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Forty years ago this year, a now largely forgotten airline invented what is arguably the single most influential force on passenger behaviour in air travel.
The airline was a small regional US airline called Texas International Airlines. It’s invention was the frequent flyer programme.
In 1978, the US airline market was deregulated. This allowed US airlines to choose their own routes and set their own fares without Government approval. Established airlines facing newer upstarts turned to incentive programmes to revive falling revenues and profits.
By today’s standards, it was relatively unsophisticated. Passengers earned paper coupons which could be pooled to earn free flights. Texas International Airlines’ programme did not last long as the airline was acquired by Continental in 1982.
American Airlines launched its “AAdvantage” programme on 1 May 1981, which American widely credits as the first true frequent flyer programme. At the time of launch, it wasn’t certain it would last. However, all major US airlines quickly followed suit. And they were an instant success.
The basic premise was as it is today: Provide miles to passengers who fly on your airline at someone else’s expense which can be redeemed for free flights and other benefits.
It is the perfect dovetail of a free flight that would otherwise cost thousands of pounds for the passenger, which the airline can provide at minimal marginal cost.
The technology then was of course much less advanced than today. The New York Times in 1982 reports of membership packs taking weeks to arrive and miles recorded with the aid of paper log books and multi-coloured coupons:
A call to the airline is usually all it takes to register, and within three to four weeks members receive packets with all the necessary supplies. T.W.A. uses pink-patterned stickers that are attached to the ticket at the boarding gate, Republic Airways provides program members with a “passport” that is validated each time they book a flight, and Eastern Airlines mails its members “ionosphere blue checkbooks” filled with coupons.
By 1984, an estimated 75% of US business travellers were members of a frequent flyer programme. The programmes soon expanded their reach with the ability to earn miles from car hire and hotels, and redeem miles on international partner airlines.
Even without the aid of internet blogs and forums passengers quickly learned how to exploit the programmes to maximum advantage, as reports the The New York Times in 1984:
The programs have proved so successful since their introduction in 1981, say industry analysts, that loyalty is now verging on fanaticism for a growing number of passengers. Those most seriously bitten by the free-ticket bug even design business trips with the incentives in mind, to the point of flying to unnecessary cities just to increase the haul.
“I hear passengers in airports talking about how many miles they have on this or that program,” says David Aiken, a travel agent with Inverness Travel in Manhattan. “Travelers are very aware of what they are entitled to, and compare notes about the expanded range of frequent-flier tie-ins or add- ons. It’s like remembering how much money you have in the bank.”
Business travelers “will call and demand an airline,” says Steve Zinaman, senior vice president of Travel Horizons Unlimited, also in Manhattan. “They will refuse to fly another carrier even if the timing and fare are better, just so they can add to their mileage programs. That is real loyalty.”
As the programmes gained in popularity and airlines competed to win business travellers, they became more complex and convoluted. Again the New York Times reports:
As the programs have expanded they have become extraordinarily intricate, and the award descriptions can sometimes be baffling.
For example, a T.W.A. frequent flier who has flown 50,000 miles may choose: “One free first class round-trip ticket to any Eastern domestic or international destination. Plus a first class round-trip upgrade for the price of a round-trip coach ticket for a traveling companion. For international travel this bonus award also includes one free first class round-trip ticket on connecting T.W.A. or Eastern flights to the nearest Eastern gateway city, and a first class round-trip upgrade for the price of a round-trip coach ticket on the same T.W.A. or Eastern connecting flight for a traveling companion.”
There is a footnote: the two passengers must travel together.
“There’s no way to rein it in any more,” said one exasperated official of a leading airline, which offers its own complex program. “It’s a monster.”
And not everyone was enamoured with the concept. Two groups in particular: the companies who actually paid for the tickets; and the Internal Revenue Service who questioned whether the benefits should be taxed.
Unsurprisingly for a notoriously litigious country, one US corporation launched a law suit:
A Texas-based real estate company, Southmark/Envicon Capital Corporation, sued seven airlines in April, saying the carriers were committing “commercial bribery” by giving benefits to employees without the permission of the employers and with the intent of influencing the employees on behalf of the airline.
The lawsuit, filed in State Supreme Court in Manhatttan on behalf of all similarly situated companies, also charged the airlines with interfering with the fiduciary responsibility of employees by inducing them to book roundabout flights that carry more mileage credits, for the employees’ benefit and to the employers’ disadvantage.
The action further asserted that the airlines, by limiting the beneficiaries to individuals, were wrongfully preventing the awards from flowing to the rightful parties, the companies paying for the tickets. The lawsuit seeks an injunction preventing the airlines from excluding companies as frequent flier beneficiaries and seeks the return of money Southmark says has been lost through increased travel costs.
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Over on this side of the pound, there is of course one dominant programme, the BA Executive Club.
That is not a name BA would choose if it was launching a frequent flyer programme today. The Executive Club launched in 1982 and at the time its emphasis was very much on exclusivity for business travellers.
In recent years there has been more emphasis on “Club” and not “Executive”. There are no perequisites to becoming a member. Each tier of the programme has its own visual identity to try and move away from the perception of a hierarchical programme.
Today, the Executive Club has over ten million members. Although many millions of those members will have dormant accounts.
Anyone who spends anytime in Central London will regularly spot a BA branded American Express card tapped on to a gate on The Tube or a contactless payment machine in a coffee shop.
And that’s a sign of how in 40 years on frequent flyer programmes have gone from a marketing expense to profitable businesses in their own right.
The principal reason for this is what when miles are earned through means such as co-branded cards, the airline sells the miles. Ten years ago, American Airlines raised $1bn in cash by pre-selling miles to its credit card partner Citigroup. Around 100 billion Avios are issued by the Executive Club and other programmes that use the currency every year. Approximately half of these are issued in respect of activities other than flying.
Of course, as powerful as frequent flyer programmes are the relationship between the member and the airline is not always a happy one. The power rests with the airline. As a member you cannot withdraw your miles and take them to a rival. The airline has the sole power to change the terms of the scheme at very little notice. Apart from suing in court, there’s no regulatory body or ombudsman to complain to.
In terms of what’s next, well they certainly got going anywhere. As valuable as programmes have become in their own right, few airlines have been tempted to sell them. Air Canada divested of its Aeroplan programme 15 years ago to raise cash and has now bought it back.
At some point BA is expected to follow US airlines and start issuing miles by reference to the price paid for the ticket rather than distance flown. Reward flights will also be subject to “dynamic pricing” rather than a set tariff.
Virgin Atlantic is due to relaunch its programme this year and partner with Air France-KLM. It has publicly admitted it needs a broader programme to compete against BA. easyJet is also due to relaunch its frequent flyer currency this year.