Many travelers are a member of at least one airline frequent flyer program — and lots are members of multiple airline loyalty programs. And the membership numbers keep growing, as well as the accumulated earned mileage waiting to be redeemed. And therein lies the promise — and the problem.
The modern frequent flyer program began more than 40 years ago, a little more than two years after airline deregulation unleashed greater competition for passengers.
American Airlines launched first among the big carriers in 1981, quickly followed by Delta and United. Initially, American's membership was by invitation only. Today it has 115 million members, closely followed by United — 100 million-plus — and Delta, 92 million.
In 2018, the McKinsey consulting group estimated the number of unredeemed airline miles sitting in accounts at 30 trillion. How? Most mileage today is earned by people who aren't even flying, through purchases on airline mileage program-linked credit cards — 58% of all mileage earned is earned on the ground.
Over four decades, airline mileage programs have morphed from a way to generate a bit more loyalty to a massive profit center for airlines, and an unexpected financial savior for the carriers ascrashed airline travel.
When the, loyalty programs were the exception as people continued to spend with program partners on co-branded credit cards.
As the public health crisis sent passenger numbers into a nosedive, airlines searched for ways to raise money. For the first time in U.S. history, airlines used their awards programs' future cash flows as collateral to raise billions in loans, instead of the usual collateral for debt financing of aircraft, gates and other assets. In filings to secure loans, documents provided by American Airlines and United valued their awards program programs as $24 billion and $22 billion respectively. Translation: The airlines were — and are — making more money from their frequent flyer programs than operating as airlines.
United raised $6.8 billion backed by its program; Delta was able to borrow $9 billion; and American set a record for the largest financial transaction in airline history — $10 billion, backed by AAdvantage's intellectual property and cash flows.
According to ValuePenguin, a consumer research website, the top five U.S. airline loyalty programs ended 2020 with a combined balance of $27.5 billion in unused loyalty program miles, up $2.9 billion from 2019. American had the most, $9.2 billion; followed by Delta, at $7.2 billion; United, $6 billion; Southwest, with $4.4 billion; and JetBlue at $.7 billion.
As airlines have come to be increasingly dependent on the revenue derived from these programs, they are facing stiffer competition. The programs — which originally were about putting bodies in seats and based on the distance traveled — have gotten much more complex, making it harder for travelers to earn miles via airline travel, especially on economy tickets. And as travel demand soars and airlines cut flights and routes, it's much harder to redeem those miles.
The airlines like to boast to Wall Street the real value of their reward programs. And they often celebrate the financial success of these programs by how low the redemption rate is for miles — in some cases 8%. As travelers flock back to airplanes post-pandemic, airlines are even more reluctant to displace revenue passengers, and that redemption rate for frequent flyer miles could drop further. A recent check of flights from New York to London, Los Angeles to Hawaii and Chicago to Paris, as well as flights from the U.S. to Australia, showed virtually no availability for frequent flier award seats for more than 45 days in a row.
And yet, members continue to earn miles. And when an airline does redeem miles for a "free" award ticket, it's not exactly free. Since 58% of all miles are earned on the ground, a "free" ticket for 25,000 miles really means is that you've spent a minimum of $14,000 to get that ticket, not counting the money you spent to fly the miles to get you to the rest of the 25,000-mile level.
The love-hate relationship with airline miles may have reached a tipping point, as many travelers who will do anything to earn miles are confronted with the increasingly difficult challenge of using those miles.
The smart travel strategy when it comes to miles is to look at other airline partners in their marketing programs, like One World, Sky Team or Star Alliance. For One World, that includes airlines like American, Finnair, Alaska, British Airways, Cathay Pacific, Royal Jordanian and a number of others. For Star Alliance, that's United, Air New Zealand, Turkish Air. For Sky Team, it's Delta, Air France, KLM and Korean Air.
Then, think as far as 330 days out. Frequent flyer award seats this summer are not only very hard to get, but many airlines have increased the redemption levels, which are the minimum number of miles needed for any one flight.
Instead, look for flights departing after Sept. 15, and then think off-season. After Sept. 15, the mileage needed to redeem is likely to finally start dropping down towards more reasonable levels. Travelers won't be going to Paris in the summer, but then again, they weren't going to get a tan in the first place. And the same applies to hundreds of other destinations.
But one very important takeaway for travelers: Under deregulation, not a single state or federal agency has oversight or control of these frequent flyer programs, and the airlines each reserve the right to devalue miles anytime they want. So, begin to redeem frequent flyer miles as soon — and as often — as possible.
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