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POPULARITY OF FREQUENT-FLYER PROGRAMS
CONTINUALLY CAUSES PROBLEMS FOR AIRLINES
by Bob Brooke

Frequent-flier programs, those high-powered marketing miracles used by most major airlines, have reached an all-time high in popularity. What began as a temporary promotion by American Airlines in May of 1981, has grown by leaps and bounds, causing major headaches for all concerned and lawsuits, too.

"Virtually no one flew on a free ticket 20 years ago," said Randy Petersen, editor and publisher of InsideFlyer, a monthly consumer magazine for frequent-flier members and the nation's Number One expert on frequent-flier programs. "The airlines have created a 'need' for miles–a commodity almost as good as money. All of these programs focus on greed–getting something for free. They're irresistible to most people and have created mile addicts."

Originally, these programs allowed passengers to earn free or discounted tickets based on the number of miles they traveled with a particular airline. Over 12 million–25 percent of all airline passengers–used free tickets last year, which means 7 or 8 out of every 100 passengers are flying free. American Airlines alone gave out more than 2 million free tickets last year alone.

"The biggest change in frequent-flier programs has been the evolution of programs from true customer loyalty programs to marketing programs," said Petersen. "The original programs were small ones designed to reward loyal frequent travelers, thus giving major airlines a tool to complete with smaller discount ones.

"Today, a frequent traveler can earn miles from no less than 100 other sources," he added, "including credit card companies, mattress retailers, moving and phone companies. These programs are strictly driven by marketing, with 40 percent coming from non-flying members, a segment that's growing fast."

To the uninitiated all frequent-flier programs may look alike, but Petersen is quick to point out the differences. While all give free tickets for miles earned, each program is tailored to what its members expect to get out of it. Also, the type of traveler–constant executive, frequent sales, occasional middle-management–makes a difference. All major airlines have some sort of dating system.

"This type of marketing works," said Petersen. "It protects the territorial turfs of the airlines. For example, United opened a shuttle in Southern California, competing directly with Southwest by giving low fares and frequent-flier miles. Why should passengers fly Southwest, when they can get the same fare with miles and eventually get a free ticket."

The popularity of frequent-flier programs cannot be denied. Some, like US Air, sign up 175,000 new members a month, with total membership in excess of 14 million. American began its program in 1981 with 283,000 members and has since grown to be the largest with more than 23 million members worldwide.

"Many things start out one way and become quite another," said Robert L. Crandall, CEO of American Airlines. "Our popular AAdvantage program has evolved. We began AAdvantage as a way to strengthen our relationship with our best customers by offering them both a reward and an incentive to travel on American. AAdvantage is now a very broad-based, multi-industry, customer-recognition program. Earning miles to use as currency for buying airlines tickets, upgrades, and hotel stays is still the bottom line, but there are an ever-increasing number of ways to do so."

Being the first and the biggest has its disadvantages. In 1988, American was hit with a class action lawsuit brought against it by over 4 million of its AAdvantage members. They contended that the airline made retroactive changes to its program which devalued the miles they had already earned, alleging consumer fraud and breach of contract.

In 1988, American limited the number of seats used on each flight for free or discounted tickets. It said passengers could no longer get free seats on heavy travel days such as Christmas or Thanksgiving. Club members said the airline had reduced the value of the miles they had already saved by imposing such restrictions.

Changing the Rules
Basically, the 1978 Deregulation Act stated that states couldn't "enact or enforce any law" that had the effect of regulating airline "rates, routes or services."

The American AAdvantage membership agreement has always indicated that the airline reserved the right to change the program's rules. The central issue in the lawsuit was whether that disclaimer left American free to make changes that in effect devalued the miles that members had already accumulated. Also, American instituted blackout dates when frequent-flier miles couldn't be redeemed for any flights and capacity controls that limited the number of free seats available on particular flights.

American indicated that it needed the flexibility to change the terms for using frequent-flier miles in response to a changing market. The airline argued that it had improved its frequent-flier program over the years, adding new benefits and "enhancements" that had made miles more valuable and that far outweighed the impact of the imposed capacity controls.

"Everyone wanted to fly to Hawaii on Friday night from California and that's what started it all," said Petersen.

In January of this year, the U.S. Supreme Court sent down a decision that said that consumers could sue airlines that cut back benefits for frequent-flier miles they already had saved, but only in state courts and not for consumer fraud. The 6-2 ruling allowed a breach of contract claim to go forward against American Airlines, inventor of the popular frequent-flier plans.

The 1978 Airline Deregulation Act doesn't bar such lawsuits in the state courts, according to Justice Ruth Bader Ginsburg. Also, a remedy confined to a contract's terms simply holds parties to their agreements, in this instance, the business judgements an airline made public about its rates and services.

"We think it's a great victory for consumers," said Gilbert Gordon, the attorney representing over the American AAdvantage Club members. "Determining just how many frequent-flier club members might be involved and the possible damages they incurred would have to be determined through a lengthy discovery process."

"I think the decision by the Supreme Court will have an impact in the future," said Petersen. "I feel the Supreme Court's decision may cause some worries for American, which may hint that it will end its frequent-flier program. These programs have become too big and too important to the airlines, and I don't see them cutting off the hand that feeds them."

All airlines have disclaimers in their frequent-flier program literature stating that they have the right to make changes. These disclaimers allow them to change the rules as long as they give proper notice. Unfortunately, not all have abided by that in the past.

Controls and Blackout Dates
To cope with the ever-growing popularity of their programs, the airlines have instituted capacity controls and blackout dates, two of the most obvious changes in their frequent-flier programs.

"We've expanded our first-class cabins for sale and upgrade on our 757 and Super 80 service," said Bruce Chemel, American's managing director of marketing programs. "To meet the demand, we've also made our trans con business class cabin larger, in effect giving us a lot more seats to upgrade to. We've also given our members more non-airline awards, including hotel nights, car rentals and Admiral's Club memberships."

Several airlines, including American, are imposing new restrictions this year on their frequent flier benefits by requiring more miles to earn a free ticket.

"Those airlines are free to impose such restrictions if they have properly reserved the right to do so," said Gordon. "American has not and a new claim may be filed against it for restrictions it imposed on February 1."

On the other hand, Delta Airlines recently introduced a revised frequent-flier program that will reward travelers with lower redemption levels, transferable awards and the opportunity to extend the validity of mile earned as long as members remain active.

"Before assembling our new Skymiles program, we consulted extensively with some of our most seasoned fliers, asking them to evaluate various frequent flier programs and recommend improvements," said an airline spokesperson. "We are determined not only to remain competitive but to be in the forefront of the ever-changing airline marketplace."

As a result of Delta's survey, the airline found that members objected most to having time constraints placed on the accumulation or use of program miles. Under the new program, miles wouldn't expire as long as the member flies at least once every three years. The airline also created three new premium categories--Medallion, Gold Medallion and Platinum Medallion-- offering members additional bonuses and service benefits.

Expanding the System
One of the most dramatic changes has been in the partner system. Today, all the major airlines are in partnership with as many as 20 other lines, providing free ticket access to a variety of destinations. US Air is particularly proud of its collection of Latin Pass Carriers, 15 airlines serving Latin America and Mexico.

In addition, airlines are now in partnership with non-travel companies. At various times last year, for example, frequent flier members could earn miles for test driving a Mazda car, purchasing language tapes from Berlitz, or subscribing to Business Week.

American now offers AAdvantage Dining, which allows members to earn three miles for each dollar spent, exclusive of taxes and tip, at any of 2,000-plus participating restaurants in the U.S. Among restaurants participating in the program are the Russian Tea Room in New York and K-Paul's Louisiana Kitchen in New Orleans. There are 78 in Philadelphia alone. All a member has to do is present the special AAdvantage Dining card when paying and the restaurant tallies up the miles earned on the bill.

Credit Card Miles
Credit card companies are also getting in on the frequent-flier bonanza. Citibank allows its cardholders to collect a substantial number of miles and free tickets without traveling.

Many of the airlines also have their own credit cards. American leads the pack with its Visa card, which grants one mile for every dollar spent. US Air, while third after American and United, is especially proud of its Visa card with Nation's Bank. Even though the bank doesn't have a branch in Pennsylvania, the state has the highest number of patrons due to US Air's presence, according to Dan Block, director of frequent-flier programs for the airline.

But the newest facet of the frequent-flier diamond is the ability to attract outside companies to use it as an incentive program. American Airlines' new AAdvantage Incentive Miles program (AAim) has really taken off since its launch last fall. The airline has sold frequent-flier miles to more than 200 companies aiming to develop effective promotions and incentive programs.

Companies in the retail, travel and transportation, electronics and computer, and business services industries lead the pack in terms of the number of businesses flocking to American to purchase frequent traveler miles.

"Many companies are hoping to capitalize on the allure of free travel," said Chemel. "Companies that have purchased miles from American are finding that members of the AAdvantage program are likely to be good customers for the goods and services they market."

"We knew that frequent fliers were upscale customers, but we underestimated the allure of miles in changing their buying patterns," said Daniel Flamberg, director of marketing for Dial-A-Mattress, one of AAim's vendors. "Using AAim got us new, high-end business at a very competitive price. Our customers receive 500-1000 miles for the purchase of a mattress."

"Companies are using AAim as a powerful promotional tool to zero in on sales and marketing goals," Chemel said. "Many companies are offering miles not only as a customer promotional incentive, but as an employee sales incentive as well. Sometimes it’s the customers who force companies to design promotional incentive using AAdvantage miles. For example, a radio ad for a Dallas Cadillac dealer recently offered 10,000 miles for buying a car."

Over $200 million is taken in annually from selling miles to partners. "The airlines could almost get out of the business of flying and sell seats to other companies to give away," said Petersen. "The airlines have created an addiction, and now they have to deal with it."

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