The next bubble? Travel loyalty programs

Lexarts/Shutterstock
Lexarts/Shutterstock

Did anyone pay attention when Robert Shiller warned about the real estate bubble or Nouriel Roubini sounded the alarm bells about the impending global economic crisis? Probably not as much as they should have. So feel free to ignore this one, too: travel loyalty programs — and particularly airline programs — are a bubble. And it may be about to pop.

All the signs are there. Delta Air Lines’ recent, precipitous devaluation of its loyalty program is just the latest. Your hard-earned frequent flier miles now die with you, and can’t be inherited by your next of kin. (Yes, Delta can do that.) This follows a wholesale downgrade of its SkyMiles program. Several hotel chains, including Marriott and Hilton, have also decimated their programs in the last few weeks.

You can tell that frequent travelers are feeling frustrated. Consider the recent lawsuit filed by Hongbo Han of Rockville, Md., who alleges United Airlines shorted him by a few miles. (Of course, United can calculate its award miles any way it wants to, and it doesn’t have to explain itself — see its program’s onerous terms if you don’t believe me.)

But the sentiment is clear: Air travelers like Han can practically feel those miles slipping through their fingers.

Sky’s the limit

Apparently, the sky’s the limit for mileage programs. From 1981 to 2005, the number of unredeemed miles mushroomed from 2 billion to more than 14 trillion.

And it hasn’t stopped. Have a look at Delta’s latest annual report. It says SkyMiles members cashed in more than 262 billion miles for 11 million award redemptions in 2012. Of the revenue miles flown on the airline during that period, 8 percent came from award travel, according to the airline.

Delta won’t say how many trillions of unredeemed miles are in the wild, but it’s not hard to determine. For unredeemed mileage credits, which Delta refers to as “breakage,” it attaches a dollar value during the period in which the remaining mileage credits are expected to be redeemed.

Delta uses statistical models to estimate breakage based on historical redemption patterns, so even the airline doesn’t know exactly how many unredeemed miles are floating around out there. Last year, the aggregate deferred revenue balance associated with the SkyMiles program was $4.4 billion, according to Delta.

Assuming each frequent flier mile is worth one cent, which is a very generous appraisal, that’s almost half a trillion miles. But wait! Airlines are known to value their miles at far less — by some estimates, a fraction of a penny. And Delta isn’t even the largest domestic airline.

That’s a lotta miles, my friends.

Earn and burn

Meanwhile, it’s never been easier to earn miles and points. You can get miles for buying groceries, renting a movie, purchasing a home or by clicking a scammy affiliate link on a mileage blog to sign up for affinity credit cards. Airlines are playing both sides of the fence on this one, allowing customers to earn limitless miles, and quietly trying to deflate the bubble on the other end.

This isn’t going to end well.

At some point, the loyalty programs we know and love will have to be dramatically restructured and your miles will almost certainly be devalued in a tragic way. Many observers already say miles are a form of unregulated currency. If they are a currency, then they remind me of the hyperinflated German Mark in the 1920s.

The fix for that? Issuing new Marks at an exchange rate of one to one trillion.

The devaluation of the travel industry’s funny money may only be slightly less painful.

The lesson seems clear: Redeem your miles now, while they’re still worth something, because someday soon they may be worth next to nothing — if they aren’t already.

Are travel loyalty programs a bubble?

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