The Extra Mile

Are Travel Loyalty Programs Losing Their Mojo?

Loyalty is losing its luster.

January 21, 2008 - To be or not to be. Loyal, that is.

Whether 'tis worthwhile to be an airline loyalist. Or whether 'tis better to choose travel suppliers opportunistically, ticket by ticket, based solely on price and convenience. That's the vexing question increasingly on the minds of travelers.

Travel loyalty programs, which award consumers with free trips and upgraded services, were designed to tip the balance in favor of loyalty. And for many years, they did just that.

But we may be closing in on a point where the programs, which have so far been a win-win for the airlines and their customers, lose their ability to influence consumers' behavior, to the detriment of both travelers and airlines.

As travelers disengage from loyalty programs, the myriad partner companies -- allied airlines, hotel chains, rental car companies, financial institutions, retailers -- will see miles as an ineffectual tool in their own marketing efforts and quit the programs. That in turn will give consumers even less reason to actively participate in the schemes, leading to a vicious cycle culminating in the programs' eventual demise.

The reasons for the programs' increasingly precarious hold on travelers are twofold. First, the airlines themselves have devalued the schemes, adding fees, increasing award prices, decreasing the life of miles, and, perhaps most saliently, making too few seats available for award redemption.

Second, consumers today have more choices than ever before.

After flying, credit card use accounts for the most miles earned in airline programs. From their profitable experience issuing airline co-branded cards, major credit card issuers such as American Express, Bank of America, and Citibank, have learned first hand the power of rewards programs. They've channeled that expertise into designing new rewards cards which compete against the very airline cards which inspired them.

Citibank, for example, which issues credit cards linked to American's AAdvantage program -- by all accounts the most popular of all airline-affiliated cards -- also features in its card portfolio the Citibank PremierPass card. The PremierPass card is airline-neutral, awarding miles for charges that can be redeemed for free flights on any airline, with, it's pointedly boasted, "no blackout dates." Take that, American Airlines!

The PremierPass card is just one of many similar cards which cater to consumers' frustration with the award restrictions associated with traditional airline programs, including the American Express Blue Sky card, the MilesEdge card from Bank of America, and the No Hassle Miles card from CapitalOne.

Hotel programs have traditionally allowed program members to choose either airline miles or hotel points as a reward for their stays, implicitly acknowledging the primacy of airline miles in the minds of many travelers. But the financial calculation has changed. As hotel rates have steadily increased, year in and year out, airline ticket prices have barely budged. As a result, the cost of the hotel component of a typical trip has increased relative to the air cost, giving a significant boost to the value of hotel points over airline miles.

In addition to competition for consumers' attention elsewhere, there's contention for the loyalty of travelers from within the airline industry itself. As the mainline carriers have reinvented themselves as lower-cost carriers, stripping their services of all but the most basic features, the airlines which began life as low-cost companies have begun looking much less Spartan by comparison. In fact, low-cost carriers sometimes look positively opulent compared to so-called full-service airlines.

JetBlue is the prime example of a discount airline up-ending the traditional price-quality equation. In spite of its lower prices, JetBlue is able to offer its customers newer planes and more generous legroom than its higher-priced rivals. And JetBlue boasts a seatback entertainment system more robust by far than anything available on most major airlines' flights.

In past years, the older airlines' better developed mileage programs might have offset some of the advantages enjoyed by JetBlue. But today's mileage programs have been too enfeebled for such heavy lifting.

In spite of the fact that the airlines have allowed the value of their programs to erode in recent years, there are still meaningful benefits to be garnered from participating in mileage programs. But the danger of terminal erosion is real and imminent. The stage is set for a wholesale exodus from the airline programs.

Notwithstanding the crisis - because of it, in fact -- there's reason for travelers to hope that the airlines will reverse the programs' decline before it's too late. After all, the programs have proven their mettle as marketing schemes, as well as generating significant revenues from the sale of frequent flyer miles to the many companies partnering in the programs. It's a one-two combination the legacy carriers need not only to prosper but to survive.

While the crisis is not entirely of the airlines' own making, it's one only they can address if they want to continue reaping the rewards their programs bestow. In this case, the best interests of airlines and their customers may actually coincide.