The Department of Transportation is investigating the airline loyalty programs associated with the four largest carriers — American, United, Delta and Southwest. The focus of the investigation is on the fairness, transparency, predictability and competitiveness of the airlines’ loyalty programs. Should program members be concerned that the investigation could change their benefits, possibly for the worse, or happy that any changes mandated by the DOT would enhance their benefits even more?
Before addressing this question, we must first look at what airline loyalty programs once were and what they have become.
Airline loyalty programs had a rather modest beginning more than 40 years ago. They were labeled as frequent flyer programs: Travelers were rewarded for flying on an airline. The hope was that such benefits would create loyalty to an airline, giving flyers a reason to continue to choose an airline to meet their travel needs. The benefit of elite status, which offered numerous perks such as complimentary first-class upgrades and, in some cases, access to airport lounges, gave travelers a reason to focus on a single carrier.
Airlines eventually realized, after many years, that a person who flew on deeply discounted tickets with many flight segments could accrue high-level elite frequent flyer benefits more quickly than a business traveler who paid high ticket prices on the most direct routes. This epiphany led to the transformation of frequent flyer programs into revenue-based loyalty programs. Airlines now reward loyalty by how much flyers pay for their tickets and offer perks that are aligned with money spent, not just flying. They created opportunities to earn loyalty points for making purchases with an “affinity” credit card by shopping at certain retailers or even dining out.
The most valuable asset
Regarding the DOT investigation, the agency has opened an inquiry as to whether these programs treat travelers fairly and equitably. Given that airlines control the terms and conditions of their programs, loyalty points can be devalued in a flash, with loyalty members having no recourse. Few, if any travelers, ever read the terms and conditions document, which can run more than 5,000 words. So the DOT likely will uncover that loyalty programs score low in regards to fairness.
Loyalty programs are designed to reward those who spend the most money, whether it be via purchasing airplane tickets, buying goods and services, or any other activity with a company that has bought loyalty points to distribute to their customers.
Airlines guard their loyalty programs for a very simple reason. These programs are the most valuable asset that they own, with billions of dollars of revenue generated annually.
In 2020, when airlines were bleeding cash and needed an infusion of capital, they used their loyalty programs as collateral to secure loans. For example, the United Airlines loyalty program at that time was valued at more than $22 billion, with the American and Delta programs similarly valued. Without such assets available, investors may have been reluctant to lend airlines the money they needed to weather the COVID-19 pandemic’s downturn in air travel.
Today, the four airline loyalty programs are collectively valued at more than $80 billion, much more than the airlines’ total market capitalizations.
Less buying power
What the DOT investigation is doing is poking the bear. It’s stepping on toes and touching issues that consumers value. The airlines earn a significant amount of money from such programs, but the programs also benefit consumers, who receive flying perks and products and services that they would not otherwise accrue, even if such value gets devalued over time.
Of course, to gain such benefits, a consumer must participate. If they choose not to do so, they effectively leave money on the table, which the airlines are happy to accept.
What the airline loyalty programs have created is a currency in the form of loyalty points. (Even in divorce proceedings, loyalty points are an asset that must be distributed among the parties.) Yet over time, the airlines have the power to devalue such currency. In fact, as a currency, accounts should earn interest rather than having inflation, as dictated by the airlines, reduce their buying power.
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What the DOT is asking for is reasonable but unachievable. The airlines have large liabilities in their loyalty programs that they are motivated to reduce. Much like debt, inflation reduces its value. The same holds true with loyalty program liabilities and how airlines use inflation to reduce their liability by adjusting their terms and conditions and how they convert points into products.
This means that anything that the airlines agree to will mostly be window dressing and, eventually, will be circumvented with new rules and limitations.
Until a settlement is reached, people will happily continue to accrue airline loyalty points, and airlines will stealthily continue to find ways to reduce their loyalty point liabilities.
Sheldon H. Jacobson is a professor of computer science at the University of Illinois Urbana-Champaign. ©2024 Chicago Tribune. Distributed by Tribune Content Agency.
