Today I transferred some of my frequent flyer miles from American Airlines for the first time. I don’t fly that often, but I have an American Airlines credit card that earns miles every time I use it. Plus when I flew to Savannah in October, the American flight attendants were trying to get you to use a particular type of American Airlines credit card — Aviator Mastercard — so if you signed up for the card on the flight and then used the card, you received 60,000 free frequent flyer miles which is great until you try to transfer them to someone else. My sister Julie needed 16,000 more miles for a flight she was booking, so I went online to transfer them from my account to hers. Easy right!?! It seems logical that if you are just moving miles from one place to another, there should be no charge. However, after I completed the number of miles I wanted to transfer on one screen, a screen asking me how I wanted to pay appeared. Pay? Pay?? It’s a simple transfer. Why should I pay? After reading all the FAQS, I determined that yes, you have to pay to make a simple transfer. American Airlines was very proud to tell me that there was no processing fee, but the charge was $240!!! I couldn’t believe it. Seems like mega corporations always find a way to stick it to the consumer. Anyway, most of the time I appreciate my frequent flyer miles. I use my credit card for everything — including the monthly contribution to my church — so miles accumulate quickly. I usually earn enough miles to take a couple of domestic trips a year. Let’s learn more about frequent flyer miles.
According to Wikipedia, a frequent-flyer program or FFP is a loyalty program offered by an airline.
Many airlines have frequent-flyer programs designed to encourage airline customers enrolled in the program to accumulate points — also called miles, kilometers or segments — which may then be redeemed for air travel or other rewards. Points earned under FFPs may be based on the class of fare, distance flown on that airline or its partners or the amount paid. There are other ways to earn points. For example, in recent years, more points have been earned by using co-branded credit and debit cards than by air travel. Another way to earn points is spending money at associated retail outlets, car hire companies, hotels or other associated businesses. Points can be redeemed for air travel, other goods or services or for increased benefits, such as travel class upgrades, airport lounge access, fast track access or priority bookings.
Frequent-flyer programs can be seen as a certain type of virtual currency, one with unidirectional flow of money to purchase points, but no exchange back into money.
History
Although United Airlines had tracked customers far back as the 1950s, the first modern frequent-flyer program was created in 1972 by Western Direct Marketing for United. It gave plaques and promotional materials to members. In 1979, Texas International Airlines created the first frequent-flyer program that used mileage tracking to give “reward”' to its passengers, while in 1980 Western Airlines created its Travel Bank, which ultimately became part of Delta Air Lines' program upon their merger in 1987. American Airlines' AAdvantage program launched in 1981 as a modification of a never-realized concept from 1979 that would have given special fares to frequent customers. It was quickly followed later that year by programs from United Airlines (Mileage Plus), Delta (Delta Air Lines Frequent Flyer Program, which later changed to SkyMiles), Continental Airlines (OnePass), Air Canada (Altitude) and in 1982 British Airways (Executive Club).
Frequent-flyer programs have grown since. In 2005, 163 million people were enrolled in frequent flyer programs from over 130 airlines. By then, 14 trillion frequent-flyer points had been accumulated by people worldwide, for a value of $700 billion. When United Airlines filed for bankruptcy in 2002, its frequent flyer program was its only money-making business. Tom Stuker is the world's most frequent flier having logged over 21 million miles with United.
Accrual
Flying
Most larger airlines around the world have frequent flyer programs; each has a program name, along with policies and restrictions regarding joining, accumulating and redeeming points.
The primary method of obtaining points in a frequent-flyer program until recent years was to fly with the associated airline. Paying expenses using an airline-sponsored credit card — even those charged to an employer — can rack up frequent flyer points. Most systems reward travelers with a specific number of points based on the distance traveled — such as 1 point per mile flown — although systems vary. Many discount airlines, rather than awarding points per mile, award points for flight segments in lieu of distance or the amount paid. For example, a number of airlines in Europe offer a fixed number of points for domestic or intra-European flights regardless of the distance — but varied according to class of travel. With the introduction of airline alliances and code-share flights, frequent-flyer programs are often extended to allow benefits to be used across partner airlines.
Bonus points
Most, if not all, programs award bonus earnings to premium-cabin passengers and to their elite-status members based on tier status; earning an extra 25%-100% of miles flown are common bonuses. While these bonus points may not count toward ascension to — or retention of — elite status, they count toward the member's total balance for normal redemption purposes.
Minimum credit guarantee
Some programs award a full 500 points or a similar minimum credit guarantee for nonstop flights spanning less than 500 miles. An airline's program can either award this guarantee to all members regardless of elite status, or it can reserve this privilege only for its elite members.
Credit card purchases
Many credit card companies partner with airlines to offer a co-branded credit card or the ability to transfer points in their loyalty program to an airline's program. Large sign-up bonuses and other incentives are common. Accruing points via credit cards bonuses and spending allows infrequent travelers to benefit from the frequent flyer program.
With a non-affiliated travel rewards credit card, a cardmember can buy a positive-space ticket considered "revenue" class, which can earn the passenger points with the airline flown.
Other purchases
Frequent-flyer programs may offer points through other means, such as purchasing food or merchandise sold by an affiliated company. In 1999 engineer David Phillips — who works as the associate vice president of energy and sustainability at University of California Office of the President — calculated while grocery shopping that the value of a mail-in promotion for frequent flyer points exceeded the sale price of the pudding on which it was offered.
Healthy Choice was running a promotion offering 500 miles for each pack of 10 Healthy Choice bar codes or UPC mailed in as proof of purchase. Valuing each mile at 2 cents, Phillips calculated that the return per UPC of $1 was worth a significant part of the price of a frozen meal which were selling for $2, but while shopping he also found Healthy Choice soup cans for only 90 cents.
He later discovered the same promotion also included individual pudding packages at 25 cents each, while shopping at a nearby Grocery Outlet. He subsequently visited ten Grocery Outlet stores in the Sacramento area, buying every case of pudding available — totaling 12,150 individual servings of pudding — for $3,140. He also had the Grocery Outlet manager order additional cases. In order to divert attention, he claimed he was stocking up for Y2K. Clerks started calling him "Pudding Guy."
The promotion included an early-bird bonus if the packages were mailed during May 1999; the mileage earned would double from 500 miles to 1,000 miles for every 10 UPCs submitted. Phillips, unable to remove all the UPCs himself in such a short time, recruited members of a local Salvation Army branch to cut the UPC codes off the cardboard wrapped around the pudding containers; in exchange, Phillips donated the individual puddings. This donation allowed him to receive $815 in tax write-offs further increasing his return on investment.
Phillips submitted proof of mailing the certificates and Healthy Choice Foods awarded him 1,253,000 frequent flyer miles. He would apply some of the miles to his United, Delta and Northwest frequent flyer accounts, and the majority — over 1 million miles — to his AAdvantage account, in the process earning him lifetime Gold status.
It is also speculated that neither ConAgra — the owners of the Healthy Choice brand — nor the airlines were seriously disadvantaged by the outcome, due to the small price paid by ConAgra to the airlines and the resultant publicity gained.
Since 2000, Phillips continues to take advantage of frequent flyer promotions and is earning points five times faster than he is spending them, now having reached lifetime Platinum status on his AAdvantage account.
Elite status
Occasionally, airlines may offer double elite-qualifying mile or EQM promotions, which speeds up a member's status ascension or retention by reducing flight mileage requirements.
Some carriers also require frequent flyers to spend a set amount of money on tickets before they are eligible for elite status. This is in addition to the miles-flown requirements that are already in place. Delta switched to revenue-based elite status requirements in January 2014, United in March 2015, with American Airlines the last of the three U.S. legacy carriers to switch on August 1, 2016. This has led to some frequent flyers devaluing those programs over others, as the changing model can be less rewarding to frequent flyers. To date no UK frequent flyer scheme has sought to operate in such a fashion, with both Virgin Atlantic and British Airways opting for the traditional method of granting tier points based on the miles flown and class of travel.
Redemption
After accumulating a certain number of points, members then use these points to obtain airline tickets. However, points only pay for the base fare, with the member still responsible for the payment of mandatory taxes and fees.
Flights
Although a controversial topic and a source of frustration among frequent flyers, award flights are still the primary commodity purchased by members using points. While alliances and partnerships have facilitated the redemption process for some programs, award seat availability is still subject to blackout dates and seasonal fluctuations, as airlines utilize statistics, yield management and capacity-control formulas to determine the number of seats to allocate for award booking.
This lack of availability has since been alleviated by non-airline rewards programs, such as certain credit cards and other corporate programs — Expedia Rewards, Starwood Preferred Guest — by allowing a member to use points to search for and purchase revenue tickets as if using cash.
Products and services
Depending on an airline's program, members can also redeem points toward cabin upgrades, hotel stays, car rentals, and purchase of various retail items. On American Airlines' AAdvantage program for example, it is possible to pay for a complete vacation package solely with points.
Value of points
Travelers frequently debate how much accumulated points are worth, something which is highly variable based on how they are redeemed. An estimate is approximately 1-2 cents per point based on discount — rather than full fare — economy class travel costs.
The author of an economics PhD thesis published in 2014 at Monash University in Melbourne, Australia, examined the cash-equivalent value — purchasing power — of loyalty points, the impact of FFPs on consumer behavior and surplus and the taxation issues surrounding FFPs. Unlike most previous research on FFPs, this research used data from an actual FFP. The cash-equivalent value of a loyalty point in 2010 was estimated to range between AU$0.0066 and AU$0.0084. This range however excluded the value of status benefits to the status member. The loyalty point gained by a FFP member per flight equated to an in-kind discount on an average airfare of 3.3% for lowest status members, 3.96% for medium status members and 4.63% for premium status members. A detailed survey undertaken in 2010 among a representative sample of over 3,300 members of that specific FFP showed that a large proportion of leisure and business travelers admitted a willingness to pay a higher fare — a FFP premium — to fly with the sponsoring airline because of their FFP membership. The average FFP premium was estimated to be around 8% and was statistically different between leisure and business travelers. The cash-equivalent value of a loyalty point as encapsulated in the FFP premium was estimated to range between AU$0.0108 and AU$0.0153, depending on the FFP status of a member.
The airlines themselves value points in their financial statements at less than one one-thousandth of a cent per point. That loyalty points undoubtedly have an estimable monetary value is also reflected in the fact that some programs allow for the donation of frequent-flyer points to certain charities.
Accounting and regulatory issues
The frequent flyer points accumulated through business trips are a desirable employee benefit, which can encourage unnecessary travel within organizations to accumulate them and lead to superfluous personal trips.
Business travelers typically accrue the valuable points in their own names, rather than the names of the companies that paid for the travel. This has raised concerns that the company is providing a tax-free benefit — point-based awards — to employees, or that employees have misappropriated value that belongs to the company or even that the rewards acts as a kind of bribe to encourage travelers to choose one particular airline or travel unnecessarily. Most companies consider the miles earned by their employees to be a valuable personal perk that in part compensates for the daily grind of frequent business travel, though some governmental organizations have attempted to prevent their employees from accumulating miles on official travel.
Although it has long been recognized that FFP rewards earned on employer-funded business flights should be subject to either income or fringe-benefit taxation, this is currently not taking place in the vast majority of countries — a notable exception, however, being Germany. One of the main arguments against the implementation of taxation is the lack of a monetary tax base. It can, however, be argued that since the cash-equivalent value of loyalty currency can be reasonably estimated with public data, this value is appropriate as a tax base. Hurdles preventing the taxation of FFP rewards are generally less related to the technical issue of valuation, but have more to do with legal constraints e.g., "who owns the points" and often a lack of political will e.g., "who would lose out due to taxation." Australian and German public servants are not permitted to redeem points accrued from official travel for private purposes. The Australian example occurred in the 1990s when Qantas and the now-defunct Ansett Australia competed for the Australian federal government travel contract; this was put forward as a system requirement for the competing companies in order to win the contract.
In the U.S., the General Services Administration has regulated "frequent traveler benefits earned [by federal employees] in connection with official travel, [which] may be used only for official travel, see 41 C.F.R. § 301-1.6(f)." Frequent flyer program contracts are not generally regulated.
Competition
These programs have been studied as anti-competitive practices: in 1989, M. Tretheway found competition prevented an airline to unilaterally end its program, but the regulatory body could end all; in 1999, S. Storm observed loyalty programs were forbidden in Denmark until 1992, instated then because Danish airlines were disadvantaged, as governments can forbid these programs at industry players’ requests and the World Trade Organization could ban all programs. They also have been studied for their ethics implications.
In the U.S. in 1989, Braniff wished for an end to unfair competition from frequent-flyer programs. Precedent exists for ending frequent-flyer programs. In 2002, Norway banned domestic loyalty programs to promote airline competition. In 2005, the Modernization Minister asked the competition authority to consider extending the Norwegian ban on frequent flyer miles to include all of Scandinavia. The country lifted the ban in 2013 when the competitive situation changed.
Flight shame
Frequent-flyer programs have been receiving scrutiny because of the prevalence and rapid growth of air travel, in terms of both the frequency that individuals fly and the tendency toward longer distance travel. In 2011, S. Cohen observed both air travel and concern over its climate impacts were growing, balanced by technology and physical resources, self and external regulation and social norms, including stigmatization of excessive air travel. In 2009, Stefan Gössling pointed out the conflict caused by air travel growth in a carbon-constrained world, with a minority of hypermobile individuals responsible for a large share of air travel.
Mileage runs
A "mileage run" is an airline trip designed and taken solely to gain maximum frequent-flyer miles, points or elite status usually at lowest cost. If a traveler has already achieved some sort of elite status, then that traveler will earn bonus award miles or points on top of his or her actual flight miles or points. Depending on the program, that traveler will reach their goal sooner if the miles they accrue are elite qualifying miles. A mileage run may allow a traveler to re-qualify for a beneficial elite level, which requires a minimum number of miles to qualify. Some airlines have changed their frequent flyer rules to award miles based on ticket expense rather than absolute distance traveled, which may remove the incentive for mileage runs.
Status challenge
A status challenge can be an often-unpublicized offer to accrue a certain amount of flying within a certain very short timeframe — usually 90 days — to earn elite status. The higher status may or may not be given immediately if it can be seen that qualifying travel —particularly travel that is non-refundable — has already been booked before the challenge was offered, otherwise higher status will be conferred once the challenge is officially completed. In some instances, a fee for a challenge may also be charged. Status challenges are employed by other types of establishments, as well, such as casinos and hotels.
Status match
Some airlines will match status with that of a competitor upon application, usually to airlines outside of any alliance that the airline used to match status with belongs to. This enables travelers to switch their travel more easily from one carrier to another e.g., when the traveler's employer switches carriers due to a new travel contract's being signed. It does so by maintaining equivalent elite benefits with the new airline, without the need for time to pass while the traveler earns the benefits; this also has the side effect of retaining elite benefits with the previous airline, in order that one does not have to be given up for the other to allow for a more gradual transition. Status matches are employed by other types of establishments, as well, such as casinos, cruise lines, hotels and rental car companies.
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