Frequent flyer programs…from the beginning

In This Installment: Are Frequent flyer Miles for Me? The Path to the Prize: Earning Miles Eye on the Prize: Redeem Miles for Travel, etc. Mileage Expiration The Fine Print

American Airlines introduced the first of what we now know as frequent flyer programs in May 1981, with 283,000 members. At the time, no one could have imagined how pervasive the programs would become.

In the 20-plus years since the launch of AAdvantage, airline programs have become the cornerstone of travel industry marketing. AAdvantage alone now boasts more than 45 million members. And it is estimated that more than 70 million Americans participate in one or more airline programs.

The basic loyalty program model?earn points for purchases, redeem points for rewards?has been adopted by businesses ranging from single-outlet coffee houses to Fortune 500 mega-corporations.

Are Frequent flyer Miles for Me?

While the lure of a free ticket is sufficient incentive for most to participate in a program, there are skeptics. Among the most common concerns, and responses to them, are the following:

I don’t travel very much, so I’ll never earn enough miles for a free trip.

You can earn miles for many non-travel-related activities, including credit card charges, dining, phone usage, shopping, financial services (investments, insurance, mortgages), and more.

For example, if you were to participate in iDine?a program that awards 10 miles for every dollar spent at participating restaurants and use a mileage-earning credit card?you could reasonably expect to earn the 25,000 miles required for a free domestic award ticket in one year, as follows:

Total Number of Miles	Mile-Earning Rate
13,000 miles	250 miles per week x 52 weeks through iDine
12,000 miles	1,000 miles per month in credit card charges
25,000 miles	Total miles earned in 12 months

Without flying a single mile, you’d earn a free ticket.

It’s not worth the time and effort required to pursue frequent flyer perks.

It is a mistake to think of frequent flyer miles as an extra. The cost of frequent flyer miles is included in every ticket issued. So if you don’t earn miles, and eventually redeem them for an award, you are effectively overpaying for you ticket.

I travel a lot. And usually in first class. Why bother with frequent flyer miles when the last thing I want is to be “rewarded” with yet another flight?

For bona fide frequent travelers, the payoff isn’t necessarily more travel, it’s better travel: upgrades, priority boarding, expedited baggage-handling, enhanced customer service.

The Path to the Prize: Earning Miles

While the focus of many frequent flyer program participants is understandably on the goal?the free trip to Mazatlan or Paris they hope to earn?it takes many days to earn the many miles required for an award ticket. Luckily, those many miles can be earned in many ways.

In the beginning, frequent flyers earned miles for only one activity: flying. Over time, the airlines recognized that a trip comprised several components and began awarding miles for hotel stays and car rentals. When members responded favorably, airlines offered miles for credit card charges. Realizing that even the most extensive single-airline route network wasn’t all-inclusive, program operators invited other airlines to join their programs, with the goal of offering miles for travel anywhere in the world. And more recently, the programs have moved beyond travel altogether, making miles available for everything from supermarket purchases to investing.

Here’s a summary of mileage-earning options offered by most programs:

Mileage Programs Are Profit Centers for Airlines Underlying these partner relationships is the buying and selling of miles. When a program partner rewards a customer with miles, that partner is purchasing those miles from the airline, which hosts the program at a negotiated rate (2¢ or less, depending on volume). Airlines now sell so many miles to partners that the resulting revenue in some cases exceeds the costs of operating their frequent flyer programs. In other words, the programs not only help retain customers, they generate a profit in the process.

Partner Airlines

With very few exceptions (e.g. Southwest), frequent flyer programs aspire to be global in scope, offering their members opportunities to earn and redeem miles most anywhere in the world. So, for example, American Airlines includes British Airways and Japan Airlines in AAdvantage as “program partners,” giving program members mileage opportunities throughout Europe, the Middle East, Africa and Asia… opportunities not available on American’s own flight network.

American currently has 21 such partner airlines in AAdvantage; United has 24 in Mileage Plus; and Delta has 11 in SkyMiles. Even a smaller airline like Alaska Airlines, the country’s 10th largest, has nine partners in its Mileage Plan program.

Hotel Stays

Although the major hotel chains operate their own frequent-traveler programs (Hilton HHonors, Starwood Preferred Guest, Marriott Rewards, Priority Club Worldwide, etc.), they also participate in airline programs, a tacit admission that consumers place a higher value on airline miles than hotel points.

Miles are usually earned at the rate of 500 per qualifying stay. In some cases, especially for budget-priced hotels, mileage is earned according to the member’s dollar expenditure.

Car Rentals

Most major rental-car companies offer frequent flyer miles in most airline programs. The industry-standard earning rate is 50 miles for every day a car is rented.

Credit Card Charges

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Every major airline program has one or more co-branded credit cards associated with it which reward cardholders with miles-for-charges. Examples: the AAdvantage Mastercard from Citibank, the OnePass Mastercard from Chase, the Delta SkyMiles Credit Cards from American Express, United’s Mileage Plus Visa from First USA, and so on.

As with non-mileage cards, the airline-affiliated cards are normally offered in a choice of Classic, Gold and Platinum versions, with annual fees and interest rates varying accordingly. Cardholders generally earn one airline mile for every $1 charged. And there’s usually an annual cap on the number of miles that can be earned (sometimes waived for program members who have attained elite status).

Also worth considering: cards offered by hotel programs, and cards from American Express and Diners Club which allow users to earn “generic miles” which can be converted to miles in participating airline or hotel programs.

In just the last few years, several airlines have introduced mileage-earning debit cards. Because debit cards are less profitable for the issuing banks, the mileage payout is less?typically one mile for every $2

Look for a separate chapter in future on airline cards.

Shopping

To capitalize on consumers’ infatuation with miles, and the need for online retailers to gain a competitive advantage for themselves, most airline programs offer their members miles for purchases at participating Internet merchants.

<a name=”Redeem Miles”Eye on the Prize: Redeem Miles for Travel, etc.

While opportunities to earn miles have multiplied steadily, redemption options have been a mixed bag, waxing and waning over the years. Old timers long for the days when airline miles could be used readily for free hotel rooms and car rentals, making it possible to construct an entire trip using “free” components. And they’re right: with few exceptions, travel awards today consist almost exclusively of airline flights.

On the other hand, there has been an expansion of award-redemption opportunities outside the area of travel proper.

Airline Awards

The great majority of miles are redeemed for airline tickets. And the most-requested award ticket is the capacity-controlled roundtrip coach-class ticket within the continental U.S., offered in most programs for 25,000 miles.

A typical (but somewhat simplified) award chart would be as follows:

	Saver Awards (Capacity Controlled)		Anytime Awards (Unrestricted)
Between U.S. and…	First/Business Class	Coach Class	First/Business Class	Coach Class
Continental U.S.	40K miles	25K miles	80K miles	40K miles
Hawaii	60K miles	35K miles	120K miles	70K miles
Europe	90K miles	60K miles	180K miles	100K miles
Asia (Japan)	90Kmiles	65K miles	180K miles	120K miles

In addition to free tickets, all programs offer upgrades-for-miles, a popular award among business travelers who tend to be more interested in increasing the comfort quotient during required trips than in taking more trips.

Miles for Merchandise

For those who are not keen to use their miles for yet another plane trip, a relatively new option is redeeming for merchandise.

Several programs now allow members to use miles for assorted hard goods (consumer electronics, luggage, jewelry, etc.), and the independent website MilePoint.com permits frequent flyers to use miles to partially pay for merchandise at a wide range of online retailers, including Amazon.com, Lands’ End, and Sharper Image.

Mileage Exchange

Another new feature of the mileage landscape is Points.com, an online service, which makes it possible to convert miles from one program into miles in another. There’s a steep price exacted for this convenience: when converting American AAdvantage miles into Midwest Express Frequent Flyer miles, for example, your original 10,000 miles are reduced to 1,024 miles in the conversion process.

It is also possible to convert miles from one program to another through the Reward Exchange feature of Hilton’s HHonors program. Again, there’s substantial “conversion loss” in doing so.

In general, consumers get better value for their miles when redeeming them for a free flight than for hard goods. That’s for one simple reason: the cost to an airline of giving away a seat on its own flight is much lower, relative to its perceived value, than the cost of giving away a Sony Walkman. We’ll cover this in more detail in an upcoming installment.

Mileage Expiration

Miles, it should be noted, do expire.

However, the rule governing mileage expiration in most programs reads something like this: All miles will expire 36 months after the latest earning or redemption transaction. In other words, any account activity automatically extends the life of all miles in that account for an additional three years.

So while miles do expire in theory, in practice it’s a simple matter to keep them indefinitely.

The Fine Print

Frequent flyer programs are notoriously rule-laden. Reading through any program’s “Terms & Conditions” is a mind-numbing experience, likely to confuse all but the most lawyerly among us. A few key issues to bear in mind:

• The airlines have the right to modify or terminate their programs at any time, for any reason. At least that’s what all programs’ member guides claim. It’s not clear whether such a sweeping claim would be upheld in court, if it were disputed.
• Miles are generally awarded only for “qualifying” rates and fares, and may not be awarded on all routes or, in the case of hotels, at all properties. If there’s any doubt in your mind as to whether a transaction will qualify for miles, contact the program’s customer service center and ask for confirmation.
• Frequent flyer program members are expressly prohibited from buying or selling miles, certificates or award tickets. While it’s difficult to enforce, the consequences of breaking this rule should give would-be scofflaws pause: sellers will have their accounts frozen; buyers will have their ticket confiscated.

Choosing a program that will work best for you?given your individual goals, travel patterns, etc.?will be the subject of the next installment.