Are U.S. Frequent Flyer Reward Programs A Systemic Fraud?

The member of Congress who figures out a way to actually prevent telemarketers from bothering people-- if the Do Not Call list ever functioned, that's now a distant memory-- should get a bonus... or a Senate seat or a job as Vice President or something. I guess it's not as important as figuring out how to un-rig the system to lessen income inequality and institute Medicare For All but, let's face it, conservatives will never allow any of that so let's find something everyone can agree on-- like the death penalty for telemarketers. Or more accountable frequent flyer programs. Actually one member of Congress, did take some time to try to sort out the frequent flyer morass.

Florida Congressman Alan Grayson, a Member of the House Foreign Affairs Committee, is the most well-traveled Member of Congress. He serves on the Subcommittee on the Middle East and North Africa and on the Subcommittee on the Western Hemisphere. He's racked up something like ten million frequent flyer miles. So it shouldn't surprise anyone that he's paid attention to some of the shenanigans perpetrated by the airlines who systematically mislead consumers-- in 2011 when he started working on it, Delta was the worst-- and misrepresent their offerings to the public. That year Grayson introduced legislation to regulate the programs and keep the airlines from cheating the flying public. A crafty spokesperson for the airline industry trade organization claims that "Carriers are completely transparent regarding loyalty programs both on their websites and in direct communication with their customers." Do you know any travelers who would agree?

In the 33 years since American Airlines (AAL) launched the mileage craze with its AAdvantage program, frequent-flyer miles have become a critical revenue source for U.S. carriers. The airlines sell billions of dollars worth of miles each year to banks, retailers, and other marketers that use them to entice customers. Today, more miles are earned from credit cards and other loyalty programs than from actual flying. Millions of people who rarely fly are keenly attuned to boosting their mileage balances.

The top frustration of frequent-flyer program members is needing more miles than they expected for an award, followed by sudden rule changes, according to a survey of 1,600 miles collectors earlier this year by MileCards.com, a credit card comparison site.

...Grayson maintains that airline competition kept the programs relatively unchanged for mileage collectors throughout the 1980s and ’90s, with most award travel seats offered at starting rates of 25,000 miles. In recent years, especially as airlines have gone bankrupt and restructured, the carriers’ push for profitability has made the programs far less generous to consumers than they once were.

Irate members of Delta Air Lines’ (DAL) SkyMiles program began calling those miles “SkyPesos” several years ago, owing to difficult redemptions and their perceived lack of value. Delta has announced several changes for 2015, including offering more seats at lower mileage levels, to try to make SkyMiles more competitive with the programs at United Airlines (UAL) and American.

Next year, Delta and United will begin considering annual spending in their rewards calculation, not just the distances that travelers cover, so customers who spend more money will get more miles. Awards for most international business- and first-class seats on partners of the Big Three U.S. carriers have also soared within the past year. Those changes and others in recent years have caused many miles collectors to rethink the value of trying to amass miles for free airline travel.

Regardless of how much consumer irritation airline miles generate, the Transportation Department probably lacks a “leverage point” to delve too deeply into new regulations for the programs, says Tim Winship, editor of FrequentFlier.com. But he says the department will be able to push airlines to offer more advance notice of program changes that are negative for consumers.

Grayson says many of the recent program changes have been made with little or no warning, which often requires travelers to spend more miles for an award trip. American made such a change on June 1. “Announcing a program change today that takes effect today sticks in the craw of most consumers, and rightfully so,” Winship says. Eric Fraser, a miles collector and Phoenix attorney who specializes in federal regulatory issues, says the department is likely to be most interested in whether airlines properly notify program members of pending changes. “This is an area where the DOT sniffing around could just have an immediate benefit, even if they don’t start to write rules,” Fraser says.

Ideally, Grayson says, the airlines should be forced to give at least one year’s notice of major program changes and to offer at least one seat on every flight available at the lowest mileage level. “If you’re going to have a program like this at all, it’s got to be an honest program,” he says. “Every human being comes with a built-in cheat detector. They know when they’re being cheated; they know when they’re being deceived.”

This month the Wall Street Journal's annual best and worst frequent-flyer rewards programs for 2016 was released. They assert that "there's good news for frequent fliers: Airlines are slowly, cautiously increasing availability of hard-to-find frequent-flier award tickets."

Really? I wanted to fly to Paris. A few months ago I called the American Airlines Gold Desk and said I will fly any day, any time from any Southern California airport to any airport remotely near Paris. "Sorry, nothing is available," the operator replied. I stopped flying on American and switched my main credit card from Visa to American Express so I could accrue miles on a different airline. But even the business-friendly Journal admits there's bad news in the skies-- especially for Americans. "Much of the improvement is happening abroad and the largest frequent-flier program, from American Airlines, appears to have gotten stingier with loyalty benefits, according to an annual survey of award availability. The price of awards is going up, too.

[C]ustomers often find it difficult to use their miles at peak season and get frustrated when airlines force them into more expensive redemption levels. Delta Air Lines doesn’t even publish an award chart anymore-- prices fluctuate for awards much as ticket prices do. And even though the survey gauges availability on each airline’s busiest routes, where award seats should be easiest to find, nearly one of four queries showed no saver-level seats available.

Southwest Airlines and Air Berlin had seats available on every request. It was the fifth year Southwest has topped the survey at 100% availability. Value airlines like Southwest and JetBlue , which had seats available on 93% of booking queries, do well in the survey because they let customers earn points based on fare rather than distance. Then they let customers pay for any seat with either cash or points. The payback works out well for customers. Last year, 12% of Southwest’s passenger traffic was award travel.

American was among the stingiest of the 25 airlines surveyed, with saver-level seats available on only 56% of booking queries made. That was down from 67% in the 2015 survey, and put American ahead of only South America’s Avianca and LAN in terms of availability.

With skimpy redemption availability and award prices rising, American’s AAdvantage program is falling behind rivals in terms of value to customers, Mr. Sorensen says. “Their loyalty program needs attention,” he says.

American says AAdvantage program is keeping pace with competitors and last year the number of MileSAAver awards redeemed increased. “We made no changes to our approach to MileSAAver awards,” says Bridget Blaise-Shamai, American’s managing director of customer loyalty.

[Denial is a bad thing in the corporate world and I need to make sure I don't own any American Airline stock in my portfolio.]

At American, as at many airlines, award availability is largely controlled by the pricing department and what kind of demand for seats the airline estimates, so high demand can reduce the number of free seats available, she says.

United and Delta ended up with similar award availability in the lower half of the pack, even after a big jump this year at Delta.

Delta says it is trying to improve availability after several years near the bottom of the survey. Over the past year it had more than 10 sales on award tickets, discounting the number of miles needed, and marketed them aggressively to members via email and the airline’s website, says Karen Zachary, SkyMiles managing director. The airline has also opened up availability of saver-level seats earlier. Previously Delta held back more seats at lower redemption levels to see how fast seats were selling.

“We’re really committed to investing in the program and making it more rewarding,” she says.

Delta recently started letting members buy drinks with miles in airport clubs. A bottle of Dom Pérignon champagne costs 25,000. Beers and spirits range from 600 to 800 miles.

The number of miles redeemed at Delta in 2015 was up 5.4%, according to the company’s 10-K annual report, and the number of awards rose 6.4%. This indicates customers were taking advantage of some of the lower-priced awards Delta made available. Ms. Zachary says the pace is quickening: In the first quarter this year, Delta issued a record number of award tickets at 2.2 million, and the average redemption price was down 10%.

The survey made 7,000 booking queries in March asking for two seats for 280 trips at each airline on dates spread from June through October. The 10 busiest long routes and the 10 busiest medium-length routes for each airline were chosen, based on total seats offered for sale over a 12-month period.

As any traveler looking for tickets to Paris in July knows, availability is seasonal. Overall reward availability hit nearly 85% for trips in October, but only 63% in July. There has been some improvement since 2010, when the survey began. That year July availability was only 53%.

Mr. Sorensen says the survey found improved availability for long trips of 2,500 miles or more, often the prizes travelers most want for their miles. This year’s survey found saver-level seats on 61% of queries for long trips, up significantly from 54.5% last year and a much skimpier 43.9% in 2010. He notes that the prices of those saver awards have also increased over the past seven years, especially in the last couple of years at U.S. airlines.

At American, the number of miles issued in 2015 rose nearly 10%, according to the company’s 10-K filing. American had 853.6 billion award miles outstanding at Dec. 31, up 5.5% from a year earlier. The number of award redemptions rose, but accounted for only 6.5% of total passenger miles. By comparison, award travel, which includes upgrades, totaled 7.2% of passenger miles at Delta in 2015, 7.5% of passenger miles at United and 12% at Southwest, according to their annual 10-K filings. (A passenger mile is one customer flown one mile—the basic measure of traffic in the airline industry.)

The survey also looked at reward payback-- how much value you get for flying trips on an airline, exclusive of credit-card rewards and other ways to earn miles. For example, a $249 base fare trip on United would earn 1,247 miles in United’s MileagePlus program, which now gives nonelite program members 5 miles for every dollar spent. That means it would take 20 trips to earn a 25,000 saver-level award, so the payback for the traveler is 5%.

Elite status results in greater payback, since you earn more miles. Using miles for more expensive tickets, such as upgrades to first-class and international business-class tickets, can increase the payback. But at the basic level, Mr. Sorensen found JetBlue’s program had the richest payback at 7.9%, while American had the lowest at 3.1%. (This was based on the change American will make later this year to revenue-based mileage accrual instead of distance flown, following Delta and United.)