Should airlines own your frequent flier miles?

by Charlie Leocha on January 11, 2013

They do. If you haven’t read your contract with your frequent flier program, you might take some time to do so. Those precious miles that you so carefully earn and add up don’t belong to you. They belong to the airlines. And, they mean it.

Is it time to change the rules?

In the beginning there were miles. Those miles were flown miles. Then bonus miles crept into the system. Then the airlines learned that they could sell miles to other marketers who then provided miles as bonuses to their clients. Today it seems that miles are available for every purchase through credit cards, the more miles are tacked on by deals that are offered by the merchants directly.

CitiBank early last year sent out IRS Form 1099-MISC for frequent flier miles that they had awarded to customers for opening accounts. Those 1099s disappeared into the world of lost forms and ignored taxes, but a precedent has been made — frequent flier miles were worth money. And, they were taxable; at least according to CitiBank.

Let’s look at who owns these valuable frequent flier miles. Here is the sad news from American Airlines, the grandfather of frequent flier programs.

American Airlines may, in its discretion, change the AAdvantage program rules, regulations, travel awards, and special offers at any time with or without notice. This means that the accumulation of mileage credit does not entitle members to any vested rights with respect to such mileage credits, awards or program benefits. In accumulating mileage or awards, members may not rely upon the continued availability of any award or award level, and members may not be able to obtain all offered awards for all destinations or on all flights. Any award may be withdrawn or subject to increased mileage requirements or new restrictions at any time. American Airlines may, among other things, (i) withdraw, limit, modify, or cancel any award; (ii) change program benefits, mileage levels, participant affiliations, conditions of participation, rules for earning, redeeming, retaining or forfeiting mileage credit, or rules for the use of travel awards; or (iii) add travel embargo dates, limit the number of seats available for award travel (including, but not limited to, allocating no seats on certain flights) or otherwise restrict the continued availability of travel awards or special offers. American Airlines may make any one or more of these changes at any time even though such changes may affect your ability to use the mileage credit or awards that you have already accumulated. American Airlines reserves the right to end the AAdvantage program with six months notice.

Basically, your award of miles is worth nothing unless American Airlines agrees. Every other frequent flier mileage program is the same according to the agreements that consumers have signed.

Some Fortune 500 companies claim ownership of FF miles for travel paid for with company funds. Those frequent fliers face a different set of rules when the air travel is purchased with someone else’s money.

For the rest of us, however, the rules that were in effect when the FF programs were created — namely, miles that were awarded for flying and used as a loyalty program — were far different from those in effect today.

Airlines are now receiving compensation for miles without any need to fly. FF miles now have a price and that means the contract between the airline and their passengers collecting FF miles should be modified to acknowledge that these miles are no longer scrip (like trading stamps) awarded for purchase, but a tangible asset for which passengers have paid a price.

Changing the ownership of these miles would change the game. Airlines might still be able to change the requirements for mileage redemption for flights, but the miles would have intrinsic value. Airlines should no longer be allowed to confiscate mileage from those who may not have participated in programs frequently enough.

Would we be faced with possible taxation of FF miles? Perhaps. Would new venues for trading of FF miles be created? Perhaps. Frequent flier miles are already a form of international currency.

Air Canada sold its frequent flier program to a private entity, LoyaltyOne, Inc., but it claims full ownership of your miles. Airlines don’t own a thing, but not much has changed.

The Program, including all reward miles, Collector Cards, every certificate or other document which can be exchanged for a Reward (“Certificate”) and all rights relating to them, are and will remain our property. You are responsible for all taxes payable as a result of your participation in the Program, including collecting and redeeming reward miles and obtaining Rewards. You may not transfer, sell, exchange, give, charge or otherwise dispose of any reward mile except in accordance with such conditions as we may prescribe from time to time and upon payment of such fees as we may impose in our discretion from time to time.

Do you think it is time to re-examine the ownership of frequent flier miles? Should airlines have confiscatory rights over your miles (er, their miles)? And, what about taxation of these miles?

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  • bodega3

    It is their program and if you participate in it, you follow their rules. You don’t have to participate if you don’t like it. If you are having issues with the airline programs, what about grocery store, or drug store, or department store loyalty programs? Gonna want to change those, too?

  • jimtbay

    I shop with schedule and price in mind. To me, it is not worth it to participate in a miles program.

  • bodega3

    Mileage programs due tend to steer you towards the carrier but if you have a goal in mind, they can be worth it.

  • BobChi

    When you join a program you agree to the terms and conditions. I don’t think anyone is forced to join a frequent flyer program. If you don’t want to play by the rules the airlines establish in their business model, simply don’t sign up. I think a very important point that Charlie brushed over quickly here is the tax consequences. If I own the miles, it seems much more likely they will viewed as taxable income to me, and at a valuation that I very probably won’t like. Let’s suppose I get 30,000 miles for a credit card signup bonus and the airline values these miles at 2.5c each. That’s suddenly $750 in taxable income to me, and if I’m in the 25% tax bracket, that costs me an extra $187.50, instead of an extra $0 under the current setup – for very, very little extra benefit. Charlie, keep your hands off things you don’t understand, and spend your time dealing with real consumer problems.

  • TonyA_says

    Must have been part of the fiscal cliff discussions – taxing miles.

  • BobChi

    I don’t know about that. The direct concern is that if the airline legally owns the miles, then when you “get” them it shouldn’t be taxable income to you (since you don’t actually own them). If, on the other hand, the miles were legally yours, then they might well be construed as income to you when you are awarded them. I’m not a tax expert, but I see a big difference in the two setups.

  • TonyA_says

    If it HAS to be taxed, then tax the USE of reward travel and not the [bogus] earning of something you don’t own or might not be able to use.

  • MeanMeosh

    That’s not how the concept of income taxation works, though. Full disclosure – I’m a CPA and do taxes for a living, so I deal with these kinds of issues all the time. If you individually own the miles, it’s really no different than if your employer gives you a gift card for $100 for your 5th anniversary with the firm. You might or might not use the card, but by definition under the tax code, it’s taxable income to you. You can’t just tax the use of the miles and not the receipt because it’s somehow a fairer result. The IRS will either have to arbitrarily decide to create an exemption for FF miles – and possibly open up a big can of worms on the taxation of other awards – or Congress will have to pass legislation to except FF awards from income tax and subject them to excise/use tax instead.

  • MeanMeosh

    Charlie, I agree with some of the others that you really need to stay out of an area that you don’t understand properly, as what you suggest is likely to create all sorts of unintended consequences.

    First off, though I disagree with Citibank’s argument, the FF miles they give you are entirely different from FF miles you receive from an airline for flying with them or a partner. The FF miles in question were associated with the opening of a new bank account, not a credit card or other program. Their logic is that 30,000 miles as a bonus for opening a bank account is no different than receiving a $50 cash bonus, or a toaster, or whatever – that is is a substitute for extra cash interest and is therefore taxable to you. That argument, flawed as it is, fails when we’re talking about miles awarded for credit cards or flying because the miles are never intended to be a substitute for cash (you can’t earn “interest” or “dividends” off a credit card or for purchasing services). Part of the reason why this works is because whatever rewards you earn – whether it’s miles, points, “cash back” bonuses, whatever – belong to the company providing you the rewards, and not you yourself.

    If you want to argue that those rewards belong to you and you only, then I can all but guarantee that the IRS will now call these taxable income. And they won’t stop there. Your hotel, credit card, and grocery store rewards will also become taxable. Are you prepared to pay your taxes on that income, even though you’ll never receive a penny of actual cash with which to pay it? If your goal is to put all of these rewards programs out of business, then I guess you’ll get your wish.

  • palladin

    (Last I checked) On KLM to transfer miles to someone else, it costs the exactly the same as it would to just simply buy them.

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