The frequent flier programs initiated by American Airlines back in 1981 have succeeded as loyalty programs far more than any marketer expected. Passengers are clearly addicted to miles. But are airlines hooked, too?
In the quest for the almighty frequent flier mile, passengers have been flying hopscotch across the country, cramming in as many flights as possible at the end of the year, spending more to fly on their preferred airline just for miles and elite status, and using expensive, high-interest-rate credit cards.
The airlines for their part, have been maneuvering their frequent flier miles for millions of dollars from their mileage partners. One airline, Air Canada even spun off its Aeroplan program to raise needed capital in order to exit bankruptcy.
American Airlines is in early talks to raise cash from its credit card partner, Citigroup, by selling it frequent flyer miles, the Financial Times reported citing people familiar with the matter.
Basically, American Airlines is getting ready to sell billions of frequent flier miles for millions of dollars to Citigroup (a bank, by the way, that is holding our bailout money). Talks about this massive frequent-flier-miles transfer seem to be at an early stage, but may be rapidly becoming urgent for American Airlines which is said to have a weak liquidity position.
The recession, wildly swinging jet fuel prices, a depressed stock market and tightening credit markets have combined to make selling miles one of the best and cheapest ways to raise capital and ease the pressure on the balance sheets of the airlines.
American Airlines would not be alone in selling their miles for money. It has been a staple of the frequent flier programs recently. Both United Airlines and Continental Airlines, prior to the banking meltdown, raised millions in 2008 via advance sales of frequent flier miles to their credit card partner JPMorgan Chase.
The miles that American, Delta, United and Continental are selling, partner miles, now outnumber miles earned by actually flying. The percentage of these “partner miles” has been growing every year. For the past three years, the total of miles earned by credit card spending has been greater than miles earned by flight activity (excluding bonuses).
Even as successful as these programs have been in term of loyalty, enticing consumers to spend money foolishly and making them believe airline alliances are good for them, they have become equally important as a way to borrow money by selling future frequent flier miles.
Consumer beware. Few commercial programs give as much contractual latitude to the owners vis-à-vis members as the current frequent flier programs. Consumers all blithefully accept the possibility that their program may be changes at the whim of the airline. Every frequent flier has signed agreements that basically allow the airlines to confiscate their miles and change the program rules any time the airline desires.
At least bankers have a few more protections, it would be expected. However, their protection means more uncertainty for passengers if hard times get harder for the airlines.
It’s time that someone in government consumer affairs take a closer look at these giant anti-consumer, uncontrolled frequent flier programs and initiate some protections for the little guy rather than leave them at the mercy of the airlines.
