The Feds Are Eyeing Airline Loyalty Program Abuses – But Don’t Expect Changes

By Robert McGarvey

Reuters dropped the bomb: Exclusive: US scrutinizing airline frequent flyer programs: “The U.S. Transportation Department is scrutinizing the frequent flyer programs of major U.S. airlines for potential deceptive or unfair practices, the agency said Thursday as regulators step up oversight of the airline industry.”

The trigger of course is the Durbin-Marshall bill that’s in the Senate where the Senators complain about “troubling reports that airlines are engaged in unfair, abusive, and deceptive practices with respect to these loyalty programs.  For example, reports have suggested that airlines are changing point systems in ways that are unfair to consumers, including by devaluing points, meaning it takes more points than initially marketed to achieve the promised rewards.”

There’s no questioning reality: airlines do, routinely and seemingly arbitrarily, devalue points.  Just last month Southwest sliced 4% off the value off its Rapid Rewards. Just this month Alaska Airlines significantly devalued its miles.  

The devaluation part is beyond debate. But even so I do not expect meaningful federal restraints regarding how airlines manage their miles programs.

Miles are big money for airlines. United lifted the kimono when it valued its loyalty program at north of $21 billion.  That program is worth more than the rest of the airline.

Delta meantime expected to pull in around $7 billion this year from American Express and much of that money is for rewards miles.

The carriers will fight with all their considerable might to derail federal efforts to control how they manage their awards programs.

I do not see the regulators prevailing.

Airline rewards strike me as an updated iteration of S & H Green Stamps, which were everywhere in retail during the 1960s.  I personally remember hijacking some of my family’s green stamps and cashing them in for a Zippo lighter.  I also remember losing all interest in the stamp programs immediately thereafter.  

S & H Green stamps actually had a stated cash value – they carried the note: “Value 1 ⅔ mills” which is 1/5th of a penny. But their real value was cashing them in for consumer goods, everything from blenders to dolls and of course cigarette lighters.  I know nobody who ever claimed the cash value, ever.

Do understand that S & H owned and of course controlled the distribution centers where stamps were traded for goods.  S & H naturally bought merchandise at wholesale, sold at retail, and it had complete control over the value it attached to stamps in those trades.

Of course there was grumbling about how the stamp companies priced their merchandise.  But we played and continued to play because, well, it was all free.

It wasn’t of course. Grocers for instance paid the stamp companies for the stamps that were handed out to grocery shoppers.  The stamp companies in fact were wildly profitable, in part due to how they valued the merchandise stamps could “buy,” but also because of the fees exacted from retailers (who naturally raised their prices to pay these new costs).

The stamp companies were cash machines. For instance: Curt Carlson built his fortune on the back of his Gold Bond Stamps. When he died in 1984 the New York Times obit reported: “For a corporation whose more than 100 separate companies include the Radisson and Regent International hotel chains, T.G.I. Friday’s and half a dozen other restaurant chains, several travel agencies, a cruise line, the nation’s largest marketing services company, vast real estate holdings and a host of other operations in 140 countries, the Carlson Companies had distinctly humble beginnings.”

The Times continued: “At a time when some local department stores were seeking to assure repeat business by giving customers Security Red trading stamps, exchangeable for premiums, Mr. Carlson realized that such stamps would be ideal for grocery stores, whose identical products left them little room to distinguish themselves from the pack.

Acting on his vision, Mr. Carlson created the Gold Bond Stamp Company in 1938, with a $55 loan.”

Understand, it wasn’t regulation that killed off the various retail stamp companies. It was the death of consumer interest, as alternatives – such as airline miles! – seemed more suited to the times.  Who wanted a free toaster where the same effort could produce a free flight to Paris?

The time will come when airline rewards programs fade away. We may be nearing that time as more consumers find it very difficult to trade miles for flights they want – 70% of us have stashes of miles.

By some counts as few as 8% of airline rewards miles are redeemed in a year.  The argument is that we are stockpiling them as we aim to cash in a big trip – but just maybe we will never have enough points because the airlines keep moving the goalposts.

Airlines will continue to mint rewards miles until we lose interest.

I just don’t see the carriers changing their ways. Not this year, not until we and they wake up and stop caring about miles.  We’re a long way from there.