Frequent Flyer Miles A major charity raised the average contribution from its direct-mail campaign from $46 to $126 in one year. How was this accomplished? By offering one American Airline frequent flier mile for every dollar donated, the charity increased not only the amount given but also the percentage of those donating (from 10 to 35 per cent). The idea for frequent flier miles originated in 1981 at American Airlines. Initiated to build brand loyalty among veteran airline travelers, frequent flier programs gradually expanded beyond providing free miles for airline travel. In the mid – 1980s airlines began selling miles to “travel partners,” such as car rental agencies, credit card purveyors, and hotels. In the early 1990s, the list of firms giving away frequent flier miles expanded exponentially. By mid-decade, miles could be obtained from restaurants, mortgage firms, investment houses, and even roofing companies. By the 21st century, the Internet has worked to expand these opportunities for miles. Randy Peterson, of Webflyer.com, estimates that there are as many as 15,000 individual mileage-making opportunities. In 2000, a number of websites, like Webflyer.com, offer a virtual trading place where consumers can go to swap ideas for gaining additional miles. For some people, accumulating frequent flyer miles has become an obsession. One consumer described collecting frequent flier miles as a compulsion. He said, “I live, eat, and breathe the United Airlines Mileage Plus Program.” In the late 1980s, the problem of mileage maniacs grew to epidemic proportions for the airlines. One lawyer and her husband had six credit cards, each of which netted a free mile for every dollar spent. When they applied for another card, they were rejected but still collected 2,500 free miles. Her husband described his wife as addicted, saying “It’s like drugs; you first start small, and it gets bigger.” Before 1995, some frequent flier junkies even cheated by enlisting people to ride airlines under their names. How to deal with such rule flouters, who ultimately drove up costs for everyone, was a major problem at the time. This problem, however, was resolved in 1995 when the Federal Aviation Administration began to require that airlines examine the IDs of all travelers. Although this was actually done to thwart terrorism, it also cut down on frequent flier “cheaters.” Even absent the cheating, the airlines suffered huge revenue losses as a result of all the free mile’s passengers were racking up. In the early 1990s, the estimated total cost of frequent flier programs approached $940 million. By the mid-1990s, however, the unfunded liability problem had largely vanished because the airlines had placed deadlines on when the miles had to be used. Moreover, this was the time period when airlines learned how to sell “free miles” to other companies for use in their promotions. By 1995, nearly half the miles were being sold to other companies at a rate of $.02 per mile. American Airlines earned roughly $300 million this way. Because frequent fliers fill seats that would otherwise be empty, this revenue is virtually pure profit. For example, at $.02 per mile, a 25,000-mile round-trip domestic ticket earns the airline $500. The extra cost for that additional passenger ranges from about $43 to $93, depending on the airline. So selling frequent flier miles has become a profit centre for the airline industry. Airlines also take these “elite” fliers very seriously. It has been estimated that those passengers who fly at least 25,000 miles a year make up only 2% of all fliers, but they can bring in as much as 25% of a company’s revenue. What makes consumers act as though frequent flier miles are worth more than their actual value? One explanation offered by the Wall Street Journal is that the miles have “…become a jar of mad money for families, a vacation-enabling fund untouchable for paying bills, saving for college, or providing for retirement.” Indeed, when United Airlines offered consumers a choice of free miles or a cash rebate in a promotional campaign, most consumers chose the miles. One consultant said, “Cash is not what consumers want anymore. The whole lure of something for nothing is very powerful. Miles are almost a second national currency.” Question From a consumer welfare perspective, define the problem that frequent flyer miles pose for some consumers.
Frequent Flyer Miles
A major charity raised the average contribution from its direct-mail campaign from $46 to $126 in one year. How was this accomplished? By offering one American Airline frequent flier mile for every dollar donated, the charity increased not only the amount given but also the percentage of those donating (from 10 to 35 per cent). The idea for frequent flier miles originated in 1981 at American Airlines. Initiated to build brand loyalty among veteran airline travelers, frequent flier programs gradually expanded beyond providing free miles for airline travel. In the mid – 1980s airlines began selling miles to “travel partners,” such as car rental agencies, credit card purveyors, and hotels. In the early 1990s, the list of firms giving away frequent flier miles expanded exponentially. By mid-decade, miles could be obtained from restaurants, mortgage firms, investment houses, and even roofing companies. By the 21st century, the Internet has worked to expand these opportunities for miles. Randy Peterson, of Webflyer.com, estimates that there are as many as 15,000 individual mileage-making opportunities. In 2000, a number of websites, like Webflyer.com, offer a virtual trading place where consumers can go to swap ideas for gaining additional miles. For some people, accumulating frequent flyer miles has become an obsession. One consumer described collecting frequent flier miles as a compulsion. He said, “I live, eat, and breathe the United Airlines Mileage Plus Program.” In the late 1980s, the problem of mileage maniacs grew to epidemic proportions for the airlines. One lawyer and her husband had six credit cards, each of which netted a free mile for every dollar spent. When they applied for another card, they were rejected but still collected 2,500 free miles. Her husband described his wife as addicted, saying “It’s like drugs; you first start small, and it gets bigger.” Before 1995, some frequent flier junkies even cheated by enlisting people to ride airlines under their names. How to deal with such rule flouters, who ultimately drove up costs for everyone, was a major problem at the time. This problem, however, was resolved in 1995 when the Federal Aviation Administration began to require that airlines examine the IDs of all travelers. Although this was actually done to thwart terrorism, it also cut down on frequent flier “cheaters.” Even absent the cheating, the airlines suffered huge revenue losses as a result of all the free mile’s passengers were racking up. In the early 1990s, the estimated total cost of frequent flier programs approached $940 million. By the mid-1990s, however, the unfunded liability problem had largely vanished because the airlines had placed deadlines on when the miles had to be used. Moreover, this was the time period when airlines learned how to sell “free miles” to other companies for use in their promotions. By 1995, nearly half the miles were being sold to other companies at a rate of $.02 per mile. American Airlines earned roughly $300 million this way. Because frequent fliers fill seats that would otherwise be empty, this revenue is virtually pure profit. For example, at $.02 per mile, a 25,000-mile round-trip domestic ticket earns the airline $500. The extra cost for that additional passenger ranges from about $43 to $93, depending on the airline. So selling frequent flier miles has become a profit centre for the airline industry. Airlines also take these “elite” fliers very seriously. It has been estimated that those passengers who fly at least 25,000 miles a year make up only 2% of all fliers, but they can bring in as much as 25% of a company’s revenue. What makes consumers act as though frequent flier miles are worth more than their actual value? One explanation offered by the Wall Street Journal is that the miles have “…become a jar of mad money for families, a vacation-enabling fund untouchable for paying bills, saving for college, or providing for retirement.” Indeed, when United Airlines offered consumers a choice of free miles or a cash rebate in a promotional campaign, most consumers chose the miles. One consultant said, “Cash is not what consumers want anymore. The whole lure of something for nothing is very powerful. Miles are almost a second national currency.”
Question
From a consumer welfare perspective, define the problem that frequent flyer miles pose for some consumers.
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