THE BLOG
11/22/2016 02:04 pm ET Updated Nov 23, 2017

Why It's Time To Rethink Frequent Flier Programs

As much as I fly, I'd never had "status" in a frequent flier program. That's because I fly on whatever airline has the cheapest fares. But last year, I received a tempting offer from American Airlines: fly a set number of miles, reduced from the normal level, within a given time, and they'd give me "platinum" status. I took the bait and for a while enjoyed what I consider to be the main benefit of loyalty: free upgrades to business or first class. But it looks like I wasn't the only one to get this offer, because soon I noticed that there were 20 or more people on the "free" upgrade lists at the airport and on many flights no one got upgraded at all.

Now I feel like I was suckered in. At least I'm not alone. A recent poll we did on Airfarewatchdog.com tells the story: When asked if airline loyalty still pays, almost 80% of over 1,500 respondents said "no".

What's going on here?

Upgrades are harder to find these days because airlines have slashed first and business class domestic fares, enticing more people to buy them rather than play upgrade roulette (I remember when a one-way business or first class fare on the popular LA to JFK nonstop route cost anywhere from $1500 to $2400; I recently bought a non-refundable one on United for $599).

And airlines are offering cheap last minute "buy ups" to first and business class when you buy an economy airfare (last year I received a last-minute email from Alaska Airlines allowing me to upgrade a one-way $133 economy class fare to first class for $50).

By 2018, Delta, for example, plans to sell 70% of its business and first class seats rather than give them away; in 2011 they sold only 31% and gave away the other 69% to elite fliers. The Atlanta-based airline recently made it harder for program members to upgrade even to premium economy, and plans to sell more of those seats (the goal is 50% by 2018 versus about a third today) rather than giving them away for free.

Not only are free upgrades harder to find, but airlines have increased the number of miles (or points on some airlines) needed to obtain award seats, plus they're awarding fewer miles for flights, and they've added fees and surcharges to what were originally truly free awards.

Originally there was just one award seat redemption level (typically 20,000 or 25,000 miles for a domestic round-trip ticket). Now there are at least two, sometimes more levels, and it's increasingly hard to find seats at the lower ones. If award seats are available at all they're often offered on the least desirable flights, such as connecting flights, or inconvenient schedules and flight times.

Sure, award seats are still available. A 2015 audit by the U.S. D.O.T. of 660 flights on Delta and American found that slightly less than two-thirds had award seats at the lowest award level. That may not sound so bad, but what the study didn't control for was whether the seats were available the 9 a.m. nonstop or the 11 p.m. red-eye with a nearly impossible 36-minute connection in Atlanta, or whether these seats were in economy, business, or first class.  

In August, American announced it would follow United and Delta by awarding as few as 25% of miles flown on "partner" airlines, such as when you buy a discounted fare on British Airways but apply the miles flown to American (it used to be 100%); "status" is harder to earn now that airlines require minimum annual "spends" (before, you could get status simply by flying a required number of miles each year, no matter what the ticket cost); and many airlines add onerous fees and surcharges to Hawaii and international award travel, sometimes as high as $700 per passenger.

Not only are the programs worth less, but their hidden costs are going up and being paid for not just by airline customers but even by those who don't fly at all.

One of their most obvious but insidious aspects is the incentive to pay more for airfares. If American is selling LA to New York for $400 round-trip but United has it for $230, will a flier ask his corporate travel agency to book the American flight, perhaps pleading that the more expensive departure better suits his or her schedule? The temptation is real, and although it's impossible to quantify, it is probably costing consumers and corporate travel budgets more than it should.  

The New Green Stamps

The programs remind me of S&H Green Stamps, which were once awarded by grocery stores and gas stations for everyday purchases. Back in the 1960's when I was a kid, my Aunt Freda would keep me busy licking and pasting these stamps into booklets, which she then traded in for housewares like pots and pans, toasters, and other items. Sometimes a supermarket would be offering double Green Stamps, so she'd shop at there even if its prices were higher.

Like Green Stamps, frequent flier miles and points generate hidden costs. Back when the programs started (Texas International Airlines launched the first in 1979, followed by American two years later), airlines were operating with load factors (the percentage of empty seats flown) of about 58%.  So it cost them little to fill those empty seats with award fliers. Today, most U.S. airlines report load factors of 85% or more, so they're giving away seats that they could otherwise sell at the right price point. Airlines make up the lost sale opportunity one way or another, mainly in higher fares and fees.

"Credit card miles" aren't really free

Even those who don't fly pay for these programs. Credit card issuers pay airlines billions to buy miles, which they award to customers using the cards, resulting in higher credit card fees and interest rates. Stores award miles for purchases made through the airlines' shopping malls; consumers pay for those miles in higher merchandise costs.

By one estimate, reported by Adam Tanner on Forbes.com, it costs a bank about $250 to acquire a new credit card customer, $100 of which goes to buy the bonus miles airlines award for minimum spends within the first three months (typically from 30,000 to 70,000 miles or points), and perhaps as much as $50 per card in commissions to websites that tout the cards. Many consumers get the bonus miles and quickly cancel the cards. Who pays for this? We all do in the form of higher credit card fees and interest rates.

Consider: The U.S. Mint Scam

A particularly egregious mile scam (and I don't think that's too harsh a word): the case of a "deals" website founder who exploited the Presidential $1 Coin Act of 2005, designed to put dollar coins into circulation. In order to facilitate this effort, the U.S. Mint allowed people to buy the coins at face value with their credit cards and shipped the coins for free. So the deal maven bought almost $3 million in coins using his mileage-earning credit card, deposited the coins in his checking account, and paid his credit card bill with them. Thousands of people did the same thing, leaving taxpayers with the bill for shipping and banks with the cost of counting and processing the returned coins. Call me a silly moralist. Guilty as charged.

If you're wondering, three million dollar coins at 8.1 grams per coin comes out to 53,572 lbs. I only have a vague idea of what it cost the Mint (and, of course, taxpayers) but you can still buy these same coins and get miles using your credit card; a bag of 100 coins now costs $117 to cover shipping and credit card fees, so a million coins bought this way would now cost an additional $117,000, which was previously paid by taxpayers: you and me.

As frequent flier programs approach their fourth decade, it's time to rethink them. They were a great idea before the four major U.S. airlines controlled 80% of domestic travel, but today they're a shadow of their former selves, and involve too many hidden costs. Perhaps there are better reasons for being loyal than collecting miles, such as rewarding those airlines providing good service and lower airfares.