The state of the mileage world (or more accurately, the sad state of the airline industry)

Eric left an interesting comment to my recent post where I reminisce about some of the most pleasant mileage runs I’ve taken thanks to United’s cheap first class Tampa to Ontario fares. Anyway, the questions he asked and points he raised deserve a separate post, in my opinion. Here’s his comment:

Lucky:

When flyers are trying to accumulate miles for status, are they booking a fare from point A to point B, and then booking as many waypoints as the fare will allow? Why do the airlines allow this? Is this a technology issue? Given that a pax is paying a fare for a city pair, why don’t the airlines just award the defined mileage between those cities?

When I’ve commented on revenue based FF programs, I received a response how on an annual basis, this may benefit the airlines (a full fare flyer travelling 2x per year), but from a cash flow perspective, a miles program creates the incentive to fly more often. This made sense.

However, this argument loses some steam when these types of practices are allowed (good for you, bad for the airlines).

It’s really not fair to the frequent fliers who fly a lot, but don’t have the time to take full advanteous of the system. In other businesses, these loopholes are eventually closed. Will this be as well? Or is there a good business reason for the airlines to allow it? Or am I misunderstanding the concept altogether?

Curiously,

Eric

Rather than tackling Eric’s points head on (apply directly to the forehead), I’ll be a bit circuitous. This is one of the reasons I didn’t respond to his comment in the comments section, because my response was just getting too long, detailed, and off topic.

Right off the bat I should say that everything I say from hereon out applies to the US legacies, and not necessarily other airlines. Aside from the legacies, some airlines — shockingly enough — are in the transportation business. Their primary goal is to move passengers from point A to point B efficiently while making a profit. Can the same really be said for the legacies post 9/11 (and even a bit before that)? I’d argue not.

I’d argue the legacies are really in the mileage program business, and they just happen to operate fleets consisting of several hundred high performance machines that serve no purpose other than to provide a vehicle for miles to be issued. I actually just got the December issue of InsideFlyer magazine a few days ago, where Gary of View from the Wing writes an article that’s similar to what I’m trying to get at. It was through selling miles to credit card companies that several of the legacies either emerged from bankruptcy or are still in business. I don’t remember the exact numbers (and I’m not trying to write a research paper, so I’m fine with that), but we’re talking about billions of dollars, much of which was financing when the airlines needed it most.

So what does this have to do with the price of butter in Patagonia (oh gosh, did I really just say that?)? Well, frequent flyer programs aren’t really frequent flyer programs anymore. They’re frequent spender programs, frequent diner programs, and frequent hotel stay programs. Just take my obsession with miles as an example. I open checking accounts, donate $1 to plant a tree, dine at restaurants I wouldn’t otherwise eat at, and much more, just to earn miles. Hell, I think “Up in the Air” does a pretty good job of showing what an obsessive, ridiculous hobby this can become. And I’m betting that even beyond the FlyerTalk crowd, the concept doesn’t seem that outlandish anymore.

I guess I still haven’t answered what this has to do with anything, so let’s get to it.  I’d argue that the airlines like the fact that this has turned into a game for us. Maybe not people like me that do the absolute minimum to earn miles, but in general the mileage obsession is a good thing.

While a revenue based frequent flyer program sounds good in theory, I think it would be a bad idea in the long run because it would disconnect many people from frequent flyer programs, and largely some of the most profitable customers — no, I’m not talking about paid first class passenger, but instead those that earn hundreds of thousands of miles without stepping on a plane. So if the purpose of a frequent flyer program were really just that — to reward frequent and maybe profitable flyers — I think a revenue based model is the way to go. But as long as they’re frequent [fill in the blank] programs, I think the airlines are happy with the status quo as far as the programs go.

Now to finally answer your question a bit more directly. When I book a ticket from Tampa to Ontario via Washington, New York, Los Angeles, and San Francisco, I’m really booking a Tampa to Ontario roundtrip ticket which just has four transfers in each direction. This is exactly what United’s fare rules allow domestically.

But not all airlines are this generous. Delta and Continental don’t allow this many transfers. American is somewhat generous, as is US Airways. But why would United allow this? Well, in some cases the rules make sense. There are some destinations that could potentially practically require three transfers in one direction. For example, flying from a small regional airport on one side of the country to a small regional airport on the other side of the country. So it’s definitely not a technology issue, it’s intentional.

A further reason this might be the case is because the inventory and revenue management departments at airlines are just so un-friggin-believably complex. I’ve obviously never worked for an airline, but as a consumer that spends half of my awake life looking at fare rules, routings, fare buckets, etc., I still get thrown off some days. It’s ridiculous how complicated the system is. First you have published fares, then you have fare buckets, then you have fare rules, and then half of the time (from my perspective) the actual inventory released doesn’t make sense. I don’t doubt that the suits at IM/RM know what they’re doing, because they most definitely do, but the system as such is so complex that I think the airlines somehow miss the big picture.

A couple of quick examples. Explain to me how a flight from San Diego to Los Angeles can be ten times the price of a flight from Los Angeles to Boston. Furthermore, I’d love if someone could explain to me how airlines try to get away with charging ten times as much for a domestic first class seat as a coach seat. This is something Continental actually agrees with me on, and it’s one of the many reasons upgrades are so tough with them — they actually sell first class seats.

Wow, I’m rambling. What does this have to do with your question? Well, I’d argue the airline inventory system is so out of control that the airlines can’t even keep track of it. There are many cases where flying Tampa to Denver to San Francisco would price out higher than Tampa to Washington to New York to Los Angeles to San Francisco, due to the fare buckets available on the individual flights, even though the flights on the four segment route might be substantially fuller than the planes flying the more direct routing.

So that’s fine and dandy, but why do airlines not just award mileage based on the origin and destination, regardless of where you connect? Well, that does make a lot of sense, but then again, lots of travelers (even profitable ones) have become very loyal and involved in mileage programs. Let’s say I need to travel from Washington to San Francisco and I’m loyal to American. Well, I could fly United nonstop, which is no doubt a more convenient option, or I could fly American and connect. I’d earn a few extra miles, which is a small consolation for the more inconvenient routing.

So I apologize for totally rambling here. Holy crap, what an unorganized, disconnected, scatter brained post. But it sums up how I see the industry right now. There’s a lot of things the airlines need to work on improving — on-time performance, customer service, the onboard experience, etc. But I think the airlines are best off leaving frequent flyer programs alone for the most part. They’re massively profitable beasts that have grown totally out of control, and probably for the better!

About lucky

Ben Schlappig (aka Lucky) is a travel consultant, blogger, and avid points collector. He travels about 400,000 miles a year, primarily using miles and points to fund his first class experiences. He chronicles his adventures, along with industry news, here at One Mile At A Time.

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Comments

  1. “I’d love if someone could explain to me how airlines try to get away with charging ten times as much for a domestic first class seat as a coach seat. This is something Continental actually agrees with me on, and it’s one of the many reasons upgrades are so tough with them — they actually sell first class seats.”

    But United has to get fewer paid F seats than CO does do to their higher prices. United can (conceivably, no clue how this works in reality) be getting the same amount of premium revenue as CO does but on fewer seats, thus allowing more elite upgrades, which keeps them happy and loyal. Seems perfectly reasonable in theory from the airline’s perspective-No clue how well it works in practice.

  2. @whakojacko – good observation. However, you assume that the demand curve is linear (if you sell 10 seats at $300, you’d be able to sell 3 seats for $1000each just as easily). I’m guessing more revenue would be gained with lower first class prices, and this provides more stability/predictability to cashflow. Ironically, for the same reason that many argue why miles vs. revenue ff programs make more sense to the airlines.

    If the buyers of these cheaper seats are frequent fliers, then it seems that the airline would end up ahead (even though there are fewer upgrade seats for other ffers). However, if the buyers are tourists or other infrequent fliers, then it would seem a bad idea for the airlines.

  3. Lucky – I’m new to your blog and find this post very interesting. I’m a fellow college student who’s flown a fair bit in my life but never with a significant focus on frequent flyer benefits. I’m starting to pay more attention, and your post brings me to a question.

    Towards the end of your post you say ‘When I book a ticket from Tampa to Ontario via Washington, New York, Los Angeles, and San Francisco, I’m really booking a Tampa to Ontario roundtrip ticket which just has four transfers in each direction.”

    I don’t have any idea where to find such an itinerary, let alone figure out a way to efficiently determine whether this or some other four transfer iteneary is more economical, both price and mileage wise. Have you ever done a post discussing your “tools of the trade?” If so can you point me in that direction? If not, I think it would make a really interesting post. Maybe this exists on FT already, in which case I’d love to be pointed there as well.

    Keep up the good work, I’m enjoying reading.

    Zach

  4. > But I think the airlines are best off leaving frequent flyer programs
    > alone for the most part. They’re massively profitable beasts that
    > have grown totally out of control, and probably for the better!

    Out of purely selfish reasons, I agree with you. After all, I believe I actually benefit from the current system and would be at a disadvantage if carriers like United or American implemented revenue-based award systems.

    That said, if you were (for whatever bizarre reason) going to start an airline today, what system would you put in place? Would you want to run a company that is really a points program with a redemption transportation appendage, or would you want to run an airline that sees transportation as its primary business and uses awards as a way to encourage loyalty among the customers for that primary business? It seems to me that many newer US airlines have chosen the latter approach (Virgin America, Jetblue come to mind).

    You also say that the mileage programs of the legacy carriers are wildly profitable. How profitable, exactly? What’s the return on capital? Do the mileage sale profits justify the huge costs of operating a fleet of airliners and employing tens of thousands of people? How does the profitability of mileage-program-driven companies compare to the profitability of the premium cabins of Singapore Airlines, BA, and Lufthansa, for example (ignoring the current economic environment and looking at it over a period of 20+ years, which I think a resource and capital intensive company needs to do.

  5. @ Zach., You can often times book the 4 transfers each direction for the same price as A to B. You just have to pay the taxes on the additional segments.

  6. @ Halothane – I get that, but I’ve never seen a way to create an itinerary with that many segments. Then again, I’ve never booked much on United. Most of my flying has been CO, AA, and a bit of USAir. That may be part of them problem.

  7. Hi Lucky, I really enjoyed this post and appreciated your approach to answering the readers comment. I am a huge fan of your blog but because I review it in google reader I feel likeI often miss out on some of the fantastic comment threads. I love that you took this interesting comment and created a new post. Please do this more often. I would recommend that you write new posts to reply to any comments that may be of general interest. Then go back to the original comment and post a reply to the comment that contains a link to your new post. I think this would increase usability of reviewing your archived blog entries and receiving the content (for casual readers like me that don’t visit the blog itself regularly but still want to keep up). maybe you could tag these types of posts as “Ask Lucky” if you aren’t already doing that… Hope you will run with this suggestion but I’ll come back either way – I am totally hooked.

    One final comment, I noticed that Zach wants to see some of your old posts but isn’t sure how to find the content. I appreciate your use of keywords/labels on the right and I am confident those categories improve readability and indexing of your site but would love a more social aspect like a X ‘People found this item helpful’ button or some other visibility metric to indicate which content is hot. I for one would love to see a blog post or a dynamic item on the right column of your blog with links to your most popular old posts (maybe this could be a feed item just like your recent comments feature, which, btw I also live although I would prefer to see a comment snipit rather than the full title of the post it refers back to) – fingers crossed you add something like this soon to provide more framewok for those of us who haven’t been with you from the beginning but don’t want to miss any kernels of advice or helpful info.

  8. I have to say, i disagree with your somewhat pessimistic view of today’s legacy airlines. So what if they sell miles, they end up having to fly more people around as a result. Its simply another method of the sales of their services. They’ve essentially added another way to segment they market, in which the prices is very low, but the services is provided at a time most convenient for the airline. I like to think of this as having the effect of creating a new cheaper non-mileage accruing fare bucket to compete with discount airlines in order to capture more of the infrequent flyer market, while maintaining the marketing needs associated with regular ticket sales, so the frequent business travelers. By selling miles to the population through credit card companies, a lot of people who wouldn’t otherwise have miles are ending up with sizable mileage accounts, those miles are then used for the once a year trip to see grandma at Christmas, taking away business that would have most likely belonged to discount carriers.

    The problem however comes from the way airlines record these payments as revenue, and the subsequent miles as liability, when they really should be considered as unearned revenue. Selling miles should be just like selling tickets, until the flight has actually been flown, no revenue is earned. But the way they do it now, the revenue aren’t being matched by any expenses, and especially in the service industry, when the matching principle isn’t being followed, problems and inefficiencies o will occur, and wrong discussions will end up being made by managers and investors, not to mention the tax implications.

    And when i comes down to it, airlines do all those seemingly stupid things to segment the market, and maximize revenue. Why dose UA sell domestic F tickets at 10 times the price when CO only sell they at twice, because UA thinks the number of people who will buy F seats on UA will still be high than 1/5 that of CO’s. And SAN-LAX is 10 times that of LAX-BOS simply reflects the revenue maximizing prices on the routes. Whether it makes sense is irrelevant.

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