Wednesday, April 15, 2009


On customer loyalty programs

In this post, Liz at Everyday Goddess notes that she prefers American Airlines to Southwest for a number of reasons, and is willing to pay more for a ticket on the former. One of her reasons is that she’s accumulating miles on AA’s frequent flyer program and plans to use those miles to get a free trip to Florida this August.

I’ve heard people say that sort of thing often, and it is, of course, why the loyalty programs are there: the airlines (and hotel chains, and so on) hope you’ll do business with them, even to the point of paying more, because you want the benefits the loyalty program provides.

But, while that sounds reasonable on the surface, it doesn’t make much sense when you look at it more closely. I said this in a comment on Liz’s blog, but I wanted to bring it here, too, because it’s so common.

In general, you should not pay more for a flight because you want the miles. Here’s why, using Liz’s example:

LAX (Los Angeles) to ORD (Chicago O’Hare) gives you about 3500 miles, round trip. Let’s say that the AA flight cost $100 more. That means those miles cost you around 3 cents per mile extra (2.857 cents, more precisely) — you didn't get them for free. You need at least 25,000 miles for a "free" ticket (or 50,000, depending upon when you want to do and what restrictions you have). At $0.03/mile, it will cost you $750 for 25,000 miles (and $1500 for 50,000).

I just priced an AA ticket from LAX to FLL (Fort Lauderdale, FL) in mid-August, and I got a fare of $265. Spending miles that cost you $750 extra to “earn”, to buy a ticket that would cost under $300 over the counter, is not a good deal.

And this is almost always the case. If you select your airline based on a desire to accumulate miles there, on the whole you will pay far more than the miles are worth. In general, you should select your airline for other reasons (price, flight schedule, on-time record, seat comfort, like or dislike of the way they do business, or whatever matters to you), sign up for every airline’s loyalty program, and let the miles accumulate all around. When one program has enough miles for you to redeem them, then you really will get a free flight out of it.

To be sure, there are times when it’s worth paying a little extra, but it’s important to think about it and do it in an informed way. For example, suppose you’ve amassed 48,000 miles on AA and were careful not to pay extra for them. And you want to redeem miles for a trip soon, but you need 2,000 more. Then it could make sense to pay an extra $100 or $200 to buy your next ticket on AA, so that you have enough for, say, a $500 ticket somewhere. Similarly, you might be willing to pay a little more occasionally to keep your account active, so your existing miles won’t expire.

So if you have other reasons to prefer one airline over another, by all means, let those reasons decide for you. But be wary of doing it because of the frequent-flyer program.


Call me Paul said...

A good reminder for people using rewards programs. I collect airmiles (a Canadian generic rewards program). I can get airmile when I fill up at a specific gas station, so I look for opportunities to fill up at that station. I won't pay extra to do so, nor drive a significant way out of my way, but I can plan my fill-ups so that I can take advantage. Liewise, I can collect airmiles at a specific grocery store. I don't buy everything there because they do tend to be more expensive. However, there are many items my wife and I buy regularly that we cannot find at discount grocery stores, so when we want those, we do visit that particular store to take advantage of the points. We feel that we do not pay more for the points than we would have spent anyway, and to date they have netted us an iPod, an iPod dock, and a digital camera. Several hundred dollars worth of luxury goods we would not otherwise chosen to purchase.

Frisky070802 said...

Another thing to bear in mind is the other benefits of frequent-flier status. For example, if you fly enough to be elite, you'll get bonuses that affect the math you performed in your example (though perhaps not enough to tip the balance). You may also get free checked baggage, early boarding (well, earlier than at least a few others on the plane), and so on.

As an aside, I not only try to concentrate my miles on Continental (though, as you said, not religiously), I also have a CO credit card that gives elite qualifying miles based on purchases. Interestingly, the threshold for getting 2K elite points dropped this month from $25K to $15K. I used some of those points this year to make CO elite status, so they do have meaning. But again, it's a cost-benefit analysis. I felt the incremental cost to get this card and get the elite miles plus airport lounge access was worth it.

Not that you'll see me renewing next time around, I wager.

lizriz said...

All this is very true, but there is a degree of well, I still at some point get a free flight. It's like your tax return - Sure it's "better" to keep as much of your money on the front end, but let's face it, I wasn't gonna get interest on it anyway, and I do benefit from the big check I can spend wisely when it comes. Or like, the amount of money you spend on lattes in a year, what if you saved it? But who cares, because I wouldn't save it, I just end up spending it on something else.

Which is just to say, you're totally right, and certainly if miles are the only consideration then it's not a good reason, but I *am* going to enjoy my free flight in August.

Thanks for linking me and expanding the conversation. :)

scouter573 said...

Time is another factor to consider. Originally, miles lasted forever, but now they expire. If the traveller scatters travel across a set of airlines, there may never be enough useful miles in a single airline's account to allow a free ticket. We've had this problem recently and tens of thousands of miles expired valueless. Of course, they are "frequent" flyer miles, not intermittent flyer miles, so this result is quite predictable.

The solution seems to be to shop exclusively on price and treat accumulated miles as a lottery, or focus on a single carrier to build your numbers. I have an affinity credit card, and I'm going to drop it when it expires. I'll find a card that yields something I value.