It’s the end of the airline industry as we know it

Hope/Shutterstock
Hope/Shutterstock
Airlines don’t exist.

I came to that somewhat Magrittesque conclusion after hearing from Julie Eisenberg, a loyal United Airlines customer who last year spent $1,700 per ticket to fly her partner and herself from Washington to Sydney.

For just $600 more, plus 30,000 miles, United promised her a chance to upgrade into a slightly roomier seat. But the ticket agent she spoke with failed to mention that there were no guarantees and that the money and miles would be deducted from her account then and there, many months before her flight.

“The only way I can get the miles and money back is to cancel my upgrade request,” she says. “They will have possession of the money and the miles from the date I booked, on May 10, 2013.”

Veteran frequent fliers know this is how it’s done at United, of course, but it didn’t sit well with Eisenberg.

“I’m really shocked that it’s OK for them to hold this amount of money and return it after almost a year, paying no interest on it,” she says. “Yet they continue to insist that they can’t confirm our upgrade.”

Why, she wonders, can United get away with that?

Well, there’s a simple answer — and a complicated one.

The simple one: because they can.

An airline is free to set its own rules and policies without government interference. It’s been that way since the industry was deregulated 36 years ago.

The complex — and somewhat controversial — answer: Maybe United is no longer an airline. Maybe it’s a loyalty company that happens to be running an airline.

You see, charging a customer months before a flight for a promise to consider an upgrade into a seat that should be standard on a marathon transpacific flight doesn’t make any sense if you’re an airline that cares about its customers. A caring airline gives all of its passengers a reasonably comfortable seat, no questions asked.

But it makes perfect sense if you’re looking at this from the perspective of a loyalty company trying to prod customers into buying more.

A look at United Airline’s latest annual report shows why it’s no longer entirely accurate to call it an airline. In 2012, it sold $5.1 billion worth of frequent flier miles to credit cards and other third parties. It expects about a quarter of those miles to expire or go unredeemed.

By comparison, United earned $25.8 billion in revenue from its mainline passenger operations for the year. In other words, 1 out of every 5 dollars earned was because of MileagePlus, and worse, it doesn’t always have to give customers something for their purchase. United will only have to honor 4 out of every 5 points earned through one of its partners. (If that number gets too high, no problem! Just devalue the miles, as it did for 2014.)

Ka-ching!

In 2013, airlines raked in a total of $18.9 billion from the sale of frequent flier miles to program partners, according to an estimate by IdeaWorks. That figure also includes some commissions from the sale of services to travelers. Hotels are less forthcoming, but in a recent conversation with a high-level executive for a major hotel chain, I was told that roughly half of every booking had a loyalty program component and that the programs were a “significant” source of revenue.

Do you really need me to tell you we’re going down the wrong road here?

When travelers clamor for gimmicks in order to be treated just a little more humanely, when the sale of these elusive “rewards” are what makes a company profitable, what has this world come to?

Forgive me for being an idealist, but shouldn’t an airline make money by transporting passengers? Shouldn’t a hotel earn an honest living by selling accommodations?

The tail is wagging the dog, my friends.

So why aren’t any other watchdogs speaking out about this twisted business model, which relies on us paying for an unregulated currency in order to get the benefits all travelers probably deserve?

Perhaps the airlines and credit card companies have built a small army of propagandists masquerading as bloggers and consumer advocates, who obediently endorse the loyalty lifestyle in exchange for six-figure referral fees. Then again, maybe they’re betting customers won’t question the economics behind the offers — that they’ll actually believe the flights and rooms are “free.”

Are we that naive?

I think we’ll find out soon enough. If more consumers blindly sign up and participate in these programs, lining the pockets of airline and hotel company shareholders, then at some point, we won’t have a travel business anymore.

It will be a loyalty industry.

Are loyalty programs controlling the travel industry?

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Christopher Elliott

Christopher Elliott is an author, journalist and consumer advocate. You can read more about him on his personal website or contact him at . Got a question or comment? You can post it on the new forum.

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  • bodega3

    Carver is correct in his post, as that is how you come across in your articles about the programs.

  • PolishKnightUSA

    This is known as the economy plus/non-check in gamble: You don’t check in online and wait until you reach the airport. You hope that all the space in regular economy is full and the gate agent puts you into economy plus. However… if economy isn’t full you get stuck by the toilet. OR you may even get bumped off the flight if it’s full.

  • PolishKnightUSA

    I was just researching prices for my in-laws to come visit. A United fare is about $30 cheaper than Austrian Air. Austrian Air has tiny seats (my gymnast wife complained and for her to complain…) BUT we love the service and food. The Austrian wine is good and they have the special meal option of seafood (only other airlines I’ve seen with special seafood meals are Asian.) So I’ll probably book Austrian based upon service and amenities. However, the layover is shorter for United: 2 hours versus 4 in Vienna. So it’s a complex decision. But yes, I”ll pay about $50 more for a pleasant transatlantic experience.

  • PolishKnightUSA

    “An airline is free to set its own rules and policies without government
    interference. It’s been that way since the industry was deregulated 36
    years ago.”

    I think that statement is unfair. Even before 36 years ago, an airline could set it’s own policies provided they didn’t conflict with the law just as they do now. An airline cannot set a policy that says a passenger cannot get a refund for a fare within a 24 hour period after booking, for example.

    I googled the airline deregulation act and found the following shocking cite: “The Carter administration argued that the industry and its customers
    would benefit from new entrants, the end of price regulation, and
    reduced control over routes and hub cities”

    Hell hath truly frozen over. Keep in mind that before the deregulation act, smokers puffed away on flights and in the waiting area and people dressed up to fly because it was considered expensive and rare to travel. My wife and I always travel “business casual”, FYI.

    Why the smaller seats? I think in some ways, the people are just getting fatter, er, bigger. Also, after deregulation, several newer airlines appeared and prices fell and before 911, without a significant loss of service. After 911, costs soared and the airlines have controlled the rise with significant success and shielded consumers. It costs money to make you wait at security, to pay more for jet fuel due to carbon credits/restrictions on drilling on federal lands, and to outsource service to other countries who mess it up and the CEO’s run off with a golden parachute.

    Hmmm, kind of makes me MISS the Carter days:

    Temporary lay offs. – Good Times.

    Easy credit rip offs. – Good Times.

    Scratchin’ and surviving. – Good Times.

    Hangin in a chow line – Good Times.

    Ain’t we lucky we got ‘em – Good Times.

  • PolishKnightUSA

    I did some googling and found this: “The United Kingdom is the only country that has regulations defining
    the minimum size of passenger seats and the space between seats. These
    regulations apply to all aircraft registered in the UK.”

    My research found that regulations appear to restrict how many passengers they can cram onto a particular plane in total. This would make it kind of like the Titanic where steerage gets crammed belowdecks and United makes those lie-flat beds in first. As long as they keep below the maximum passenger number, they’re fine.

    In the case of international travel (which is the case here), the passenger will be getting a free meal (but no free alcohol which may be a good thing as far as some FA’s are concerned), and a water/beverage. For domestic travel, they can buy food if they want if they’re in bottom economy. When I took a ferry from Gdansk to Stockholm, I had to pay for my own meal too. (But it was so reasonable and good, I couldn’t complain.)

  • PolishKnightUSA

    I’m not sure if this was the cause of AA’s woes. But certainly, it would be interesting to know if consumers care more about unadvertised “hard product” such as seat pitch/width, free check in bag, free meals, liberal change/cancellation policies versus glamorous soft product add ons such as internet (almost always with a service fee!) and IFE systems or just plain lower prices.

    When I shop a fare, I always take the above factors into play along with the itinerary/route (even riding on Jabba-the-Hut’s barge for 4 hours non-stop from NYC to Chicago beats having to transfer through Atlanta.) I’ll confess: If the hated Spirit Airline offered me a fare from DC to Arizona to visit my sister for $200RT, I’d consider it. My wife and I would cram EVERYTHING we own into a single checked bag and I’d take an ambien to dull the pain for the flight but I’d do it. But for a $60 difference? No way.

  • PolishKnightUSA

    Hahaha! My in-laws LOVE it when I book tickets for them because I do online check in while most passengers via aeroflot or British Airways seem to just wait to go to the airport. So at 23 hours, 59 minutes before departure, I grab seat 11A/C for them. My wife says they’re now spoiled rotten at sitting in the front of the plane and getting the choice of meals (meat!)

    This proactiveness saved my tail during a memoriable trip where the damn travel agent reserve me a seat next to the lavatory. During online check in, I caught this and got a seat further up. I was the last row before things went meatless.

    Regarding AA’s more room throughout coach. I noticed when my wife and I flew Jetblue a few years ago that the economy plus area was a ghost town. That was thousands of dollars in revenue seats burning empty. The best way for an airline to make money is whether they have big seats or small seats, sell ALL of them. Elite flyers love to get upgrades for free from unsold business class seats. It’s enraging them that the airlines are now offering paid upgrades to bums in coach. Austrian offered me the option to bid for an upgrade. I put in $100. It wasn’t accepted. Which was ok, we like Austrian coach.

  • PolishKnightUSA

    A good travel agent is worth gold. But they all have their own set of contacts. My old agent in Los Angeles had knowledge of a great route from LAX to Europe via a consolidator. I got great fares on a great airline but with the bottom rate ticket (same as economy, but it was like a super discounted fare, non-refundable/changable) BUT I got frequent flier miles. They were amazing.

    However, I was on my own for seat reservations and trying to get upgrades. Some other agents are masters of that though.

  • Carver Clark Farrow

    No disrespect is intended. The claim is my perception based upon the numerous articles posted and the descriptive phrases used, such as “catering to the intellectually challenged…” ergo, the claim.

  • http://elliott.org Christopher Elliott

    True, I am a loyalty program critic, but I’ve gone on the record to say that I participate in several worthwhile airline programs. Therefore, it’s impossible that I hate airline loyalty programs.

    But I guess it’s more convenient to call me a “hater” and dismiss my unusually well-reasoned and highly persuasive blog posts on the subject.

    Oh well, feel free to do whatever you want. I’ve also been called a “frequent flier hater” an “airline hater” and a “travel agent hater” in the past.

    So absurd, it’s not even worth responding to.

  • PolishKnightUSA

    This may explain why my mailbox for two months has been jammed full of United credit card offers for my wife and I. I considered it for a while, but grew suspicious about availability. Even if I made the miles, would I be able to book or get blacked out? Lufthansa which is affiliated with United via the star alliance also sent my wife and I offers but they charge fuel surcharges which makes the “free” tickets almost worthless.

    10 years ago or so the loyalty programs were great but the golden days are over.

  • Lindabator

    Unfortunately, although the pitch of seats have changed – the problem is OUR widths have changed over the years. So who is to blame in that case?

  • Carver Clark Farrow

    Good point. My suspicion is that the more frequent the traveler, the more the hard product matters. But I have no hard data.

  • Carver Clark Farrow

    Amen. I remember back in the day when flying was an expensive and rare thing. We flew once a year and no more. Now we hop a plan whenever.

  • bayareascott

    You might get a good seat or a bad seat, but if you try this option, you certainly have no right to complain about it.

  • bayareascott

    No fee for this.

  • TonyA_says

    High Fructose Corn Syrup

  • TonyA_says

    If she asked me, I would tell her to buy a ticket on NZ Spaceseats Premium Economy.
    Not sure why people still like United. What’s there to like?

  • TonyA_says

    Chris, I think you need to do a little math.
    She paid about 7.8 cents per mile to the airline. What really do you expect for that cheap rate? Really honestly?

  • Asiansm Dan

    And the Air New Zealand food is awesome, even in Economy.
    Flight from Auckland have excellent Lamb on menu.
    I don’t work for Air NZ, just a regular transpacific satisfied passenger of Air NZ, even from the date their flight begins with TE instead of NZ like today..

  • brianguy

    the airlines still make at least 5x as much revenue flinging people around as they do selling airline miles for upgrades (20% of which will never be redeemed, but 80% will).

    yep still an airline.

  • Justin

    As my mom and I go through my grandparents house after their passing, we’ve come across retro clothing from the 60s and 70s. Groovy :). To quote my mom “I doubt a size 13 from the 60s or 70s is anywhere near a size 13 today”. I bets its probably called a 7 or 8 to make people “feel better” as we’ve gotten larger in girth.

  • Justin

    Being short and skinny has advantages. I can fit in any small space :) so no need for upgrade. I would like a better seat pitch though.

  • gracekelley

    Exactly money talks and bullsh*$ walks.
    Consumers are just as much at fault for the state of things as the airlines are.
    You wanted cheaper fares in exchange for certain things that once were free but now that’s not the case they all want even cheaper seats plus everything that used to come with it.
    Most travelers these days don’t even have the slightest idea that the department of transportation tracks complaints and if they do they can’t be bothered to log a complaint to anyone but the airline.
    I’m afraid people will see soon that the beluved Southwest business model is changing and it’s looking alot like the rest of the carriers. Things are deplorable back in coach yes, but you still get transportation to places in hours where it took weeks or months before and it’s safer than it’s ever been to fly.

  • Joe Farrell

    you know what it costs just in fuel to fly a seat from SFO-SYD? Its a 7400 statute mile flight at a cruise speed averaging 500mph with a 777 engines burning 35 gallons of jet fuel per min? $375 – just in fuel. She paid $850 for that ticket and it has at least $100 of taxes and fees in it – so United got about $750 for that trip and is spending $375 of that just in fuel. Add in the cost of the two full fight crews, plus the ground staff, the flight attendants, maintenance burden – etc . . . They are prob barely breaking even on that flight . . .

    As for the whiny complaint . . . what part of ‘give us the money now and maybe we’ll give you a premium economy seat later’ was unclear?

    United makes its rules – its up to the customer to decide if they wish to follow them There is no reason why a person should use an American airline to travel to Australia . . . I’d fly Qantas or Virgin Australia Premium Economy . . . for literally just a few dollars more.

  • Joe Farrell

    See, Bodega did not get a minus!

  • Joe Farrell

    no one is buying a full fare first class seat on United to OZ when you can, for less money, get the full private suite on the Qantas A380 flight . . . I wonder how many seats in F or A have been sold in the last 365 days . . . F seats are solely for upgrading their best customers . . .

  • Joe Farrell

    Loyalty programs do save me money. . . . and I just proved it.

    We need to be in Boston for Easter. The day after Easter is the Marathon. Hotels are full. Airlines are charging over $800 a ticket to travel from Los Angeles to Boston.

    My Gold status with Hilton means I can get a reservation anywhere I want – when the hotels are full – you can get a preferred room at a fair price.

    Next – airline tickets. I was able to get 2 50,000 mile round trip tickets, non-red eye and in first class [meaning I was able to access the lower level F class tickets for the same price as the only available coach tickets]. Given that First class is $2500 round trip or so – even on Virgin America – my loyalty to an airline, coupled with buying everything from fast food to paying taxes using that airline’s credit card, means that this 4 days trip will not be full of discomfort and travel shock. . . .

    Given that coack tickets were between $800 and $900 I started looking at award tickets . . . . we are going back for a wedding on July on 4th of July weekend and I have already bought those and got three of them for less than one and one-half of the prices the airlines were asking for April . . .

    Chris – loyalty programs do work. But you need to be loyal enough that the airline makes some money from them . . , and you.

  • http://www.alumnifutures.com/ Andy Shaindlin

    Basic arithmetic error here:

    “[United] sold $5.1 billion worth of [MileagePlus] frequent flier miles….
    United earned $25.8 billion in revenue from its mainline passenger operations…
    1 out of every 5 dollars earned was because of MileagePlus…”

    No. I believe you’re trying to calculate the fraction of ALL revenue that came from FF miles.

    It’s 1 out of every 6 dollars.

    5.1 + 25.8 = 30.9 in total revenue.
    5.1/30.9 = 0.17, or 1/6, fraction of revenue from frequent flier miles.

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