Airline Frequent Flyer Miles, 30 Years Later


Airline marketers realize that they can say "No" only so often before their best customers disengage from the programs, pinching off an especially lucrative revenue source. Airline accountants, on the other hand, endorse the David Spade approach, pointing out that the programs are under no legal obligation to issue a single restricted award ticket.

Caught in the middle are consumers, who face frustration and uncertainty when it comes time to cash in their miles, and have been left to wonder whether they wouldn't simply be better off flying on the airline with the cheapest fare.

4. Miles as Money

Miles are miles, and money is money. But the line between them gets blurrier every day as loyalty currencies come ever-closer to mimicking if not replacing cash.

Miles and points can be redeemed for gift cards that have a cash value. They can, under some circumstances, be exchanged for other program currencies, as yen can be converted into dollars. They can be bought and sold. They can be combined with cash to purchase flights and hotel nights. And they are routinely bequeathed to others in the wills of frequent travelers.

Further blurring the line, in February took another step toward bridging the gap between loyalty currencies and traditional currencies by allowing members of the American Advantage, US Airways Dividend Miles, and Aeroplan programs to redeem their miles for PayPal credits, which in turn can be transferred to a linked bank account as cash.

5. The Business of Miles

In the beginning, airlines viewed mileage programs as representing a certain cost and an uncertain return.

That's still true of smaller, partner-poor programs. But the larger schemes have become profit centers unto themselves, and indeed would be highly profitable undertakings if they were spun off as independent enterprises, as was Aeroplan, formerly the loyalty scheme of Air Canada and since 2005 a freestanding business.

How does an airline make money from giving away free tickets? It sells billions and billions and billions of miles to the partner companies that award miles as an incentive for doing business with them. For the largest programs, the sale of miles is a $1 billion a year revenue-generator. And on the cost side of the ledger, those award tickets represent only a modest expense since they're mostly "distressed inventory."

6. Miles for Everything

Since the airlines' ability to generate revenue from their programs depends on the size of their partner rosters, the guiding principle has become "Bigger is better." American, for instance, boasts more than 1,000 AAdvantage-affiliated companies. Which means more than 1,000 companies regularly purchase American miles.

That's been a boon to mileage-collectors, who can now earn miles for everything from home mortgages to Lasik surgery to buying Gap jeans online.

There's a limit to the number of miles airlines can issue, however, before the house of cards comes tumbling down. There are only so many unsold seats available to give away as low-cost awards. Once the airlines are forced to displace revenue passengers to accommodate award travelers, the economics of the programs turn ugly.

With trillions of unredeemed miles in circulation, and the airlines' flights currently running more than 80 percent full, year round, something will have to give.

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