Frequent flyer programs began as a way for airlines to build loyalty and fill empty seats. They’ve since morphed into a complex financial ecosystem that’s drawn the ire of even the most savvy consumers and the scrutiny of the US Department of Transportation.
Bloomberg’s global aviation editor Benedikt Kammel joins David Gura to talk about points, miles, qualifying trips — and how we got here in the first place.
Read more: The Airline Rewards Game Is Getting Tougher to Win
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Remind us what frequent flyer programs used to be like? Is I remember it? They used to be a lot simpler.
You're absolutely right. I mean, frequent fly programs have been around for quite a while, and the original idea was, let's somehow create a loyalty bond between the traveler and the airline.
That's Benedict Camel and he oversees Bloomberg's coverage of aviation worldwide.
So the idea was quite simple. You took a number of flights from A to B, let's say, from Berlin to London, or from East coast to West coast in the US, and if you did five of those flights, the airline would reward you for your loyalty and give you, let's say one free flight. That's a slightly over simplistic way of putting it, but that's sort of how it worked. That was the original contract. You could fly to Paris free or to London.
In a TV commercial from nineteen eighty eight, American Airlines emphasize the simplicity of its frequent flyer program.
Then see how fast you can fly free.
Benny and several members of his team have taken a deep dive into how airline incentive programs have changed. And this may surprise you, but he personally is not a rewards program nerd.
I have colleagues on my team who really try and game the system. They look at this and say, Okay, if I take this flight from London to Aberdeen, don't even get off the other end and just fly right back. I'm gonna and this number of points will get me into this test status. They've really got it figured out. I'm not that guy, not because I don't care, but really it's just too complicated for me.
Too complicated. Today you can accrue points by flying, but increasingly the rewards program economy is driven by credit card spending, so the way you can earn points has changed, and the way you can spend them has gotten much more confusing, so confusing that it's nowt at the attention of consumer advocacy groups and the US government.
Buddhajic, the Secretary of Transport, actually launched an investigation in September into frequent flyup programs, and his starting point was Hi, on, guys, how far is it these days?
Buddha Judge talked to us about this on the Big Take a few weeks later.
There's real value in these rewards balances. I think a lot of us think of our points and miles as part of our savings. But unlike savings in cash in a bank account, the value of your points in miles could be changed arbitrarily by the airline that controls them.
I'm David Gerat and this is the big Take from Bloomberg News today. On the show, a Bloomberg investigation into how frequent flyer programs have evolved into a complex financial system that's left customers confused and the government skeptical. Can we start with the way that we earn rewards? The first big change that the airlines made what changes did they put in place in terms of how we earn miles.
So the traditional system of earning miles was always you earn miles for distance flown or for times flown. These days, miles are far more connected to the notion of spending, so spending on your credit card that is sort of the underlying payment system to your miles as it were, And most people these days actually earn their points through spending and through consumption rather than through flying. That's one of the big changes that's happened.
So even though they're called frequent flyer programs, these rewards are mostly being given to consumers based on their use of credit cards.
Absolutely right, Yeah, So you go to Starbucks, you earn points. You buy something on Amazon, you earn points. You buy something at your local supermarket, you earn points. So sort of the breadth of points has become far greater, and the number of points in circulation as a result has also become greater, but spending those points has become more complicated.
At the same time, talk a bit more about that. The way that the opportunities for us to redeem these points has changed.
So it used to be fairly straightforward. There were lists, you knew how many flights you had to take to earn a number of points that you could then redeem on a flight. These days, we've gone from the static to the dynamic model, which means that you can use your points on certain routes on certain days. And that's one of the areas where a lot of consumers feel they're getting short changed on their points. They're not really getting the sort of we give you something, I you we buy a ticket and we get something in return. Ieu free flight. At some point that sort of link has been broken in the minds of a lot of people.
What was wrong with the system so much so that airlines decided they had to reinvent things.
So the idea was, or the problem was that airlines noticed a lot of people were actually then booking their flights, they weren't really paying for them because we're using their rewards, and they felt, there's a way we can do this better. We can somehow apply an algorithm and make sure that we're awarding the flights for people who aren't paying and who are using the rewards in a way that is more efficient to us.
Airlines made this change, Billy says, because there are fewer free seats on planes than there used to be a couple decades ago.
The load fact is so sort of a number of people on a cabin was often sixty percent, so you know, it was fairly easy to then say, Okay, we've got a bunch of empty seats, let's fill them up with people who are using their points rather than paying cash for their tickets. These days, most of the time you have load factors of eighty ninety percent, So the wiggle room that you have to get on these people who aren't actually paying for their flights is much smaller.
In other words, the more people who buy tickets with cash, the viewer seats are available for frequent flyers who want to use their points. By controlling how customers can use those points, Earlines can make sure rewards customers don't get in the way of paying customers.
That's why they've gone from this very static model, should we say, to the more dynamic one, because it lets some sort of breathe people in and out of the cabin.
What is it meant for regular consumers, flyers like you and me?
It got a lot more complicated. That's essentially what happened. So previously you would even have something like a chart that you could look at so you knew, Okay, I've earned let's say twenty five thousand miles with my flights that I've taken. I look in my chart and I'll say, oh, okay, twenty five thousand miles. That gives me a free flight from Berlin to Paris. Gonna book it. Yeah, Alines did away with those charts so they said, okay, this is no longer useful for you guys as flyers. We are moving to dynamic pricing and therefore became much harder for the average consumer to know when you could use your points for a ticket, how you could fly. And that's something that a lot of people have lamented that the previously fed, straightforward, easy system has become so complicated that in some ways you almost need like a you know, an advanced maths degree to be able to figure out where you can use the points, when you could use them, and in essence, what they're worth.
Who wins here and who loses with the shifts that you were talking about and how frequent flyer programs work. Is this a pretty cut and dry thing or is it more complicated?
Well, like everything, it's complicated. But the airlines are definitely net winners in this plan because the loyalty point programs, the frequent flyer programs have become such a big part of their business these day, some of these loyalty programs are bigger than the market value of the airlines behind them. Yeah, so these are huge, multi billion dollar programs for these airlines are very important.
Say that again, I'm just astopped just second, I can't believe that the market cap is how huge.
Well, it's the value of the point programs. Yeah, so the revenue generated on them in the you know, five, six, seven, moving up to like ten billion dollars. Some of these programs, the market value of a lot of airlines is inferior to that. So these programs are massive, and they're hugely profitable. We're talking about profit margins in some cases of fifty percent. So these are big businesses that the airlines want to protect.
Coming up after the break, the US government is undertaking a big investigation into frequent flyer programs, and so did Bloomberg. What Benny and his team found when they looked at the real value of airline points. As Bloomberg's Benedict Cammell's been saying, airline rewards programs changed from being focused on rewarding customers for how many miles they've traveled to rewarding them for using their credit cards. That shift has attracted the attention of the US Department of Transportation, and it's been something Benny and his team here at Bloomberg have been looking into. You and some other college of ours did a pretty extensive analysis of the way the big frequent flyer programs work. First of all, what did you set out to do. What did you want to find out?
Well, the starting point really was an investigation by the Department of Transport Pete Buddhagij, the Secretary of Transport. Airlines are putting something out there that is pretty opaque, you know, and most people today really struggle to get a sense of what's the underlying value of that product. And that's something that the government took quite seriously and continues to take quite seriously, like, okay, our consumers getting a fair shake? Here are they getting a good deal? And a lot of people feel that's no longer the case. For us, that was the starting point.
Walk us through the mechanics of the analysis of how it worked and what you discovered.
So we discovered, looking at about six thousand flights, that the value of points is roughly one point one cent per mile flown, So in some ways that's pretty close to what you get on a normal cash back card these days, and that for us, this was an interesting discovery because you realize, you know, it's not worth nothing, but it's not necessarily a greater value that would make you want to stick with one particular airline. So those are some of the things that we discovered. A the opaqueness of the system, the dynamic pricing, just how it works and how complex it is be the points and the value of each point per mile isn't actually that much better a deal. In some ways, it's worse a deal than what you would get on a cash back program. And see if you're new to the program, then you know you better be patient.
As you mentioned, these changes are attracting scrutiny from regulators and consumer advocates. What specifically are they looking into?
So the investigation is ongoing and we as part of the series, had an interview with Pete Budhajij, the Secretary of Transport, and they are essentially looking at how fair a deal is this.
Here's a Secretary Buddha judge on this show back in September explaining the Department of transportations concerns.
We want a better sense of how airlines manage and maintain the value of these points and miles when there are situations where they are being devalued, what's behind that and making sure that there's a level of transparency and fairness, because again you've got folks who decide which airline to take sometimes pay more for a ticket in order to have it be on their preferred airline. Because of the mileage program, some consumers are not just choosing a certain credit card, but choosing a credit card with a higher annual fee and a higher interest rate, which is a choice that could affect them to the tune of hundreds or thousands of dollars just based on these points and miles if they're if a consumer is putting that much stock into points and miles, we want to make sure that they're getting what they were promised.
In the meantime, the Consumer Financial Protection Bureau published a memo in mid December saying that some credit card companies might be breaking the law if they devalue airline miles after customers earn them. But its belly points out the future of the DOT investigation is uncertain.
You know. The big question now, obviously, is does it still have a life after January When we have a new administration coming in with a new mind frame that might continue. They might think, well, this is something that interests people across a political spectrum. But maybe they'll come in and say, well, hang on, maybe we should be thinking more about how much of an advantage is this to airlines and to passengers and maybe we'll give a fresh look at this. That's something that we don't know the answer to at this point, but that'll be very interesting to keep an eye on.
You've anticipated my next question, and Pep put to Judge's successor maybe Sean Duffy, the former congressman, who, if I recall, has been doing a good deal of lobbying in part for the airline industry.
Yes, exactly right. And you know President elect Donald Trump at one point ran an airline, so you know it's short lived, but at the same time, he has a thing or two for the airline industry. He's very pro business, pro derais. So anything that withsolved sort of being at a disadvantage to Alan's to growth, that's something that they might take a hard look at and reconsideric. Thank you very much, Thank you.
This is the Big Take from Bloomberg News. I'm David Gura. This episode was produced by Alex tie. It was edited by Aaron Edwards and Naomi Shaven, who's our senior producer. It was fact checked by Adriana Tapia and mixed and sound designed by Alex Sagura. Our senior editor is Elizabeth Ponso. Our executive producer is Nicole Beemster bor Sage Bauman is Bloomberg's head of podcasts. If you liked this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back next week.