At 25, Mileage Programs Are Healthy but Diminished

Twenty-five years ago, on May 1, 1981, American Airlines quietly launched a marketing revolution.

With little fanfare and modest expectations, American unveiled AAdvantage, the first modern mileage program. While there were precedents such as Green Stamps and Western Airlines’ Travel Pass, American’s program was the first such marketing scheme to fully harness the emerging database technology that ultimately made possible today’s robust and sophisticated loyalty programs.

The other factor that had everything to do with the advent of loyalty programs was airline deregulation. Jimmy Carter signed the Airline Deregulation Act into law in 1978, mandating that federal supervision of ticket prices and flight routes be gradually ceded to the forces of the free market. And to literally and symbolically punctuate the end of the regulated era, the Civil Aeronautics Board—the agency charged with the discontinued oversight—was itself scheduled to be disbanded on the last day of 1984.

So frequent flyer programs were born in a period of transition, just one of many measures taken by an industry accustomed to playing by gentleman’s club rules readying itself for the free-for-all to come.

Airline deregulation is still playing itself out today, and so are the mileage programs. Here’s the latest check-up on how the programs are doing.

The pulse of loyalty programs: Strong

Having reached the 25-year mark in the history of frequent flyer programs, the airlines are showing impressive numbers. American’s program, the largest, boasts almost 50 million members. In the U.S., more than 100 million travelers (and non-travelers) participate in one or more programs. And worldwide, membership exceeds 150 million.

During 2005, members of American’s AAdvantage program redeemed their miles for more than three million free tickets and 863,859 upgrades. Industry-wide, the airlines issued more than 20 million free tickets.

Today, there are almost 100 programs throughout the world. Indeed, no airline of significance can afford to be without its own program or a link to another carrier’s program, or both.

What is the result of all those consumers participating in all those programs? There are now in the neighborhood of 10 trillion miles residing in members’ accounts. If all those miles were redeemed for domestic coach awards at 25,000 miles each, the airlines would be on the hook for 400 million free tickets. To put that into perspective, it would take American, the world’s largest airline, more than 700 years to transport all those non-paying passengers, even assuming every seat on every flight was given to award travelers.

Vital signs: Stable

For all the financial turbulence that has roiled the industry in the post-deregulation era, the resulting bankruptcies, mergers, and liquidations have been kind to frequent flyer program participants.

Of the major airlines, only American has never been in Chapter 11, and such former giants as Eastern, Pan Am, and TWA have disappeared forever from the aviation landscape. Yet members of the largest airlines’ mileage programs have never lost miles to insolvency. In their darkest moments, struggling carriers realized they needed their loyalty programs—more than ever, in fact. And the miles and member accounts of Eastern, Pan Am, and TWA’s programs were folded into the programs of Continental, Delta, and American, respectively, leaving members of those defunct programs with new cards in their wallets but their account balances intact.

Members of the smaller carriers’ programs have not fared as well. Most recently, on January 5, 2006, more than one million members of Independence Air’s iClub lost their miles when the Washington-based discounter succumbed to a toxic combination of sky-high fuel costs and rock-bottom fares and shut its doors permanently. But Independence is only the latest in a long line of small and mid-sized carriers whose demise has left consumers mile-less, including Midway, MGM Grand, Legend, National, and Jetsgo.

But because the failed programs were relatively small, the number of members affected has been modest. The big fear—that a major program would vaporize, leaving tens of millions of members missing hundreds of billions of miles—hasn’t materialized. And with the airline industry currently on the road to recovery, a major meltdown is unlikely in the foreseeable future.

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The programs’ value: Diminished

While few miles have been lost outright, the value of a frequent flyer mile has eroded significantly.

The first round of mileage depreciation took effect on February 1, 1995, the day most major U.S. programs raised mileage requirements for restricted domestic award tickets—by far the most popular type of award—from 20,000 to 25,000 miles.

The most recent wave of program devaluation went hand in hand with the industry’s post-9/11 woes. While the airlines left the price of domestic saver awards untouched, mileage levels for other awards crept up. The carriers added new fees and raised existing fees. They decreased the supply of award seats, prompting unprecedented indignation from program members. And further undermining the value of frequent flyer awards, the proliferation of low-fare airlines has driven down the average price of a paid ticket to historic lows.

As a result of the changes, the average value of a frequent flyer mile has taken a nose dive, from a high of two cents to its current low of approximately one cent.

The formula: Still potent

Twenty-five years is a long run. Why have mileage programs proven so durable?

First, travel itself has maintained its cachet, its allure. Notwithstanding the long lines, the often shabby service, and multiple other travel-related insults and injuries, the prospect of a free trip still motivates consumers on a deep psychological level, in a way that a cash rebate or a free Sony Walkman never will.

Compounding the aspirational power of travel is the airlines’ unique ability to deliver that travel at little cost, because those free seats would have gone mostly unsold anyway. (They’re “distressed inventory” in industry parlance.)

So, due to the favorable underlying economics of their programs, the airlines can offer awards that have high perceived value, both in dollar and psychological terms, and incur minimal cost to do so, resulting in a value proposition that simply cannot be duplicated by loyalty programs in other industries. As a result, hundreds of retailers and service providers rely on their participation in airline programs rather than on their own or other non-travel programs.

The fact that airline programs retain their incentive power even after a significant loss in value is further proof of their durable power to influence attitudes and behavior.

The prognosis: Long life

Frequent flyer programs are here to stay.

Alfred E. Kahn, the economist nicknamed “the architect of airline deregulation” who in his role as director of the Civil Aeronautics Board managed the transition to a competitive marketplace for air travel, was a realist about the free market. “Wherever competition seems feasible, my disposition is to put my trust in it much the same way I do in democracy—as a manifestly inefficient system that is better than any of the alternatives.”

Something similar might be said of frequent flyer programs: Warts and all, they easily outshine the alternatives. In fact, for many, even after 25 years, the very idea of an alternative to airline programs is inconceivable.