HOW THEY RIG THE FREQUENCY PROGRAMS
By Joe Brancatelli
April 24, 2014 --Want a sense of how completely the travel industry thinks business travelers are slaves to frequency programs? Consider just three recent indignities foisted on us:
The newest changes to the American Airlines AAdvantage Award charts, released earlier this month, don't even include prices for some awards. You literally have to guess how much American will charge you.
After massive devaluations to its HHonors program in recent years, Hilton Hotels says it won't follow lodging industry practice and reprice awards each year. Why? The chain's newest charts are so broadly written that award prices for a free night at many properties can double at Hilton's discretion and without notice.
After refusing to release award charts when it overhauled SkyMiles two months ago, Delta Air Lines reluctantly published award prices several weeks later. The reason for Delta's hide-the-pickle play was revealed: There were five levels of prices instead of three and a bellwether award -- a restricted, roundtrip business-class ticket to Europe -- functionally jumps to 160,000 miles next year from its current price of 100,000 miles.
These bits of insight into the soul of the (mostly) men who run airline and hotel frequent-travel programs often leads self-described "travel experts" to urge you to abandon your participation in the plans. That's patently self-serving advice from bloviators whose goal is to generate clicks and page views and crown themselves "consumer advocates."
If you travel on business even a little bit, of course you should be playing the frequent-flier and frequent-stay plans. You're leaving money -- and the occasional free trip -- on the table if you don't. And for those of us who travel frequently, the programs remain the sole avenue to get the elite treatment we crave.
But you need to be careful, understand how and why the plans are rigged, and make sure that you act only in your best interest. It's no longer enough to try to squeeze the most value out of the programs. To succeed even a little bit, you must understand the financial, emotional and legal underpinnings of the plans.
Programs are company stores
With a lyrical tip of the hat to Tennessee Ernie Ford, the first thing you must understand about frequent-travel plans is that they are classic company stores. Airlines and hotels control the inventory available for awards, they set the award prices and create, price and manipulate the currency you use to claim prizes. Most importantly, they control all of the rules and regulations for your participation. Think that's unfair? The Supreme Court doesn't agree. Earlier this month, the Court unanimously decided that airlines have the unfettered right to run the plans as they wish and a traveler's only practical recourse is to find another program. And lest you think the Supreme Court was kidding, consider the matter adjudicated: Northwest Airlines (now merged into Delta Air Lines) revoked a member's elite status, closed his account and confiscated his legitimately earned miles because the carrier's executives thought he complained too much.
This isn't about loyalty
The more business travelers book airline seats and reserve hotel rooms, the more they consider frequency plans a payback for their loyalty. Nothing could be further from the truth. Even when the programs began--and most observers date that to May 1, 1980, when American created AAdvantage and United Airlines responded with Mileage Plus less than two weeks later--they weren't about loyalty. Back then, they were about convincing business travelers to give more of their business to a particular airline or hotel. By the mid-1980s, however, they began morphing into standalone profit-making vehicles. "We started programs to shift market share and generate incremental revenue," notes Steve Grosvald, who was on the start-up team for United Mileage Plus and went on to create and consult on dozens of other programs. "But the cost of a mile is they key to everything. The moment we were able to pinpoint the cost, we could sell miles"--and selling the frequency scrip meant airlines and hotels could generate profit from the plans themselves.
You're not the best customer
Business travelers have too high an opinion of their importance to a particular airline or hotel. No matter how much you fly or how many room nights you spend in hotels, you're simply not the travel industry's best customer. The industry's best customers are banks--mostly Chase, Citi and American Express--who buy miles and points in bulk to award to credit card customers. As many as 60 percent of the miles and points now awarded are generated by credit card spend, not flying or lodging. And, surprisingly, folks who carry an airline- or hotel-branded credit card are not necessarily travelers. The executive who manages a travel portfolio for one of the big banks tells me that more than half of his cardholders don't fly even once a year.
Show them the money
You need to understand that the travel industry no longer cares how frequently you consume their product. More and more, it's about money, specifically how much you spend on their product. Hotel programs have long structured their earnings around your dollar contribution to the chain. Southwest Airlines, JetBlue Airways and Virgin America also award points based on your spending. But the big airlines, who created the modern frequency infrastructure, rewarded you based on miles flown, not revenue generated. That made sense decades ago when the miles you flew were at least a rough approximation of your dollar contribution. But as fares and flying miles became increasingly detached, the major carriers decided they were being "gamed" by high-mile/low-dollar fliers. The result? American, Delta and United are gradually remaking their plans into revenue-based models. Although many predicted the move several years ago, it took until February for Delta to fully commit. United has some minor adjustments, including a new minimum-spend requirement to earn elite status. American's chart changes this month were also the first moves toward a revenue-based plan. It'll be interesting to see if American's 2015 version of AAdvantage, which will presumably subsume the US Airways Dividend Miles plan, makes a more dramatic move to rewarding you for your dollar spend.
No so contrary now
Nearly a dozen years ago, I wrote a column called the "contrarian's guide" to frequent travel plans. As New York Times money columnist Ron Lieber so graciously pointed out recently, my contrarian advice in 2002 is mainstream wisdom now. I wish my cynical view of the programs then wouldn't have come true today. But it has.