The Extra Mile

How Diners Club Lost Its Mileage Mojo

A leading program surrenders its edge

January 18, 2006 - For many of the 20 years since its introduction in 1985, Diners Club Rewards was the preferred card program of an elite cadre of top-tier travelers. Like arch rival American Express Membership Rewards, Diners Club offered cardholders the equivalent of one mile for every dollar charged to the card. And like American Express points, Diners Club points could be exchanged for miles in multiple airline and hotel programs.

But Diners points could be redeemed for miles in almost twice as many programs as American Express points. And more importantly, Diners recently had links to all major U.S. airline programs, whereas American Express was affiliated only with two majors, Continental and Delta.

Diners vigorously exercised its bragging rights, boasting that their cardholders could "Earn miles on every major U.S. airline."

Diners forfeited the right to make that claim on Dec. 31, 2005. That was the last day Diners Club cardholders could redeem their points for miles in the programs of Continental, Northwest and US Airways. The situation deteriorates further on Apr. 17, 2006, when United redemptions will be cut off as well. (Adding insult to injury, Diners Club cardholders weren't notified of the changes until the first week of December, less than a month before three of the four carriers' termination date.)

With the changes, Diners will retain links to 20 airline frequent flyer programs, still a significant advantage over the 13-airline lineup from American Express. But of the programs of paramount concern to Diners' all-important U.S. frequent travelers, only American and Delta remain on the Diners partner roster.

Frequent travelers are accustomed to their once-generous programs' slowly leaking away value, losing an earning partner here, ratcheting up award levels there, slipping in a new fee elsewhere. But never in the 25-year history of travel rewards schemes has a mighty program fallen so far, so fast.

What happened?

We'll have to wait for a retired Diners Club executive or other insider to write a tell-all autobiography to get the full story. But there are enough facts at hand to sketch out the basics.

In 2004, Diners Club contracted with MasterCard to permit Diners cards to be used throughout the network of 24 million merchants which accept MasterCard-branded cards. At the time, the move was welcomed as the remedy to Diners' single weakness: limited merchant acceptance.

But rather than signaling the rebirth of the card -- which had been losing market share to American Express and to cards affiliated with airlines and hotels -- the MasterCard tie-up may have been the beginning of the end.

Apparently -- and here we're engaging in informed speculation -- Diners Club's newfound marketing muscle caught the attention of the banks which issue cards affiliated with Diners' airline partners.

Chase, for example, issues the Continental OnePass MasterCard and the United Mileage Plus Visa cards. U.S. Bank issues Northwest's WorldPerks Visa. And Bank of America issues the US Airways Dividend Miles Visa cards.

Those airline-bank relationships are extremely lucrative for the airlines. Each time a consumer earns miles by charging a purchase to an airline-affiliated credit card, the issuing bank must purchase the miles from the airline partner for one to two cents apiece. Those pennies add up to hundreds of millions of dollars in revenue for the largest airlines -- revenue those airlines sorely need to shore up their precarious finances.

(Airlines benefit financially from partnering with Diners Club, too. But because of Diners' much smaller user base, and because Diners Club cardholders have a choice of miles in multiple airline programs, participating airlines earn far less through Diners than through their relationships with the banks that issue their single-program cards.)

The airline-bank links are no less important to the issuing banks, which benefit from a rich source of highly profitable new credit card customers.

So, faced with the prospect of the newly enhanced Diners Club card cutting into their cardholder bases, it's likely that Chase, Bank of America and U.S. Bank gave their respective airline partners an ultimatum: you can partner with us or you can partner with Diners Club; but you can't have it both ways.

The airlines, weighing the financial contribution from the bank-issued cards versus Diners Club's, made the entirely rational decision to forego the latter in order to preserve the former.

What remains unclear is whether Diners Club's move to broaden its base of retailers by tying up with MasterCard was part of a preconceived strategy shift, which anticipated the loss of airline partnerships and consciously forsook the consumers who valued them; or whether the loss of airline partners was an unforeseen consequence of a move Diners hoped would restore its luster among its traditional clientele.

In either case, Diners Club will no longer be the first choice of travelers who place a premium on earning points which can be exchanged for miles in many of the largest U.S. airline programs.

The story of Diners' fall from grace can be read as a cautionary tale with lessons for everyone who participates in loyalty programs. First, today's winners may be tomorrow's losers. And knowing that change is a constant, even the savviest consumers should expect to be blindsided occasionally.