|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
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
"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
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
"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
"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
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
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."