Everything Everywhere Daily: History, Science, Geography & More - Frequent Flyer Programs

Starting point is 00:00:00 One of the things that almost every airline has in common is a frequent flyer program. Frequent flyer programs were initially designed for loyal customers who flew frequently. However, they eventually branched out to people who use certain credit cards and earn miles by making everyday purchases. These programs have become so popular that many airlines now make a considerable amount of their money from them, and in many cases, they're the difference that makes airlines profitable. Learn more about frequent flyer programs, how they started, and how they started, and how they started. how they work on this episode of Everything Everywhere Daily. What if your perceptions about the past were wrong?

Starting point is 00:00:50 ThruLine is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed. It effectively turned day into night. And how it shaped the world now. Time travel with us every week on the ThruLine podcast from NPR. While they are ubiquitous today, frequent flyer programs were not always a part of the airline industry. The origins of frequent flyer programs date back to the late 1970s and the deregulation of the aviation industry. Before the late 1970s, the United States

Starting point is 00:01:28 airline industry operated under a highly regulated system that was essentially designed during the New Deal. The Civil Aeronautics Board, or CAB, created in 1938, set almost every major operational parameter. It approved or denied routes, controlled which carriers could serve which cities, and had the power to set passenger fares. Airlines competed mainly on service quality, food, and comfort because prices and routes were largely fixed. This created a stable but inflexible market with relatively high fares and limited options for customers, especially on less traveled routes. Economists such as Alfred Khan argued that regulation-stifled competition kept fares artificially high and prevented market forces from rewarding efficiency.

Starting point is 00:02:16 The economic turbulence of the 1970s, including inflation and oil price shocks, put pressure on the government to make industries more efficient and consumer-friendly. Airlines like Southwest, which initially only operated within the state of Texas and thus avoided federal regulation, demonstrated that lower-cost, high-frequency service could be viable without CAB micromanagement. signed into law by President Jimmy Carter on October 24, 1978, the Airline Deregulation Act phased out the Civil Aeronautics Board's control over routes and fares. The CAB's route approval role began to loosen almost immediately, and by 1983, its economic

Starting point is 00:02:57 regulatory functions were entirely eliminated, although safety oversight remained with the Federal Aviation Administration. The law also made it easier for new airlines to enter the market, allowing them to set prices according to supply and demand rather than through regulatory fiat. It was in this environment that airlines now had to compete with each other more directly. In addition to competing on price and routes, airlines adopted a trick that had been used for decades by stores. Loyalty programs. Loyalty programs had been around for a long time and were used by many businesses. Programs like S&H green stamps were collected by consumers and redeemed for everything from books to TV sets.

Starting point is 00:03:38 The first true mileage tracking program is generally credited to Texas International Airlines in 1979, which issued Paola Passes to reward distance flown. It worked by tracking the distance a passenger flu and then awarding credit towards future travel based on those miles. The idea was simple. Customers received one mile of credit for each actual mile flown on Texas international routes. Once they accumulated enough miles, they could redeem them for a free ticket. While earlier promotions had offered paper coupons or occasional discounts, the Paola Pass was

Starting point is 00:04:14 notable for using the airline's reservation system to keep a running tally of an individual consumers travel. Texas International was a small airline, but its idea caught on. American Airlines then launched their Advantage program on May 1, 1981, and used its Sabre reservation system to pre-enroll frequent customers. United's Mileage Plus program followed days later, and Delta created its program in 1981 and later renamed it Sky Miles. Air Canada introduced the Aero Plan in 1984. The brilliant part about the American Advantage program was that it made membership free and automatic. You didn't need to pay to join or remember to ask for credit.

Starting point is 00:04:57 This seemingly small decision removed friction and allowed the program to grow exponentially. By the early 1980s, the core template for frequent flyer programs was in place. Earned miles by flying, redeemed for award seats, and build tiers for elite members. During the mid to late 1980s, the idea globalized and diversified. In Britain, air miles launched as a mass market coalition scheme in 1988 and later evolved into avios, while Qantas created Qantas frequent flyer in 1987 for Australian travelers. A pivotal shift occurred in 1987 when American and Citibank launched the first major co-branded airline credit card, which let customers earn miles from everyday spending rather than only from flying.

Starting point is 00:05:44 Card partnerships quickly spread across the industry and became central to loyalty economics. Over time, those bank deals grew into multi-billion dollar relationships that now contribute materially to airline revenue. But more on that in a bit. Airlines began partnering with hotels, car rental companies, as well as credit card companies. Suddenly, you could earn Miles by staying at Hilton, renting from Hertz, or using your American Express card at the grocery store. This transformation was profound. Airlines were no longer just transportation companies.

Starting point is 00:06:16 They were becoming lifestyle brands, embedded in customers' daily financial lives. The 1990s saw the creation of global alliances. As international alliances formed, Miles became interoperable between, large networks. Star Alliance launched in 1997, one world in 1999, and Sky Team in 2000, allowing members to earn and redeem across partner airlines, and pushing programs to harmonize tiers and benefits. This era normalized the idea that a single loyalty account could follow a traveler around the world. And I should note, all these major alliances corresponded to one of the three major airlines in the United States, United, American,

Starting point is 00:07:00 and Delta. The rise of the Internet fundamentally transformed how frequent flyer programs operated. In the early days, members received paper statements in the mail and had to call and book awards tickets. The web changed everything. Online account management meant customers could track their miles in real time, browse awards availability, and book their own redemptions. This reduced airline cost while improving customer satisfaction.

Starting point is 00:07:26 But it also created new expectations. customers wanted instant access to information and immediate gratification for their loyalty. The Internet also enabled dynamic awards pricing and inventory management. Airlines could adjust award availability in real-time based on demand, seasonality, and route profitability. This optimization increased revenue but sometimes frustrated customers who found awards harder to book during peak times. By the 2000s, many programs grew into businesses in their own role. Right. Air Canada's aeroplane was spun off and floated in 2005 as the world's first publicly traded loyalty company. And then, reacquired by Air Canada in 2019, illustrating just how valuable these databases and mile issuing engines had started to become.

Starting point is 00:08:16 The most significant recent change has been the shift from distance-based to revenue-based earning. Instead of earning miles based on how far you fly, you now earn based on how much you spend. and this aligns the program more closely with customer profitability from the airlines perspective. Under the old system, a passenger who bought a deeply discounted ticket earned the same miles as someone who paid full price for the same route. Airlines realized that this was backwards. They wanted to reward their most profitable customers most generously. Delta led this transition in 2015, followed by United and American. The change was controversial among frequent flyers, but made business sense for airlines.

Starting point is 00:09:00 High-spending business travelers now earn significantly more miles than leisure travelers hunting for deals. Over the last 45 years, frequent flyer programs have become big business. In fact, they are literally what is keeping many airlines alive today, specifically their credit card programs. In 2024, Delta earned about $7.4 billion from its partnership with American Express. representing roughly 12% of its total revenue. Similarly, American Airlines pulled in $6.1 billion,

Starting point is 00:09:34 which was about 11.3% of their revenue. United Airlines, Southwest Airlines, and Delta all relied heavily on loyalty-related income to stay in the black as well. The true importance, however, isn't found in the amount of revenue these programs bring in. It's in the profits. Traditionally, airlines were not profitable businesses. From the dawn of commercial aviation until about 2010, the entire airline industry had roughly broken even. However, today they are able to mostly eke out a profit, at least in the United States,

Starting point is 00:10:09 and this is largely due to their loyalty credit cards. In 2024, all four of the largest U.S. carriers, Delta United American and Southwest, lost money transporting passengers. In other words, ticket revenue wasn't enough to cover us. operating costs. The airline industry's bottom line remained positive only because of the high margin revenue from co-branded credit cards and loyalty programs. Analysis reveals that without loyalty associated income, Delta's 10.5% operating margin would have flipped to negative 2.5. United's 8.9 becomes negative 1.9. Americans 4.8 turns into negative 8.3, and Southwest,

Starting point is 00:10:56 slim 1.2% profit margin shrinks to negative 19.9%. To give you an idea of just how dependent airlines have become on their credit cards, in 2023, 57% of all frequent flyer miles were earned through credit card spending rather than flying. This has led some analysts to joke that airlines are now essentially banks that just happen to operate airplanes. The other side of the Frequent Flyer program are people who spend an abnormal amount of time gaming the system. They are using perfectly legal techniques to maximize the number of miles that they can earn so they can travel for free. One of the best examples of this was in the late 2000s and early 2010s, when the U.S. Mint sold newly issued $1 coins directly to the public at face value,

Starting point is 00:11:51 with the goal of getting more dollar coins into circulation. Crucially, the Mint also offered free shipping and allowed purchases to be made by credit card. Frequent flyers realized that this created a profitable loop. They could buy thousands of dollars worth of coins on a rewards credit card, earn airline miles on the purchase, and then simply deposit the coins into their bank account and use the funds to pay off the credit card bill. This loophole was subsequently closed in 2011, but before it was closed, but before it was closed, it allowed some people to accumulate massive amounts of frequent flyer miles for little or no net expense. The most I've personally heard of was someone getting over a million frequent flyer miles.

Starting point is 00:12:37 The most common technique you'll hear about today is to constantly be turning over new credit cards just to get the sign-up bonus. Many cards will offer bonuses from 20,000 to as much as 100,000 miles when you sign up for a new card and make a minimum threshold spend within the first few months. Limits have been put on this as well, but it's certainly still possible to do this at least several times a year. Since airlines move to total spend rather than miles to determine their awards, one technique that is no longer as popular are mileage runs. Many frequent flyer enthusiasts would often shop for insanely good deals to anywhere just to rack up points and gain elite status on an airline. They would often literally take a round-trip flight and never leave the airport just so they could accrue miles. When I was traveling around the world, I earned frequent flyer points, but it was never really my focus. I never engaged in any of the hacks because my focus was on traveling and not playing the frequent flyer game.

Starting point is 00:13:39 That being said, at one point, I did have elite status on all three of the major global alliances at the exact same time. My problem was that I would almost always take the cheapest ticket and didn't have enough loyalty to any one program. What began as a way for airlines to reward their best customers has now become something that is absolutely critical to their success as a business. So it's not an exaggeration to say that without frequent flyer programs, especially rewards credit cards, many airlines would simply no longer exist. The executive producer of Everything Everywhere Daily is Charles Daniel. The associate producers are Austin Otkin and Cameron Kiefer. My big thanks go to everyone who supports the show over on Patreon. Your support helps make this podcast possible.

Starting point is 00:14:32 And I also want to remind everyone about the community groups on Facebook and Discord. That's where everything happens that's outside the podcast. And links to those are available in the show notes. As always, if you leave a review on any major podcast app or in the above community groups, you two can have it read in the show.

Everything Everywhere Daily: History, Science, Geography & More - Frequent Flyer Programs

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