Who really reaps mileage rewards?

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Airline loyalty programs, hailed as the ultimate in customer- relationship marketing, have become marketing crack.

Crack marketing, yes. But also marketing crack-an addictive circle in which the airlines spend to promote their respective frequent-flier programs, usually enabled by a codependent agreement with a variety of marketers, and then spend again to try to get customers to unload those accumulated miles via a barrage of direct marketing.

And, most times, the push is not for a free flight or upgrade, but rather for fringe benefits ranging from eyeglasses to magazine subscriptions. Yet participants-more than 100 million by some estimates-keep coming back for more.

"Crack dealers wish they had a product as potent as this," said travel expert Joe Brancatelli, who edits the JoeSentMe.net travel site.

But the big question these days is whether the product still has value to the consumer, a debate that Tim Winship, editor and publisher of FrequentFlier.com, says it comes down to an issue of perception vs. reality.

"The average cost of a domestic roundtrip flight is about $300, so there's a perception that people are getting something that has a perceived value of $300," he said. "In the few times you can redeem miles for a free flight, you're getting a seat that likely would have gone unsold and now costs the airline maybe $10 or $15 extra for the increased fuel, an extra meal and maybe some processing costs if there's a paper ticket involved. Think about CRM in other industries. If you're Sony and you're giving away your product as a loyalty award, you're always going to have a wholesale cost of that Sony Walkman or whatever. That's not true for the airlines."

Frequent-flier programs are among the oldest marketer reward programs around-but certainly not the first. Sperry & Hutchinson introduced S&H Green Stamps in Jackson, Miss., 1896 with a simple premise: Reward customers for their loyalty. The Green Stamps were collected from retailers and pasted into a book. When the books were filled, they were redeemable for other merchandise.


In the 1920s, General Mills introduced Betty Crocker points, which customers could redeem by buying a variety of General Mills products, including cereal and its newly introduced Gold Medal flour brand. Those points were redeemable for kitchenware. In the 1950s, cigarette companies started loyalty programs via coupons in the packs.

But it wasn't until May of 1981 that the airlines, specifically American, caught on. Using its database of customers, American created its AAdvantage program. Less than a week later, United introduced Mileage Plus. By the end of the year, Delta and TWA also had their versions of a frequent-flier program.

What initially was thought of as a marketing gimmick proved to be one of the greatest customer-retention programs in history. Those who waited, such as Southwest Airlines and Hilton Hotels, suffered lost market share.

But after almost 25 years, some question whether the programs still work. For the airlines, they most certainly do.

"The reality is, these programs are saving the industry," said a former airline executive who now helps design customer-loyalty programs for a national firm. "There's not a lot of expense to the airlines. It might sound like it's a big thing, giving away a free ticket to someone who has accumulated enough points. The reality is, very few seats are given away at the expense of a revenue passenger."

Frequent-flier programs have become profit centers for the financially strapped airlines, who sell their miles to program partners such as credit cards, rental-car companies, hotel chains and more. American Airlines' AAdvantage program, for instance, has nearly 1,200 partners who buy miles at 1¢ to 2¢ per mile.

And the partners benefit as well.

"Why does First Bank [now Chase] keep loaning United Airlines money in bankruptcy?" Mr. Brancatelli said. "Because [United's] Mileage Plus card is at least 10% of the credit-card portfolio's profit."

(Chase could not be reached for comment. United, American and five other airlines either declined to comment or did not return calls.)

Randy Petersen, editor of the influential InsideFlyer and the accompanying Web site forum, FlyerTalk.com, said: "If you broke off AAdvantage into its own P&L, it's a billion-dollar-a-year corporation. If you look at the bankruptcy papers filed by United, it said right in there that the only thing making money in the airline was Mileage Plus."

In fact, the frequent-flier programs offer some of the biggest returns with the smallest of advertising investments. American, for instance, spent just $750,000 last year in measured media on AAdvantage. United spent less than $1.5 million to advertise Mileage Plus, according to TNS Media Intelligence.

And a 2004 survey from Maritz Loyalty Marketing, St. Louis, showed that airline reward programs continue to have a direct impact on consumers' choice of airline. Almost 60% said the program directly influences their decision on which airline to choose. A follow-up survey showed that 70%-including 79% in the 18-24 age demographic-leave a loyalty program when rewards are slow to come by.

Which, of course, has been the biggest complaint among consumers: the lack of availability in redeeming miles.


"The financial situation being what it is, there is an incentive to the airlines to hold onto all of their inventory until the last minute in the hopes that someone will step up and buy that seat," said Mr. Winship. "That's why most of their marketing communications are to get you to earn more miles. And in the extremely limited extent that they push you to redeem, it is in ways that they know in advance will not in any way dilute their revenue."

On FlyerTalk.com, one of the discussions addresses the very issue with a thread titled "Airline Affinity Programs Are De Facto Dinosaurs-Fact or Fiction?" The person who started the thread, with the handle "Iluvcitibank," wrote: "I have concluded, after over a decade of laborious, proactive, aggressive accumulating ... that the day of the airline-specific affinity program is past ... and that airline-only affinity programs are now dinosaur-esque in design and value proposition and utility. The paradigm has changed and the airline affinity model is broken."

Some agreed, other didn't, with one person writing: "Fiction. You just got to learn to play by their rules and get them before they get you."

Mr. Petersen agreed, saying that the little secret that airlines don't want you to realize is that you really don't "earn" miles and points so much as you purchase them, one way or another.

"What this really is," he said, "is prepaid travel. But what it's done is create a generation of gamesters. Tens of thousands of people have figured out how to play the system. "

Still, to their credit, the airlines are trying to change and keep up with demand - if not for award seats, then at least for improvements to the system.

Last November, for instance, Delta Air Lines introduced a twist to its SkyMiles program with Mileage Transfer. In most frequent-flier programs, participants can buy miles when they are short of a reward costing anywhere from 3¢ and up.

Now, SkyMiles members can transfer miles to each other for the cost of 1¢ per mile. Transfer of miles is in increments of 1,000 miles and program members can transfer or receive up to 30,000 miles per transaction with a maximum of 150,000 miles per calendar year.

So someone needing 8,000 miles for a reward ticket could have purchased the miles from Delta for just over $260, including the federal excise tax and the $25 processing fee. But acquiring those same 8,000 miles in the Mileage Transfer program costs about $105.

"The airlines are trying, yes," Mr. Winship said. "From the consumer standpoint, it's fair to say that over the past few years there has been a falloff in the value of these programs. But the airlines know that there's a tightrope act here, and that while they're trying to contain costs they can't devalue these programs."

That’s ROI

American spent $750, 000 on marketing AAdvantage in 2004, and United spent less than $1.5 million to market its Mileage Plus.

However, AAdvantage alone takes in $1 billion for American. United reported in its bankruptcy filing that Mileage Plus is the only part of the company making money.

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