The ethical dimensions of airline frequent flier programs

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

Agency Theory

Michael Kinsley (1985) lamented, "Frequent flier programs are an ingenious system for giving the benefits of competition to the person who decides how to spend the money, rather than (to) the people whose money is being spent." In other words, there is a principal-agent problem here whereby the former is the corporation paying for the ticket and the latter is the employee choosing the airline.

The problem arises when there is a conflict of goals and it is difficult for the principal to monitor the agent's activities. In the case of frequent flier programs, it may be in the best interest of the agent employee to undertake unnecessary travel or book circuitous routes, change planes often to increase flight legs, and fly in premium classes to increase mileage credits. A business traveler flying on a corporate account may rent a big car and then check into an expensive hotel to gain additional points. When forced to use the mileage credits for travel on company business, the employee will often choose to use the bonus awards for free upgrades rather than free tickets. Unfortunately for the principal, all of these will lead to higher costs by way of greater travel expenses and lost employee productivity. But do business travelers take advantage of the principal-agent situation?

Our Survey Results

Over a continuous period of study beginning in 1987, we conducted interviews with executives of American Airlines, Alaska Airlines, Horizon Air, Northwest Airlines, PanAm, Boeing, PACCAR, Weyerhaeuser, Microsoft, Nordstrom, Runzheimer International, Plog Research, Avmark Inc., Seafirst Bank, Citibank, McCaw Communications, KPMG Peat Marwick, Brazier Forest Industries, the Internal Revenue Service, the U.S. Air Force, the Congressional Office, and representatives from two major law firms. In addition, we sent out 655 questionnaires to corporations each with more than 100 employees and received 313 usable returns. We also interviewed, at different times and on different days, 271 passengers who were asked to fill out detailed questionnaires while awaiting flight embarkation at Sea-Tac International Airport. Altogether we compiled a data base of about 20,000 points and performed numerous statistical tests and analyses on the data.

Our passenger survey revealed that 67 percent of the frequent flier members agreed with the statement that membership in a program influenced their choice of an airline. And in assessing the importance of frequent flier programs in choosing an airline, there was a positive correlation with enrollment in multiple programs and concentration on one mileage program. This indicates that those who play the frequent flier game usually belong to many programs but concentrate on one to maximize benefits. In addition, members are more likely to choose an airline on the basis of program membership and tend to concentrate their choices on one airline to maximize rewards.

When asked how important a mileage program would be in choosing an airline if frequent flier bonus tickets were considered free employee benefits, 62 percent of business travelers said it would be very important or important. But when asked how important it would be if frequent flier bonus tickets were considered company property, the figure fell to only 8 percent. It appears, then, that business travelers will play the frequent flier game for themselves but not for their companies. And members who worried most about the taxation of benefits and those who enrolled in multiple programs are the very ones who care the least about accruing the awards for their corporations.