I was recently engaged as an expert witness for a federal criminal trial. It’s a fascinating story that I plan to tell. But in order to explain how a program member got embroiled in what was seen as a conflict of interest, how this person came to be at odds with her employer, and how the federal government got involved we need to start at the beginning.

And that’s that loyalty programs are all about creating an incentive for individuals to choose their product over another — whether the choice comes at the best price, or in the case of purchases using an employer’s money whether or not the individual is acting in the best interests of their employer.

Put another way, travel loyalty programs are intended to create principal-agent problems.

Loyalty Programs Turn a Commodity Product into a Differentiated One

Frequent flyer programs are all about created a consumer preference for one carrier over another, and frequent guests programs one hotel chain over another — turning a commodity product like an economy airline seat flying from A to B into a differentiated product, and one that travelers have an incentive to choose and even spend more money to get. In the case of business travelers, the programs create an incentive for the traveler to spend their employer’s money for their own benefit.

That Can Be Good — Or Bad — for the Employer and the Traveler

Of course it’s more complicated than that. Elite status confers upgrades which make it easier to work inflight. Priority check-in and boarding saves time and hassle. Free checked bags can save an employer money (think about an employee with lots of materials headed to a trade show). And priority re-accommodation during irregular operations can get an employee to a meeting on time or back to the office instead of burning unproductive time at the airport. So it’s not all travel provider versus employer.

Small Business Programs Have Similar Conflicts

Turning to small business programs, or those that attempt to influence employer spend, it’s mostly about conflict of interest as well.

An early airline loyalty program was Southwest’s Secretaries Program where assistants were rewarded with free travel for booking their bosses on the airline.

Travel rebates are meant to lock in travelers. Small business programs offer rewards to a business for choosing a carrier. Those rewards can be used to offset business travel expenses, but that’s tough to do because mostly you’re dealing with capacity controls which are a challenge when business travel demands being on specific flights and not wasting time or re-arranging meetings based on availability. They reward the travel manager, who divvies out the points (to employees or to themselves).

Hotel programs are usually even more blatant about rewarding the individual decision-maker rather than the company. Meeting planner programs reward the individual signing the contract (the meeting planner). Starwood recently got rid of points accumulating in a company account in favor of rewarding the individual decision-maker instead.

Government Travel Programs Have Tried and Failed to Address the Conflict

The federal government — until about 13 years ago — forbid employees from keeping points earned through business travel. The idea was that federal employees were supposed to use accumulated points to reduce government travel costs. The federal government eventually concluded that it didn’t really do that, and just created complication and friction with and for employees.

• Employees who can’t keep their miles don’t add their frequent flyer account to bookings.
  
• It’s tough to sort through which miles were earned through business travel versus other means like credit card spend, shopping portal points, etc.
  
• Booking business travel on points is challenging because the needs of the former are often incompatible with the schedule flexibility needed to deal with capacity controls.

Some governments even in the US still forbid employees from using miles accumulated on business travel for personal travel however, despite data suggesting it doesn’t work.

Government city-pair contracts, though, work similarly to private sector agreements which do work to a certain extent.

Corporate Managed Travel Programs Try to Address This — But Have Conflicts, Too

Large companies try to get around the inherent conflicts with managed travel programs.

• They negotiate corporate discounts and rebates that accrue to the company.
  
• They do deals with the major carriers so benefit regardless of who their travelers fly
  
• Or if there’s a preferred carrier there is at least status matching or complimentary status opportunities so that elite benefits align with corporate rebates

To a large extent though the corporate travel apparatus is about both negotiating volume agreements but also internalizing decision-making and imposing rules to combat the conflicts of interest that otherwise invade travel.

But don’t think that corporate contracts made with managed travel programs are free from conflict, either.

Airline revenue-based top tier status like United Global Services is extended not just to the highest revenue flyers, but also those who influence large travel spend… like the heads of big firm travel departments. Similarly, Avis gives out its top rental car status (Chairmans Club) and even second tier (Presidents Club) — levels you cannot qualify for by merely renting cars — to corporate contract decision-makers.

It turns out that when benefits belong to an individual rather than a company can cause real friction — and even bring the federal government into play. That’s something I’ll describe in an upcoming post. You’ll want to stay tuned because there are lessons here for what a frequent flyer probably shouldn’t do (that many are doing today), how to avoid problems, and also a story of real government overreach into the miles and points game.

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