Beyond Free Flights: Airlines Look to Alternative Awards

Never before have so many frequent flyer program members been able to earn so many miles for so many everyday activities.

Sign up for a cell phone plan. Purchase a house. Get an insurance quote. Buy jeans. Enjoy a burger and a beer at the local tavern. If it’s a paid transaction, chances are there’s a way to earn miles for it.

All indications show the programs’ partner rosters will continue expanding. That’s because the sale of frequent flyer miles to these partners is an enormous and highly profitable source of revenue for the airlines.

But even as earning opportunities have exploded, opportunities to use those extra miles have remained essentially unchanged. The airlines’ ability to honor requests for free tickets hasn’t kept pace with program members’ ability to earn them. That disconnect has given rise to consumers’ well-publicized frustration over their inability to readily redeem their miles.

Customer complaints have put pressure on the airlines to offer more awards. But because the carriers are reluctant to forego the revenue and give away more of their own seats, profit-starved airlines have been forced to look beyond free tickets, adding such items as hotel stays and consumer electronics to their award catalogs.

Following is a summary of the current state of non-flight awards, followed by some thoughts about their likely evolution going forward.

American Airlines

In March 2005, American launched redeemAAmiles, a new AAdvantage feature that allows members to redeem their miles online for hotel stays, points in several leading hotel programs, and Diners Club Rewards points.

AAdvantage members may exchange their miles for points in the Hilton HHonors program, points or free stays with Intercontinental’s Priority Club program, and free stays at Marriott hotels. Free nights are available for as few as 12,500 miles (a night at a Holiday Inn Express) and as many as 37,550 miles (a night at an upscale Intercontinental hotel).

Another option is to exchange 10,000 AAdvantage miles for 10,000 Diners Club points, which in turn can be used for awards in the Diners Club Rewards program or exchanged for miles or points in other airline and hotel programs.

Unfortunately, American charges a $25 fee for each redeemAAmiles transaction.

Separately, AAdvantage members may also redeem their miles to wholly or partially pay for hotel packages offered through the airline’s tour subsidiary, AAVacations.com.

Continental

Continental’s OnePass Online Auction is one of the first among recent attempts to reduce the demand for free flights by offering alternative awards. Continental’s approach is to put items such as concert tickets and merchandise up for auction and let OnePass members bid their miles for them.

It’s an interesting feature, but members will find their choices quite limited. At the end of February, only 12 items were available for purchase. And the majority were concert tickets, including some to such limited-interest events as a performance of the Orchestra of St. Luke’s.

Continental also allows OnePass members to use their miles in conjunction with cash to purchase a range of products, from luggage to electronics to cookware, through the Miles for Merchandise feature. As an example, frequent flyers can purchase a Movado Museum watch on the Miles for Merchandise website for $622 plus 100 miles. But an Internet search for the same watch found it for sale at other online retailers at prices as low as $570, with no mileage add-on. So while Miles for Merchandise has a good selection, it carries a “Buyer Beware” rating as better deals may be available elsewhere.

Delta

The latest development in the non-flight award arena is Delta’s Medallion Marketplace. Beginning in March, top-tier elite members of Delta’s SkyMiles program can redeem their miles for more than 300 travel and non-travel awards, including electronics, home and garden items, outdoor equipment, and hotel stays.

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At press time, redemption rates for the various awards had not been announced, so I can’t evaluate the value proposition yet.

The other question that arises in connection with Medallion Marketplace concerns its very limited availability. Asked whether it might be expanded to include lower elite tiers and even non-elite members, SkyMiles chief Jeff Robertson affirmed that he sees the offering as a test and would be open to extending non-travel awards to other segments of the SkyMiles membership, depending on performance.

Frontier

Denver-based discounter Frontier Airlines last summer threw its hat into the alternative awards ring with the introduction of the More Store. The airline’s elite members can now redeem their miles for a range of products and services, either by purchasing them outright or bidding for them through an online auction like Continental’s.

Frontier is a relatively small carrier, with a relatively tiny program. Still, their having gone down this road reinforces the notion that alternative awards are an important theme of current loyalty marketing.

United

United has taken the idea of non-flight awards the furthest, offering Mileage Plus members multiple alternative redemption options.

Like Continental and Frontier, United allows program members to bid their miles for what might be called “lifestyle awards.” Currently only six items are up for auction, ranging from a one-day Porsche rental to a hosted wine-tasting party.

Like Delta, United developed a special catalog of alternative awards exclusively for elite program members. These elite Mileage Plus members may redeem miles for hotel stays at Marriott or Radisson, and for car rentals at Alamo, Avis, Hertz, or National. Rental car awards begin at 10,000 miles for a two-day weekend rental. Free hotel nights range from 15,000 miles at Radisson locations in North America to 30,000 miles for overseas stays at Marriott or Radisson properties.

Unlike Delta’s Medallion Marketplace, which is available only to highest-level elites, United offers the special awards to all its elite members. And unlike the American offering, there’s no transaction fee over and above the miles.

United also permits Mileage Plus members to cash in miles for cruises through United Cruises, for dining certificates (1,000 miles for a $25 Restaurant.com certificate), and for Red Carpet Lounge memberships.

The bottom line on awards

Does all the activity in this area mean frequent travelers can look forward to a new era in mileage awards—one in which a significant proportion of frequent flyer miles are redeemed for alternative awards, relieving the demand for free tickets and ultimately making award seats more accessible? Unfortunately not.

Kurt Stache, president of American’s AAdvantage program, identified two fundamental constraints to the proliferation of non-flight awards.

First, there’s the financial reality. Whereas a seat that would have remained empty costs an airline next to nothing when given away as an award, a hotel stay or Apple iPod must be purchased and therefore represents a real out-of-pocket expense. In other words, non-flight awards are cost-prohibitive, especially to highly cost-conscious airlines.

But even if the cost hurdle could be overcome, Stache pointed out that member demand for free tickets would always far outstrip demand for alternative awards. Twenty-five years of marketing history have demonstrated conclusively that the lure of a free trip easily trumps the power of other incentives, be they rebates, VIP services, or glitzy merchandise.

Certainly having award alternatives is preferable to being locked into a single-option program. But for most frequent travelers, non-travel awards just won’t fly.