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July 26, 2005

Frequent Flyer Miles as Debt in Need of Devaluation

Tim Harford asks what would be the best way for frequent flyer program to devalue their currency?

Last year I explained why a devaluation is inevitable, and why that doesn't mean you should stop collecting miles.

The simplistic version of the problem is too many miles chasing too few seats. Problems have been exascerbated the last couple of years as airlines pulled down capacity. Now, with flights running especially full, getting a nominally free seat can be tough. Award redemption (at least at the usual mileage pricing) is predicated on giving away only those seats that are likely to go unsold. That pot of inventory isn't growing, but mileages balances are.

Given the need for devaluation, how should airlines do it?

The first option Harford gives is rejected, but not strongly enough:

Airlines could simply repudiate the debt, but this seems unnecessary.

"Seems unnecessary?" It would be suicidal to the viability of the programs. Not only do the programs drive loyalty, they are a huge databsae of consumer behavior, and they actually make a profit. The Air Canada program has a market value of about $2 billion. Large US domestic programs are worth some multiple of that. Why kill the goose?

British Airways seem to have decided on the latter: they are making it nearly impossible for me to book frequent-flyer tickets, rectify their errors or coordinate with my wife's bookings. But this is a puzzle - a simple devaluation would go unnoticed, but the current shenanigans are hugely irritating.

For transatlantic crossings, I've actually found award availability on BA to be pretty good. But that aside, devaluations are far from unnoticed! Devaluations 'move the goalpost' while your customers are earning. Some may strive harder, certainly others will become angry.

It's true that an inability to redeem seats is a frustration felt by many, Capital One exploits is through their David Spade TV spots to hawk an inferior credit card.

Several explanations are offered:

1) They have devalued already and I didn't notice, but they still had too much debt outstanding.

Bingo. A good example is Northwest, but BA devalued substantially a couple of years ago. And Qantas nearly double the cost of some premium awards.

2) The frequent flyer contract makes devaluation illegal but obstructiveness legal.

Hardly, both are legal and ongoing.

3) Never attribute to conspiracy that which is adequately explained by incompetence.

Another good theory. Never trust airline websites to tell you about availability. Never trust the CSRs either. If you don't like the answer you get, hang up and try again. Not everyone is sufficiently diligent to find seats that do exist.

I've never walked away empty handed, but it takes trying each gateway one by one, flight by flight.

Technology will solve this in the short run, but without greater devaluation the problem will return as more miles are successfully redeemed, eating up available seat inventory.

Now there are inefficiencies and some award seats do go unoccupied. Once technology wrings those out, the problems will be even more acute and more demanding of further devaluation.

Posted by gleff at July 26, 2005 4:16 PM

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