Do seductive frequent flier programs hurt competition?

If you’ve ever done something for the miles, like Rick Brown has, you probably know the dilemma.

Should you shrug off a higher fare, a less convenient routing or consistently bad service for the promise of a “free” flight?

Brown, who runs a trading company in New York, has done all that — sticking with his preferred carrier, United Airlines, even when the airline struggled. He’s spent hundreds of thousands of dollars on airfares for himself and his family during his career, “more than on any other airline,” he says.

Research suggests many consumers are similarly seduced, and that the siren song of loyalty programs can lure them into booking a substandard product. The debate is particularly intense now, with United’s’ controversial loyalty program changes taking effect this month. It becomes the latest airline to reward customers based on money spent instead of miles flown.

Some of the elite-level customers, who benefit the most from these programs, claim that even now the programs represent a free and unregulated airline industry at its finest. But under the bright glare of public scrutiny, a new theory is gaining popularity. Many travel loyalty programs accomplish the exact opposite of what they’re supposed to, it contends. They prod customers into making foolish decisions that not only benefit an undeserving company but also squelch meaningful competition.

Brown says he’s disillusioned by United’s changes, which effectively stripped him of his elite status. “I feel like I have worked very hard for a company for over 20 years, and did not even get the gold watch,” he says.

United has described its revised program as a better way to reward customers, offering “new choices” for passengers like Brown. It claims it has some of the highest redemption levels in the industry. After Brown complained to United, it apologized and upgraded his status from gold to platinum as a one-time courtesy.

In survey after survey, customers say loyalty programs play a pivotal role in their booking decisions. More than one-third of passengers “nearly always” choose a flight because of the miles they’ll earn, a 2014 survey by MileCards.com found. The most loyal passengers? United frequent fliers. More than 4 in 10 admitted they’re brand loyal, even though United was the most complained-about major airline in 2014, according to the Department of Transportation.

The payoff to an airline is measurable. A loyalty program can boost a company’s market share by as much as 20%.

In the past, these facts have been spun as a “win-win” — airlines rewarding their best customers, and in return, being rewarded with more business from their grateful passengers. But as loyalty programs change, that narrative is crumbling.

A recent survey by Colloquy showed that this year, for the first time ever, memberships in airline frequent-flier programs declined, falling by 4%. More passengers are beginning to think of themselves as prisoners of an airline rather than willing participants in a loyalty program. And more industry observers are seeing the toxic effects of these programs on a free market.

“I believe there’s little question that the primary purpose of these programs is to put loyalty ahead of reason,” says Harlan Platt, a finance professor at Northeastern University.

In fact, the term “loyalty program” may be inaccurate, given the recent changes that have taken place, since the loyalty only goes one way. They are actually highly effective marketing programs, say customer service experts like Shep Hyken.

“My question then is simple,” he adds. “If the airlines took away the miles and free upgrades, would the passenger remain loyal?”

We may be a step closer to finding out. The Department of Transportation’s Inspector General is expected to complete an audit of airline loyalty programs later this year, and it could include recommendations for tighter — and some say, desperately needed — regulation. Florida Congressman Alan Grayson, who asked for the probe, has complained that airline loyalty programs are “prone to manipulation by the airlines that control them.”

The broader, and perhaps unanswerable, question is: How have these manipulations interfered with the market? Have they enticed passengers to choose the best loyalty program over the better airline?

The long-term effects on passengers is obvious, and unfortunate. Today, elite-level passengers fly in brand-new, lie-flat seats and gorge themselves on haute cuisine, while the rest suffer in steerage class, wedged into smaller seats and forced to pay a fee for even the most basic in-flight services. But the impact of loyalty programs on the overall industry might not be as obvious. Might an airline with a better product and service have failed because it couldn’t lure fliers loyal to another? We may never know.

The government needs to begin doing its job and regulating loyalty programs. The sooner, the better. But passengers also have to stop behaving like children when it comes to their purchasing decisions, say experts.

“Many parents use prizes — well, bribes, really — to motivate kids to do certain things,” says Vassilis Dalakas, a marketing professor at California State University-San Marcos. “But instead of ice cream the prize is now free Wi-Fi, or whatever other amenities come with a higher loyalty category.”

Only when we stop taking the silly rewards and start booking travel based on sound reasoning can the chokehold of loyalty programs release its grip on us. What are you waiting for, another program devaluation?

Do frequent flier programs hurt competition?

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How to collect miles (without destroying competition)

• Remember what’s important. Most consumers just want a quality product at a fair price. If you book with a site like RouteHappy.com, which tells you the best flight for your money, you lessen the influence of loyalty programs with each reservation — even if you collect miles.

• Don’t be afraid to switch. Ask a competitor about matching your status, and you can reward a more deserving airline with your business. Evaluate your portfolio frequently and switch programs if you think you’re not getting enough benefit. If you don’t have too much invested in a program, now is a good time.

• Support the audit. If you want to add something to the DOT loyalty program audit, you can contact the Inspector General’s office via its hotline — 800-424-9071 — or e-mail at [email protected].

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