Frequent-Flyer Programs Are Convoluted, Mysterious, and a Maddening Fraud

This ingenious loyalty scheme succeeded beyond the airline's wildest dreams. Frequent-flyer programs -- which now enroll nearly 200 million customers -- are the largest, and most brazen, commercial bribery systems ever.
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Thirty years ago in May 1981, American Airlines started its successful Frequent Flyer program in secret. They didn't advertise and the plan's author admitted "we didn't want the great unwashed to be a part of it." They deliberately cobbled together a complicated new class system to pay off 150,000 of its favored customers.

This ingenious loyalty scheme succeeded beyond the airline's wildest dreams. Frequent-flyer programs -- which now enroll nearly 200 million customers -- are the largest, and most brazen, commercial bribery systems ever --rewarding the deep-pocket elite and neglecting, overcharging, and abusing most everyone else.

Ironically, the elite, who benefit the most, are also being defrauded by the airlines by a convoluted "bait and switch" scheme, which effectively devalues the frequent-flyer currency. Instead of being able to redeem flights for the normal points (25,000 - 30,000 miles), airlines are forcing frequent-flyers to pay double points (50,000 - 60,000) for almost all flights, unless you can book 330 days in advance.

Today, more miles are earned from non-flight activity than from flying. In 2010 American issued more than 185 billion miles to credit cards, and other partners -- 62 percent, raising the price of everything we buy by 1 or 2 percent.

There are more than 17 trillion miles (and points) in circulation according to Conde Nast Traveler, and at a rough exchange rate of one penny and a half a mile, this is the equivalent to $255 billion. All the airlines combined are not worth that much.

The admitted goal is to build loyalty among customers in a business where the products are almost indistinguishable. The hidden agenda is to pay off the business traveler personally into spending the boss's money with one airline rather than with another. Industry analysts estimate that about a million trips are taken each year just to add miles to one's account.

If the purchasing agent of a firm were to accept a free vacation in return for selecting a certain vendor for a large purchase, he would go to jail for commercial bribery.

But ethical niceties don't apply when 200 million people are on the take. More than 40 million frequent-flyer tickets were issued last year. We have become a nation of frequent-flyer junkies. Nearly 50 percent of households participate in one or more of these loyalty programs and no one wants to give up even one frequent-flyer mile. People choose their breakfast cereal based on what miles they can earn. There is no underestimating the power of human greed.

The programs are ingeniously designed to prevent companies from claiming these payoffs from employees. The airlines zealously hide frequent-flyer records from the very corporations that pay for the tickets. But some companies, including Abbott Laboratories, Chrysler, General Motors, Kmart, Wendy's, and Nordstrom, have tried to get employees to turn over awards to be used for future company travel.

In an ironic twist, employees of the Federal government were, in the past, required to turn over their awards earned on business travel to the agency that paid for the travel, but Senators and Congressmen specifically passed a law exempting them from this regulation. In 2002 all employees were allowed to keep their miles.

What is wrong with these most successful programs? Plenty.

For starters, a kickback is built into the price of each and every ticket or credit card purchase. Everyone pays more. But while that once-a-year vacation traveler never earns enough points to get a free trip and thus loses the benefit, the elite flyers always end up winning. 39 billion miles expire annually never to be used.

Second, frequent-flyer programs cost companies $7 billion per year in fraud and unnecessary travel. Corporate travel managers are driven crazy when their negotiated lower fares are ignored by business travelers who refuse to go along because they won't earn the right type of frequent-flyer miles. Employees are often more loyal to their frequent-flyer program than to their employer.

The airline loyalty programs persuade travelers to make "irrational" higher priced decisions. One survey of frequent-flyers on Flyer Talk revealed that 24 percent admitted taking unnecessary trips to get extra miles. Estimates of waste caused by abuses come to 8 percent of annual travel expenses.

Third, these programs cost the U.S. Treasury more than billions of dollars per year in unpaid taxes from the wealthiest people in our country. The Internal Revenue Service had been considering regulations to treat frequent-flyer benefits as taxable income. But so far, even as we drown in record deficits, politicians have not had the guts, or political clout, to levy a tax on such a widespread entitlement. Such a tax is only fair, since most middle class Americans pay taxes on all other dividends and bonuses, while affluent elite flies for free.

Even frequent-flyers themselves recognize ethical dilemmas. Frequent Flyer Magazine polled readers, and 35 percent of the respondents -- the obvious beneficiaries --- saw the programs as unethical. Another third said they would gladly trade points for better service and cuts in airfare.

In this new class system, VIP flyers are rewarded with special favors and treatment including: free flights, expensive vacations, upgrades to First and Business Class, distinctive 'select' check-in lines, priority seating on sold-out flights, early boarding, special seats, and other goodies that the rest of us can only dream about.

It starts when they want to book a flight. There are secret phone numbers for "Gold" and "Platinum" and "Infinite Elite" members. They are blessed. The rest of us have to deal with constant busy signals, impersonal computer voices telling us to punch an endless series of different buttons, one after another, only to be left on infinite hold or, worse, looped back to where we started.

Elite members, on the other hand, get their calls answered right away by human beings. For the blessed, flights are never sold out. These upper castes always get their reservations booked; even if more seats are sold than exist on the plane. Somebody else can get bumped. They never get squeezed into a middle seat. American, for example, saves 10-20 aisle seats per flight for its premium flyers and, on many flights, upgrades them to First Class for a nominal fee or for free.

Continental and other airlines send upgrades to all their frequent flyers and many airlines block off adjoining seats so that the elite are not forced to rub shoulders with the masses.

At any gate or check-in line, frequent flyers wave around their platinum, gold or premier cards that distinguish them from the hoi polloi. If flights are cancelled or delayed, as is happening more and more, the airline gods -- sophisticated mainframe computers -- identify the "chosen people" according to carefully calibrated mileage totals. Road warriors always get first crack on the next available flight.

Everyone else has to wait.


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