Frequent flyer program

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This article is about airline frequent flyer programs. For the TV movie, see Frequent Flyer (film).
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A frequent flyer program (FFP) is a service offered by many airlines to reward customer loyalty. Typically, airline customers enrolled in the program accumulate points corresponding to the distance flown on that airline. Accrued points (also known as frequent flyer miles) can be redeemed for free air travel; for other goods or services; or for increased benefits, such as airport lounge access or priority bookings.

Contents

[edit] History

The first modern frequent-flyer program was AAdvantage, initiated in May 1981 by American Airlines; it was a modification of a never-realized concept from 1979 that would have given special fares to frequent customers. It was quickly followed later that year by programs from United and Delta, and in 1982 by British Airways.[1]

Germany's Lufthansa rolled out its mileage program, Miles & More on January 1, 1993.

[edit] Points accrual

Qantas Frequent Flyer co-branded credit cards
Qantas Frequent Flyer co-branded credit cards

The primary method of obtaining points in a frequent flyer program is to fly with the associated airline. Most systems reward travellers with a specific number of points based on the distance travelled (such as 1 point per mile flown), although systems vary. In Europe, for example, a number of airlines offer a fixed number of points for domestic or intra-European flights regardless of the distance (but varying according to class of travel)[2]. The calculation method can become complicated, with additional points given for flying first or business class, and often fewer points given when flying on discounted tickets.

With the introduction of airline alliances and code-share flights, frequent flyer programs are often extended to allow benefits to be used across partner airlines.

Many programs also allow points to be obtained not just through flying, but by staying at participating hotels, or renting a vehicle from a participating company. Other methods include credit cards that offer points for charges made to the card, and systems which allow restaurant diners to earn miles by eating at participating restaurants.

Programs differ on the expiration of points. Some expire after a fixed time, and others expire if the account is inactive for an extended period (for example, three years). [1]

[edit] Customer status

Many frequent flyer programs identify travellers who fly more than a few times per year by awarding them different status levels, which in turn give a number of benefits that cannot otherwise be purchased. Status levels vary from scheme to scheme, but benefits can include[citation needed]:

  • Access to business and first class lounges with an economy ticket
  • Access to other airlines' lounges
  • Increased mileage accumulation (such as doubling or tripling)
  • Reserving an unoccupied adjacent seat
  • The ability to reserve specific seats, such as exit row seats with more leg room
  • Free or discounted upgrades to a higher travel class
  • Priority in waitlisting or flying standby
  • Preference in not being bumped if a flight is oversold

Some programs even permit elite members to reserve space on sold-out flights, giving members the ability of bumping regular passengers. Customer status is based on elite qualifying miles (or flight segments), not redeemable miles. Typically one elite qualifying mile is earned for each mile flown on a paid ticket, although there may be a percentage bonus for flying full fare economy or flying business or first class. In addition, the airline may offer opportunities to earn elite qualifying miles in non-flying ways, often in connection with their branded credit card. There are usually many more non-flying ways to earn redeemable miles which can be redeemed for free tickets and other benefits. Some airlines will recognise a customer's status with a competing airline, and grant them the same benefits.

Some airlines offer accelerated admission to their elite programs through special promotions, such as flying 25,000 miles within one month gains a top-tier membership normally reserved for passengers flying 100,000 miles per year.

[edit] Value of a point

Travellers frequently debate how much accumulated points are worth, something which is highly variable based on how they are redeemed. A typical ballpark figure is approximately 2 cents per mile based on discount (rather than full fare) economy class travel costs[citation needed]. However, most airlines have stringent capacity constraints on the number of "reward" seats available, so some people argue that this ballpark figure is an overstatement. In this case, the value of a mile drops below a cent a mile. The airlines themselves value miles in their financial statements at less than one thousandth of a cent a mile. [3]

In contrast, calculating the value of a point based on full-fare business class travel costs can yield a figure several times higher, but only if the customer would personally be willing to pay the multiple thousands of dollars such tickets would cost otherwise. However, a person paying a full business fare will be able to change flights on short notice without extra cost; a person flying business class on a free award ticket may find that last minute minutes changes result in no award seat availability with the result that a ticket must be bought.

Increasing limitations on the availability of seats for point redemption, increases in services fees that airlines charge for redemption, and limitations on the transferability of redeemed tickets together have caused the value of points to customers to decrease with time[citation needed].

Most airlines call the points earned "miles" because they represent the number of miles accrued. The term "miles" is not representative of the number of miles that can be flown in redemption. However, some[citation needed] complain that the term is misrepresentative since it really could take as many as 50,000 "miles" to fly within the United States.

[edit] Bankruptcy

In the wake of the September 11 attacks, some airlines have faced financial difficulties, raising concerns among frequent flyers that their points could be lost or devalued[citation needed]. All airlines include provisos in their program agreements reserving the right to modify or eliminate them on relatively short notice. But since miles are a strong customer incentive, troubled airlines avoid their elimination in bankruptcy proceedings, and indeed may expand them or make them more generous to elite members and high fare passengers in order to win sales.

Furthermore, since most airline miles are never claimed, the programs represent a relatively small liability, and indeed can represent a profit center[citation needed]. Since the 1990s, U.S. airlines have sold billions of miles to partners such as credit cards, hotel chains, and car rental agencies, who offer this "currency" as an incentive to purchase their own services. Any effort to curtail the awarding of miles would thus endanger partner relations and another revenue stream. Notably, the banks backing several airline-branded credit cards have been a key source of airline financing[citation needed], including United Airlines (Chase), US Airways (Juniper Bank), Delta Air Lines (American Express), Northwest Airlines (US Bank), American Airlines (Citibank) and Copa Airlines (Visa).

Historically, the record is mixed. U.S. airlines have usually honored miles held in the accounts of acquired airlines. For instance American Airlines converted members of TWA's "Aviators" program to its own, as did Air Canada for Canadian Airlines' "Canadian Plus" program members. Sometimes, miles were honored by a close partner; Continental Airlines assumed Eastern Air Lines' program when it failed, as did Delta of Pan Am's. Bankrupt Swissair miles were transferred to Swiss International Air Lines TravelClub who were transferred to Lufthansa's Miles and More after the acquisition of the Swiss carrier.

Members are at greatest risk of losing their miles when an airline liquidates. All miles and privileges were lost, without recognition from any other carrier, in the cases of Midway, Braniff, and Ansett Australia.

[edit] Accounting issues

Business travellers typically accrue the valuable points in their own names, rather than the names of the companies that paid for the travel. This has raised concerns that the company is providing a tax-free benefit (point-based rewards) to employees, or that employees have misappropriated value that belongs to the company, or even that the program acts as a kind of bribe. The U.S. Internal Revenue Service has not as yet made any move to tax mileage programs, though for instance the Canadian taxation authorities consider mileage redeemed for free travel to be a taxable benefit[citation needed]. Most companies consider the miles earned by their employees to be a valuable personal perk that in part compensates for the daily grind of frequent business travel, though some governmental organizations have attempted to prevent their employees from accumulating miles on official travel. For example, Australian Public Servants are not permitted to redeem points accrued from official travel[4].

In some counties, some reward points can be donated to charity[5]. While the Canadian government will honour these donations as a charitable gift, the difficulty here is getting a tax receipt for those points from the company itself. This policy also appears to conflict with the position that reward points are taxable in the first place.

On the airline side, the points represent potential non-revenue travelers on its books. These must be carried forward on balance sheets as an outstanding contractual debt for an indeterminate time, although the actual value (or loss) may be difficult to determine for any particular period.

[edit] See also

[edit] References

  1. ^ Ben Beiske (2007). Loyalty Management in the Airline Industry. GRIN Verlag, p. 93. ISBN 3638777170. 
  2. ^ http://www.miles-and-more.com/cdautils/mediapool/media_479895.pdf
  3. ^ [/http://www.microsoft.com/smallbusiness/resources/finance/business-travel/5-rules-for-collecting-frequent-flier-miles.aspx#rulesforcollectingfrequentfliermiles>]
  4. ^ APS Values and Code of Conduct in practice
  5. ^ Frequent-flyer points donation a tricky tax issue

[edit] External links


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