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

By | January 20th, 2014

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.

Related story:   Are false wear-and-tear claims a “profit center” for car rental companies?

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.)


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.

Related story:   Is this "convenience" just another scam?

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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