miles they can earn. There is no underestimating the power of human greed.
Even frequent-flyers themselves recognize ethical dilemmas. Frequent Flyer Magazine polled readers and 35 percent of the respondents saw the programs as unethical. Another third said they would gladly trade points for better service and cuts in airfare.
The programs are ingeniously designed to prevent companies from claiming these payoffs from employees. The airlines zealously hide frequent-flier records from the very corporations that pay for the tickets. But some companies, including Abbott Laboratories, Chrysler, General Motors, Kmart, Wendy's, and Nordstrom, have tried to get employees to turn over awards to be used for future company travel.
In an ironic twist, for many years employees of the Federal government were required to turn over their awards earned on business travel to the agency that paid for the travel, but Senators and Congressmen specifically passed a law exempting them from this regulation. In 2002 the rule was changed to allow all government employees to keep their miles.
What is wrong with these most successful programs? Plenty.
For starters, a kickback is built into the price of each and every ticket. Everyone pays more, from 10-25 percent. But while that once-a-year vacation traveler never earns enough points to get a free trip and thus loses the benefit, the elite flyers always end up winning. Most points are never redeemed and are wasted.
Second, frequent-flier programs cost companies $7 billion per year in fraud and unnecessary travel. Corporate travel managers are driven crazy when their negotiated lower fares are ignored by business travelers who refuse to go along because they won't earn the right type of frequent-flier miles. Employees are often more loyal to their frequent-flier program than to their employer.
The airline loyalty programs persuade travelers to make "irrational" higher priced decisions. One survey of frequent-fliers revealed that 24 percent admitted taking unnecessary trips to get extra miles. Estimates of waste caused by abuses come to 8 percent of annual travel expenses.
Third, these programs cost the U.S. Treasury about a billion dollars per year in unpaid taxes from the wealthiest people in our country. The Internal Revenue Service has been considering regulations to treat frequent-flier benefits as taxable income. But so far, they have not had the guts, or political clout, to levy such a widespread entitlement. Such a tax is only fair, since most middle class Americans pay taxes on all other dividends and bonuses, while an affluent elite flies for free.