The ethical dimensions of airline frequent flier programs

Business Horizons, Jan-Feb, 1997 by David W. Arnesen, C. Patrick Fleenor, Rex S. Toh

The "friendly skies" could become a battleground as abuse of airlines' bonus programs comes under increasing fire.

When Tom Plaskett, then senior vice president of marketing at American Airlines, launched the AAdvantage frequent flier program in May 1981, he likened the bonus program to the time-honored Green Stamps Concept, but wryly noted, "All we've done is to replace toasters with the most sought-after reward today: travel" (Hoffman 1984). In a recent television commercial, when asked "What's in it for you?" the tired business traveler, dragging his luggage down the hall corridor, shoots back, "The points!"

Northwest Airlines offers a free economy roundtrip ticket on domestic flights for 25,000 miles of credit or points. United offers a free economy roundtrip ticket between the U.S. and Europe at 50,000 miles. A free round trip to Asia is awarded for 60,000 points at Delta. Such generous awards prompted Samuel Pruett, vice president of personnel at Procter & Gamble, to caution his employees in an internal memo: "Frequent flier points appear to be a free award, but in fact they are a form of supplier gift designed to influence the recipient and encourage greater purchase of the supplier's product." In other words: It's a bribe! And although it appears to be quite respectable, abuses of the programs are costing U.S. corporations $6.3 billion a year.

Two main ethical issues are involved here. First, are the strategies used by corporate employees to maximize their frequent flier benefits and the accompanying corporate responses morally right? Second, what are the net consequences of these actions on society as a whole?

The Frequent Flier Game

This is how the game is played. A frequent flier program allows individual members (but not corporations) to accumulate mileage credits any of three ways by flying on the sponsoring airline or its affiliates, by renting cars from or staying at hotels owned by designated partners, or by using airline affiliated affinity cards, among others. Usually more points are earned on business and first class seats. At designated levels these points can be redeemed for upgrades or free tickets, which can be transferred to family members and friends, but not sold. The "free" awards are attractive, addictive, and, for all practical purposes, tax free.

These benefits have made frequent flier programs the latest and one of the most successful marketing tools in the service industry. They are so popular that by 1995 Americans held almost 2 trillion credit miles--enough for 76 million free domestic roundtrip tickets. Travelers value these awards so highly that frequent fliers filed a lawsuit against American Airlines when it raised the minimum miles required for a free ticket. So much is at stake that the U.S. Supreme Court recently ordered a lower court to hear the merits of the case to determine whether AA broke a legal commitment.

According to recent estimates, today there are 32 million frequent flier members, each enrolled in an average of 4.7 plans. This means that about 150 million people are enrolled in approximately 40 different frequent flier programs. The 32 million members represent about 40 percent of the estimated 80 million airline passengers who take at least one trip a year. The game is so popular among professionals and business people that chances are anyone reading this article belongs to at least one frequent flier program.

Attempting to cultivate brand loyalty by rewarding repeat patronage, frequent flier programs target the approximately 33 million business travelers who fly quite often, usually at full fares and often in premium classes, and who made 122 million trips in 1995. Business travelers contributed about $41 billion, or 70 percent of the $58 billion earned in passenger traffic by U.S. scheduled airlines in 1990. It has been estimated that 72 percent of all business travelers are enrolled in at least one bonus program, and that about 60 percent of all frequent flier members are business people. Clearly the airlines have succeeded in targeting business travelers as their frequent flier members.

THE PROBLEM OF ABUSE

The enormous success of airlines in attracting business people to enroll in their frequent flier programs, hoping to ensure their brand loyalty, has become quite a headache. After all, the whole idea of a frequent flier program is to encourage people, particularly those traveling on business, not only to travel repeatedly on the same airline, but to build up mileage credits by traveling unnecessarily, more often, for longer distances, and on higher fare classes. This ensures both increased and continued patronage. Indeed, one industry survey (Dettinger 1985) revealed that 25 percent of the frequent fliers polled admitted taking unnecessary trips.

Surely, given the way the game is played and the attractiveness of the prizes, abuses abound. The anecdotal evidence is plentiful. "I'm astonished at the number of people who are flying from New York to Chicago nowadays, by way of Atlanta," observed Robert Coggin, vice president of marketing at Delta Airlines (Levy 1985). One executive from New York flew to San Francisco via a detour to Phoenix, although he had no business there. Then there was the Dallas businessman who bought a ticket to New York to obtain a boarding pass, but never got on the plane. To explain why otherwise rational business travelers behave in such an irrational manner, let's take a look at Agency Theory.