Airline Frequent Flyer Miles, 30 Years Later

May 25, 2011 — -- I first became aware, painfully, of airline mileage programs in the early 1980s. At the time, I was a junior member of the North American marketing department of a Southeast Asian airline. And despite my employer's poll-verified service superiority and comparable fares, Pan Am was somehow winning more than its fair share of the lucrative business-traveler market. They were eating our eggrolls.

The reason, I soon discovered, was WorldPass, Pan Am's loyalty program. It was doing exactly what it was designed to: give them a tie-breaker edge with repeat travelers.

It was several years before the airline I worked for finally established a relationship with one of the dominant U.S. programs, allowing us to add frequent flyer miles to our selling proposition and level the playing field. But I'd learned first-hand just how powerful loyalty programs could be.

Pan Am eventually succumbed, victim of a competitive marketplace and inept management, and WorldPass members' miles were folded into Delta's SkyMiles program. I spent another decade in the travel business, developing and managing loyalty programs, before launching a website and newsletter devoted to them almost 15 years ago. So I've been in the ring or at a ringside seat for most of the programs' 30-year history.

From that vantage point, following are 10 mileage-related events or trends that I think were, or likely will be, particularly transformative:

1. The Beginning

American Airlines launched AAdvantage, the first airline mileage program, in May 1981, during the scramble for competitive advantage following the industry's deregulation. But it was hardly the first loyalty program -- so-called frequency programs like S&H Green Stamps had already been part of the U.S. marketing scene for decades. (In the 1960s, S&H was issuing more stamps than the U.S. Postal Service. Three times as many.)

What distinguished the airline programs, and made them the most successful marketing programs ever, was a winning combination of the psychological and the financial -- the lure of travel (quintessentially aspirational) and the return-on-investment value of the awards (because they awarded unsold seats, the real cost to the airlines was miniscule).

Today, American claims to have more than 66 million members in its AAdvantage program. In 2010, they cashed in more than 165 million miles for almost 7.2 million awards.

2. Saver Awards

United introduced what have come to be known as saver awards -- restricted award tickets offered for half the number of miles required for unrestricted awards -- in 1988. The restrictions: capacity controls and blackout dates.

Today, saver awards account for the vast majority of all awards issued, and the 25,000-mile saver award for coach travel within the continental U.S. is the base expectation of most consumers who participate in traditional airline loyalty programs.

3. The Elephant in the Room

The disconnect between that expectation, encouraged by decades of airline marketing, and the reality of scarce award availability could be the programs' eventual undoing.

Listen in on the water-cooler conversation between frequent flyers and you're likely to be reminded of the scenario depicted in the snarky TV commercials for Capital One credit cards, featuring David Spade as a supercilious airline supervisor who delights in denying customers' requests for frequent flyer awards.

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, Points.com 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.

7. Credit Card Clutter

It was in 1985 that Diners Club introduced the first credit card linked to an airline loyalty program -- a move destined to have consequences almost as profound as the launch of mileage programs themselves.

Today, there are one or more credit cards affiliated with just about every travel loyalty program, and the number of miles earned for credit card charges is typically exceeded only by miles earned for actually flying.

The credit card companies have absorbed the lessons of loyalty from their experience issuing cards affiliated with the airline programs. All the issuers now have cards linked to their own travel-rewards programs, which compete head-to-head with the cards they issue in conjunction with their airline partners.

The proliferation of choices, and the competition it engenders, in theory amounts to a consumer benefit. In reality, the result is often confusion, as travel-rewards seekers find themselves overwhelmed by their options.

8. Hotel Programs Soar

For much of the three-decade history of travel rewards schemes, hotel frequent-stay programs have played second fiddle to the airline schemes.

But as hotel spend has come to account for an increasingly large portion of total trip expenses, more travelers are looking to the hotels' frequent-stay programs to earn free room nights. And the relative ease of redeeming points for hotel rooms versus airline seats has given hotel points yet another value boost.

While a recent report found that membership in airline programs still far exceeds membership in hotel programs -- 325 million compared to 177 million -- hotel memberships increased 37 percent between 2006 and 2010 whereas airline memberships only increased by 28 percent.

It's too soon to anoint a new winner, but we may be approaching a tipping point, where savvy travelers are more engaged with hotel points than with airline miles.

9. Revenue-Based Programs Gain Ground

America West's FlightFund program disappeared from view with the 2006 merger with US Airways, but its DNA remains in the programs of JetBlue, Virgin America, and Southwest's newly redesigned Rapid Rewards.

In its original incarnation, FlightFund was something other programs were not: a revenue-based program. That means that rather than rewarding customers on the basis of the number of miles they flew -- a poor proxy for the amount they spent on tickets -- FlightFund members were rewarded according to the number of dollars they spent on airfare. In principle, most consumers would admit that such a system was both fair and reasonable. And from an airline's perspective, it guaranteed that rewards were doled out precisely in proportion to a customer's contribution to the company's bottom line.

But there's a downside to such programs as well. The flipside of the predictable relationship between earnings and rewards is the inability of members to game the system and squeeze outsized value from the programs. The sure knowledge that you can reliably earn 1.2 cents in rewards, effectively a rebate, from a program like JetBlue's may be comforting; but many consumers would put up with the headaches of a capacity-hobbled scheme for the chance to get a 10 or 12 percent return on their spending, by, for example, using miles to upgrade on expensive premium-class international flights.

10. Loyalty Is Big

The popularity and pervasiveness of airline programs has given rise to a profusion of loyalty-type marketing programs in other areas of business, many of which go so far as to use miles as their earning-and-burning currency, even though there's nothing remotely distance-related being measured or rewarded.

According to the latest loyalty census conducted by COLLOQUY, a marketing research and consulting company, the number of U.S. loyalty-program memberships more than doubled between 2000 and 2010, from 973 million to 2.09 billion.

Today, COLLOQUY estimates the value of loyalty points issued across all consumer programs at $48 billion, about $622 per household, with the average household enrolled in more than 18 programs and actively participating in 8.4.

Thirty years ago, as American's marketing mavens prepared to take AAdvantage public, they could scarcely have imagined how many consumers would be touched -- directly and indirectly, for better and for worse -- by their brainchild.