Frequent-flyer program

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For other uses, see frequent flyer (disambiguation).

A frequent-flyer program (FFP) is a loyalty program offered by many airlines. Typically, airline customers enrolled in the program accumulate frequent-flyer miles (kilometers, points, segments) corresponding to the distance flown on that airline or its partners. There are other ways to accumulate miles: In recent years, more miles were awarded for using co-branded credit and debit cards than for air travel. Acquired miles can be redeemed for air travel, other goods or services, or for increased benefits, such as travel class upgrades, airport lounge access, or priority bookings.

Frequent-flyer programs can be seen as a certain type of virtual currency, one with unidirectional flow of money to purchase miles, but no exchange back into money.[1]

History[edit]

The very first modern frequent-flyer program was created in 1972 by Western Direct Marketing, for United Airlines. It gave plaques and promotional materials to members. In 1979 Texas International Airlines created the first frequent-flyer program that used mileage tracking to give 'rewards' to its passengers, while in 1980 Western Airlines created its Travel Bank, which ultimately became part of Delta Air Lines' program upon their merger in 1987.[2][3] American Airlines' AAdvantage program launched in 1981 as a modification of a never-realized concept from 1979 that would have given special fares to frequent customers. It was quickly followed later that year by programs from United Airlines (Mileage Plus) and Delta Air Lines (SkyMiles), and in 1982 from British Airways (Executive Club).[4]

Since then, frequent-flyer programs have grown enormously. As of January 2005, a total of 14 trillion frequent-flyer miles had been accumulated by people worldwide, which corresponds to a total value of 700 billion US dollars.[5]

The Supreme Court of the United States has held “good faith and fair dealing” claim about frequent-flyer program preempted by the Airline Deregulation Act.[6]

Accrual[edit]

Flying[edit]

Most larger airlines around the world have frequent flyer programs with a myriad of names, policies and restrictions regarding joining, accumulating and redeeming mileage points accrued. The primary method of obtaining points in a frequent-flyer program until recent years was to fly with the associated airline.[5] Most systems reward travelers with a specific number of points based on the distance traveled (such as 1 point per mile flown), although systems vary. Many discount airlines, rather than awarding points per mile, award points for flight segments in lieu of distance. For example, a number of airlines in Europe offer a fixed number of points for domestic or intra-European flights regardless of the distance (but varying according to class of travel).[7] With the introduction of airline alliances and code-share flights, frequent-flyer programs are often extended to allow benefits to be used across partner airlines.[8]

Bonus Miles[edit]

Further information: Fare basis code

Most, if not all, programs award bonus earnings to premium-cabin passengers and to their elite-status members based on tier status; earning an extra 25%-100% of miles flown are common bonuses. While these bonus miles don't count toward ascension to (or retention of) elite status, they count toward the member's total balance for normal redemption purposes.

Minimum Credit Guarantee[edit]

Some programs award a full 500 miles (or a similar minimum credit guarantee) for non-stop flights spanning less than 500 miles. An airline's program can either award this guarantee to all members regardless of elite status,[9] or they can reserve this privilege only for their elite members.[10]

Credit card purchases[edit]

Many credit card companies partner with airlines to offer a co-branded credit card or the ability to transfer proprietary points to an airline's program. Large sign-up bonuses and other incentives have been common. Accruing miles via credit cards bonuses and spending allows infrequent travelers to take advantage of the frequent flyer program program.

With a non-affiliated travel rewards credit card a cardmember can buy a positive-space ticket considered "revenue" class, which can earn the passenger miles with the airline flown.[11]

Other purchases[edit]

Frequent-flyer programs may offer miles through other means, such as purchasing food or merchandise sold by an affiliated company. American engineer David Phillips became known as the "Pudding Guy" in 2000 for purchasing $3,140 of Healthy Choice pudding that awarded him 1,253,000 AAdvantage miles.[12]

Elite Status[edit]

Occasionally, airlines may offer double elite-qualifying mile (EQM) promotions, which speeds up a member's status ascension (or retention) by cutting flight mileage requirements in half.[13][third-party source needed]

Some carriers also require frequent flyers to spend a set amount of money on tickets before they are eligible for elite status. This is in addition to the miles-flown requirements that are already in place. Delta switched to revenue-based elite status requirements on January 1, 2014, and United will make the switch to this model in March 2015.[14][15] This has led to some frequent flyers devaluing those programs over others, as the changing model can be less rewarding to frequent flyers.[16]

Redemption[edit]

After accumulating a certain number of miles or points, members then use these currencies to obtain airline tickets. However, mileage currency only pays for the base fare; the member is still responsible for payment of mandatory taxes and fees.[citation needed]

Flights[edit]

Although a controversial topic and a source of frustration among frequent flyers,[17] award flights are still the primary commodity purchased by members using mileage currency. While alliances and partnerships have facilitated the redemption process for some programs, award seat availability is still subject to black-out dates and seasonal fluctuations, as airlines utilize statistics, yield management and capacity-control formulas to determine the number of seats allocated for award booking.[18]

This lack of availability has since been circumvented by non-airline rewards programs, such as certain credit cards (see above) and other corporate programs (Expedia Rewards, Starwood Preferred Guest) by allowing the member to use rewards currency to search for and purchase revenue tickets as if using cash.[third-party source needed]

Other Products and Services[edit]

Depending on an airline's program, members can also redeem their earnings toward cabin upgrades, hotel stays, car rentals and various retail consumption opportunities. On American Airlines' AAdvantage program for example, it is possible to pay for a complete vacation package solely with miles.[19]

Value of a mile[edit]

Travelers frequently debate on how much accumulated miles are worth, something which is highly variable based on how they are redeemed. An estimate is approximately 1-2 cents per mile based on discount (rather than full fare) economy class travel costs.[20]

The author of an economics PhD thesis published in 2014 at Monash University, in Melbourne, Australia, examined the cash-equivalent value (purchasing power) of loyalty currency, the impact of FFPs on consumer behavior and surplus, and the taxation issues surrounding FFPs. Unlike most previous research on FFPs, this research used data from an actual FFP. The cash-equivalent value of a loyalty point in 2010 was estimated to range between AU$0.0066 and AU$0.0084. This range however excluded the value of status benefits to the status member. The loyalty point gained by a FFP member per flight equated to an in-kind discount on an average airfare of 3.3% for lowest status members, 3.96% for medium status members and 4.63% cent for premium status members. A detailed survey undertaken in 2010 among a representative sample of over 3300 members of that specific FFP showed that a large proportion of leisure and business travelers admitted a willingness to pay a higher fare - a FFP premium - to fly with the sponsoring airline because of their FFP membership. The average FFP premium was estimated to be around 8% and was statistically different between leisure and business travelers. The cash-equivalent value of a loyalty point as encapsulated in the FFP premium was estimated to range between AU$0.0108 and AU$0.0153, depending on the FFP status of a member.[21]

The airlines themselves value miles in their financial statements at less than one one-thousandth of a cent per mile.[citation needed]. That loyalty points undoubtedly have an estimable monetary value is also reflected in the fact that some programs allow for the donation of frequent-flyer miles to certain charities.[22]

Accounting and regulatory issues[edit]

Business travelers typically accrue the valuable points in their own names, rather than the names of the companies that paid for the travel. This has raised concerns that the company is providing a tax-free benefit (point-based awards) to employees,[21] or that employees have misappropriated value that belongs to the company, or even that the rewards acts as a kind of bribe to encourage travelers to choose one particular airline or travel unnecessarily. Most companies consider the miles earned by their employees to be a valuable personal perk that in part compensates for the daily grind of frequent business travel, though some governmental organizations have attempted to prevent their employees from accumulating miles on official travel.[23] Although it has long been recognized that FFP rewards earned on employer-funded business flights should be subject to either income or fringe-benefit taxation, this is currently not taking place in the vast majority of countries - a notable exception however being Germany.[21] One of the main arguments against the implementation of taxation is the lack of a monetary tax base. It can however be argued that since the cash-equivalent value of loyalty currency can be reasonably estimated with public data, this value is appropriate as a tax base. Hurdles preventing the taxation of FFP rewards are generally less related to the technical issue of valuation, but have more to do with legal constraints (e.g. "who owns the points") and often a lack of political will (e.g. "who would lose out due to taxation").[21] Interestingly, Australian and German public servants are not permitted to redeem points accrued from official travel for private purposes.[24]

In the US, the General Services Administration has regulated, "frequent traveler benefits earned [by federal employees] in connection with official travel, [which] may be used only for official travel, see 41 C.F.R. § 301-1.6(f)."[25] Frequent flyer program contracts are not generally regulated.[26]

Climate and environmental issues[edit]

Frequent-flyer programs have been receiving scrutiny because of the prevalence and rapid growth of air travel, in terms of both the frequency that individuals fly and the tendency toward longer distance travel. There have also been calls for an end to frequent-flyer programs.[27][28][29][30] An increase in the number of hypermobile travelers has been identified as a particular aspect of the issue because of the highly disproportionate contribution of this class of individuals to aviation greenhouse gas emissions, and frequent-flyer programs are a contributing factor.[31]

Precedent exists for ending frequent-flyer programs. In 2002, Norway banned its domestic frequent-flyer programs in order to promote competition among its airlines.[32] In the U.S. in 1989, a vice president of Braniff said the government should consider ordering an end to frequent-flyer programs, which he said allow unfair competition.[33]

Mileage run[edit]

A mileage run is an airline trip designed and taken solely to gain maximum frequent-flyer miles, points, or status.[34] If a traveler has already achieved some sort of elite status, then that traveler will earn bonus award miles on top of his or her actual flight miles. Depending on the program, that traveler will reach its goal sooner if the miles he or she accrue are elite qualifying miles.[34] A mileage run may allow a traveler to (re-)qualify for a beneficial elite level, which requires a minimum number of miles to qualify.[35]

See also[edit]

References[edit]

  1. ^ European Central Bank (October 2012). "1". Virtual Currency Schemes (PDF). Frankfurt am Main: European Central Bank. p. 5. ISBN 978-92-899-0862-7. Retrieved 5 March 2014. 
  2. ^ David M Rowell (August 13, 2010). "A History of US Airline Deregulation Part 4 : 1979 - 2010 : The Effects of Deregulation - Lower Fares, More Travel, Frequent Flier Programs". The Travel Insider. Retrieved September 21, 2010. 
  3. ^ "Screen shot from the very first frequent mile program". Milecards. 2013-09-01. Retrieved 2013-09-08. 
  4. ^ Ben Beiske (2007). Loyalty Management in the Airline Industry. GRIN Verlag. p. 93. ISBN 3-638-77717-0. 
  5. ^ a b "Frequent-flyer miles". The Economist. 2005-01-06. 
  6. ^ Ronald, Mann. "Opinion analysis: Justices hold "good faith and fair dealing" claim about frequent-flyer program preempted". SCOTUS Blog. 
  7. ^ [1][dead link]
  8. ^ Bilotkach, V. 2009. Parallel frequent flier program partnerships: impact on frequency.
  9. ^ "Earning Miles on Alaska Airlines - Alaska Airlines Mileage Plan". Alaskaair.com. Retrieved 2013-12-18. 
  10. ^ "United Airlines - Premier Mileage Bonuses". United.com. 2013-04-09. Retrieved 2013-12-18. 
  11. ^ Greenberg, Peter (2005). The Travel Detective. Random House. Retrieved 12 August 2014. 
  12. ^ Holder, Kathleen (2000-02-04). "Engineer finds sweet travel deal in cups of pudding". Dateline UC Davis. Retrieved 2007-06-12. 
  13. ^ https://www.aa.com/i18n/disclaimers/elite-double-miles-thank-you.jsp
  14. ^ "Medallion Qualification Dollars". Retrieved 9/5/2014.  Check date values in: |accessdate= (help)
  15. ^ Lynn Yang, Jia. "The slow demise of the frequent-flier program". The Washington Post. 
  16. ^ DeNicola, Louis. "Ranking Frequent Flier Programs". Cheapism. 
  17. ^ Stoller, Gary (2013-03-04). "Delta frequent fliers fume about award availability". USA Today. 
  18. ^ "Most Popular E-mail Newsletter". USA Today. 2011-05-05. 
  19. ^ "Redeem Miles| Book Flight Awards| Mileage Travel Destinations". American Airlines. 2010-12-22. Retrieved 2013-12-18. 
  20. ^ Adrianus D. Groenewege. Compendium of International Civil Aviation. 
  21. ^ a b c d McCaughey, N.C. (2014), 'Not just a pie in the sky': an investigation into the cash-equivalent value of loyalty currency and the impact of a frequent flyer program on its member
  22. ^ Financial Post/National Post (Canada), Frequent-flyer points donation a tricky tax issue, by Arthur Drache, undated
  23. ^ Cunningham, J. A. (1999). Are Frequent Flyer Benefits Really Benefits: An Analysis of the Frequent Flyer Tax Debate and a New Theory of Taxability for Frequent Flyer Benefts. Clev. St. L. Rev., 47, 281.
  24. ^ "APS Values and Code of Conduct in practice". Apsc.gov.au. 2009-05-06. Retrieved 2012-11-03. 
  25. ^ Stephen D. Potts (March 23, 1992). "Office of Government Ethics 92 x 13 Letter to a Government Attorney". U.S. Office of Government Ethics. Retrieved 13 August 2014. 
  26. ^ Office of Aviation Enforcement and Proceedings (2013-07-23). "Frequent Flyer Programs". US Department of Transportation. Retrieved 13 August 2014. The Department of Transportation does not have rules applicable to the terms of airline frequent flyer program contracts. 
  27. ^ Storm S (1999) Air transport policies and frequent flyer programmes in the European Community: a Scandinavian perspective. Unit of Tourism Research, Recearch Centre of Bornholm (p.1-105).
  28. ^ Cognac M, DeLozier M (1997), Frequent Flyer Programs Promotion: An Analysis Of A Paradoxical Industry. Southwestern Marketing Association (p.1-12).
  29. ^ Tretheway MW (1989), Frequent Flyer Programs: Marketing Bonanza or Anti-Competitive Tool? (30:1), p.445.
  30. ^ Cohen S, Higham J, Cavaliere C (2011), Binge flying: Behavioural addiction and climate change, Annals of Tourism Research
  31. ^ Gössling S, Ceron JP, Dubois G, Hall CM, Gössling IS, Upham P, Earthscan L (2009), Hypermobile travellers Chapter 6 in: Climate Change and Aviation: Issues, Challenges and Solutions
  32. ^ Aftenpost (2002). Sterling polishes plans for new routes, by Nina Berglund, 19 Mar 2002.
  33. ^ Orlando Sentinel (1989). Braniff Will SlimDown, Keep Flying, by Kenneth Michael, 4 Oct 1989.
  34. ^ a b David Grossman (2005-11-14). "The art and science of the mileage run". USA Today. Retrieved 2006-09-26. 
  35. ^ "InsideFlyer.com: Wild About Miles: Inside the Mind of the Mileage Junkie". www.insideflyer.com. Retrieved 2010-06-25. 

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