Why Airlines Continuously Alter Frequent Flyer Program Rules, Explained
Frustrated travelers wonder why airlines keep changing frequent flyer program rules, making it harder to obtain status Discover the multibillion-dollar business of miles, designing optimal rewards, who pays for them, and why it's a boom time for airlines but not for passengers
The opinions expressed in this commentary belong exclusively to the writer. CNN is featuring the content of The Conversation, a partnership between journalists and academics that offers news analysis and commentary. The material is created entirely by The Conversation. With the US holiday travel season in full swing, many individuals are finding that their frequent flyer perks are not stretching as far as they once did.
In September 2023, Delta Air Lines overhauled its frequent flyer program, implementing a tiered system for travel privileges based on reward points earned. However, just one month later, the company partially reversed course and made it easier to earn status. American Airlines also made significant changes to its loyalty scheme in 2022 and minor adjustments in spring 2023. Additionally, British Airways recently announced modifications to the way it awards points for travel. As business school professors who study rewards programs, we understand that many people perceive flying as a miserable experience, and having status can sometimes improve flights. Therefore, frequent flyers are justified in questioning why it appears to be increasingly difficult to achieve such status.
KinectAir
Uber-style private airplane trips are here - and flights cost from $111
Why miles are a multibillion-dollar business
A crucial concept to grasp is that airlines do not make much profit, if any, from ticket sales due to the competitive and capital-intensive nature of the industry. Instead, their profits come from bag fees, ticket change fees, and most importantly, frequent flyer programs.
For many airlines, there are two ways to earn status. One is by frequent flying, which entails spending a lot of time in crowded airports. The other method is by spending a significant amount of money using a rewards credit card.
Designing the optimal rewards program
Airlines benefit greatly from frequent flyer programs, especially when paired with rewards credit cards. For instance, Delta's most recent annual report revealed that the company generated $5.7 billion in revenue from the sale of credit card miles. This significant amount contributed to Delta's overall profitability, which stood at $3.6 billion. It's clear that the frequent flyer program has a substantial impact on the company's financial performance.
Various businesses, not limited to airlines, provide rewards programs. A well-crafted loyalty program should be cost-effective for the company, offer valuable benefits to customers, and deter them from switching to a competitor.
Frequent flyer programs exemplify this concept: Offering perks such as early boarding and lounge access at minimal cost to airlines, while highly desired by customers. Additionally, the pursuit of status and free flights incentivizes customers to remain loyal to a single airline.
The exclusivity of status programs is a key factor in their appeal for many customers. However, airlines are faced with the challenge of determining the appropriate criteria for achieving status. Setting the bar too low results in a lack of value for customers, as everyone on the plane can access benefits such as priority boarding and airport lounges. On the other hand, setting the bar too high leads to empty lounges and dissatisfied customers. Finding the right balance is difficult, especially as the number of flyers fluctuates based on economic conditions. During times of economic prosperity, travel demand increases, prompting airlines to tighten frequent flyer rules, while during economic downturns, rules are relaxed as people travel less.
During the peak of the Covid-19 pandemic, air travel significantly decreased, prompting airlines to offer more accessible opportunities to achieve or maintain status. However, as the economy improves and air travel returns to pre-pandemic levels, airlines are now implementing more stringent requirements.
Several airlines are transitioning from a frequent flyer status system based on miles flown to one based on money spent. This adjustment reflects the fundamental principle of these programs: The rewards provided to customers should correspond to the value the company receives from them.
Video Ad Feedback
Airlines are cutting back on these frequent flyer perks
02:15
- Source:
CNN
Who pays for all those rewards, anyway?
Loyalty programs prove to be lucrative for airlines and their affiliated credit card companies. However, for the cardholders, the benefits are not as transparent. Despite the promise of "free" rewards, these cards ultimately do not provide anything for free.
Rewards cards often come with an annual fee, ranging from $100 for a simple airlines reward card to $600 for a card that provides lounge access. Additionally, credit card companies make significant profits by charging interest to customers who do not pay off their balance each month.
In addition to annual fees and interest charges, credit card companies also charge merchants approximately 2.5% for each transaction made with a rewards card, known as the interchange fee. The more generous the card, the higher the fee merchants have to pay. In response, sellers may raise prices to compensate for the increased cost associated with consumers using reward cards.
What implications do all these fees have for the average traveler? Those who consistently clear their reward card balances every month essentially recoup the additional amount they pay in fees and charges. Conversely, individuals who carry over their balances or opt for debit cards or cash end up paying more to cover the "free" travel enjoyed by reward cardholders. Consequently, less affluent and financially inexperienced individuals end up subsidizing the air travel of wealthier individuals.
In this long-exposure photo, travelers wait in a security line at Denver International Airport on Tuesday, November 21, in Denver.
Thomas Peipert/AP
This holiday season is expected to be the busiest on record at airports, AAA says
A boom time for airlines, less so for passengers
Since air travel was deregulated in the 1970s, airlines have experienced highs and lows. Currently, it's a prosperous time for airlines but a difficult one for frequent flyers seeking status. It's not necessary for airlines to offer as many rewards as they did in the past, with planes filled with paying customers. However, this may change in the future, leading to a boon for frequent flyers seeking status as planes have empty capacity.
In the meantime, what should you do? Our general advice is, if you plan to use a rewards card, opt for one that offers cash back rather than airline miles. Cash is more versatile than miles, which an airline can devalue at any time. Additionally, even the most elite status doesn't provide much assistance when dealing with flight delays, which are becoming increasingly common.
Jay L. Zagorsky is Clinical Associate Professor of Markets, Public Policy and Law, at Boston University and H. Sami Karaca is Professor of Business Analytics at Boston University.
