25 Years of the Frequent Frustration Club

May 1, 2006 — -- Amassing miles as a frequent flier.

It sure seemed like a good idea at the time, especially from the point of view of American Airlines, which is widely credited with thinking up the whole idea. By creating what appeared to be an exclusive club (complete with nifty plastic membership cards), the airline could build customer loyalty and let its best, most loyal customers earn free flights and upgrades provided they flew enough miles on American.

The year was 1981, and big airlines like American were in the first frightening phases of airline deregulation, with new airline operations popping up everywhere (such as Air Florida and People's Express). The frequent flier idea (dubbed AAdvantage by American's ad agency at the time) was seen as a possible way to reward the best customers for not going over to the new competition, and in many ways the program has been a boon for fliers. Indeed, on this 25th anniversary, we're hearing much hoopla praising frequent flier programs as boons for the airlines as well.

The truth, however, is much darker.

For American Airlines, the cost of a frequent flier program seemed fairly minimal at first. Other than the added administrative, printing and mailing expenses for the monthly statements eventually sent to each member, little more seemed required than the expense of training reservationists to handle the anticipated redemption requests that would eventually start coming in (the early awards were mainly discounts on coach or free first class tickets). In addition, it was believed, frequent flier companion upgrades (get your first-class ticket free, buy a coach ticket for your wife or girlfriend and upgrade it to first) would result in significant additional ticket sales. There was also the assumption that since frequent fliers would, on average, be busy people, they might never get around to redeeming a certain percentage of their miles, and, in fact, this has proved true. A majority of program miles are never redeemed.

When American launched its AAdvantage program, United Airlines was less than a few steps behind with its Mileage Plus, and the race was on as all the carriers formed their own. By 1991, the airlines were trapped. Every carrier had thousands of customers who flew weekly and racked up huge mileage figures, spending huge sums of money on tickets in the process. Such fliers (those inducted into the airline's "elite" levels) accounted for a much greater percentage of profits than their physical numbers would indicate, so no airline could afford to irritate them by canceling a program they had all come to love. Yet even these upper-level frequent fliers also had accounts with everyone else, so the promise of great customer loyalty had largely (though not completely) evaporated. There was, in fact, some loyalty created, but the entitlements handed the customer in exchange for that loyalty has been daunting.

The word "entitlement" is important here, because even though the airlines tried hard to present their free travel schemes as awards and gifts, the programs instantly (and legally) became contractual rebates and part of the promised performance an airline provided as part of the customer's ticket purchase. In other words, you didn't depend on the airline's generosity to get a free trip or upgrade, you depended on spending hard cash for regular flights and then, with enough miles in the account, you depended on the airlines fulfilling their promise and handing over the free tickets they had obligated themselves to provide in exchange. But as the millions of unused miles grew into billions as frequent flier members exploded (United alone now has 34 million members in Mileage Plus), the result has been a massive backlog liability for free travel, a backlog so massive that most major airlines could fly their regular schedule for the better part of a year with nothing but frequent fliers aboard and still not exhaust the backlog of redeemable miles.

The industry, in other words, created a monster, and that monster demanded to be fed.

By the early '90s, two huge worries filled the heads of those charged with keeping the various airlines solvent. One, how could they add even more attractive benefits to their frequent flier programs to stay ahead of the competition and thus buy greater loyalty (the very thing the program was supposed to do in the first place before everyone had one)? And two, how could they keep all those people from using their miles to displace paying passengers, thus costing real dollars?

It was the latter worry that led to the dishonorable trend we see so often today -- promise them anything but feign surprise when no seats are available.

During the heyday '90s when even the dullest of airline managements seemed able to make a profit, the huge and rapidly growing liability for free flights was treated in the same way that Congress treated the Social Security crisis: Procrastinate it into the next decade, and let the next generation grapple with the consequences. By this time, the same department within each airline that uses algorithms to price its product (an ultimately unprofitable practice called yield management) had also been given control over allotment of the frequent flier award seats. The bottom line was that each carrier rapidly learned how to magically render available seats unavailable when there was a possibility of filling them with revenue passengers. Never mind about the free and easy promises made to everyone who signed up at the beginning of the programs. The solution had become a clandestine search for ways to avoid fulfilling the promises the airlines had made, while appearing in public and in advertising to be cheerfully attracting new members with the very same promise of easily obtainable free flights. While lawsuits filed by furious frequent flier members unable to redeem their miles have now become frequent (and are widely viewed internally as part of the cost of doing business), the overall airline attitude has remained the same: Survival depends on resisting the loss of ticket revenue to frequent flier seats that could be sold, thus survival depends on making mileage redemption as difficult as possible. (Take a look at a recent discussion of this on Webflier at http://www.webflier.com/travel/travel_information/legal_issues.php.)

There were other ideas as well for how to deal with this monster American had foisted on everyone, and perhaps the most clever and cynical was the plan offered by Continental and others in which seats magically became available if you agreed to squander twice the number of miles. A 25,000-mile coach roundtrip award, for instance, could be had for any flight not already sold out if you paid 50,000 miles. Since the airlines always try to claim the right to change their program redemption rules to suit themselves, they've largely been allowed to get by with such methods, even though it amounts to retroactively modifying the terms of a contract without the agreement of the other party.

One of the most upsetting aspects of the entire war between those who would redeem and those who must provide a free seat is the attitude the airline industry nurtured among its employees that free flights traded for frequent flier miles were an award, as if such an exchange was a gracious discretionary show of spontaneous generosity, rather than the fulfillment of a contract. In fact, from their earliest inception, each frequent flier program has become part of the business transaction. A customers is enticed to bend his or her patronage to a particular airline in return for that airline providing certain well-defined discounts in the form of redeemable miles. In other words, it is never a gift, it's an obligation, even if it's one that threatens the delicate condition of the majority of the industry.

So today we have a confusing dichotomy. The airline industry appears to be congratulating itself on a great idea it says has worked wonderfully (and indeed all of us carrying a dozen or more frequent flier accounts -- including me -- can now attempt to use them on many different airlines through arrangements like the Star Alliance and others). But behind the false front of sweetness and light lurks a dark repository of billions and billions of unredeemed miles no airline executive really wants to talk about, or allow to be cashed in, and that liability continues to fuel a tawdry history of restricting the numbers of seats available for rewards while publicly denying there has ever been anything wrong.