Andrew Kunesh writes at The Points Guy website that a second airline bailout may mean frequent flyer program devaluations, and calls for legislation providing for the bailout to require airlines “not to devalue their loyalty programs until government funds are paid back.”

However there’s no fundamental reason that a bailout means loyalty program devaluation, any such restrictions are likely to be toothless in any case, and aren’t going to make it to the top of any legislator’s or regulator’s agenda.

Airline Bailouts Don’t Mean Devaluation

Oddly for someone arguing that bailouts drive loyalty program devaluations, Kunesh begins “[t]hankfully, the U.S. government gave the airlines some much-needed cash during this time.” He never explains why he favored taking $58 billion in cash out of the pockets of the future median taxpayer and giving it to airline investors and creditors, especially when he seems to think the result is harm to consumers.

No one would like to deploy the argument that an airline bailout would lead to a devaluation of miles, and thus consumers broadly – hundreds of millions of members – should be opposed to a second bailout. I was opposed to the first bailout and the facts are even stronger against a second. But it just doesn’t follow logically that a bailout means loyalty program devaluation.

Kunesh’s argument seems to boil down to,

• Airlines have a lot of debt. Bailouts actually increase that debt.
  
• Airlines need to conserve cash and pay down debt, so they can’t spend money on awards.
  
• Therefore they need to devalue their programs, and they’ve already done so.

Historically struggling airlines have been the most generous awarding miles, and they devalue those miles once they’re past the struggle.

• When Continental Airlines struggled in the 1990s they offered lifetime Infinite Elite for maintaining 5 years of Gold status, the highest level in the OnePass program at the time. When Continental introduced Platinum in 1998, Infinite Elites were bumped up, told that they would ‘always have the highest level in the program.’ With the United Airlines merger they received lifetime 1K status. (Of course lifetime status was then devalued.)

• When United was in bankruptcy in the early 2000s they were generous too. United even offered a quintuple miles promotion where a roundtrip to Singapore from the East Coast (perhaps upgraded to business class with a systemwide upgrade) earned enough miles for a business class roundtrip Australia award. Of course they devalued those miles in 2006 once they came out of bankruptcy.

• More recently many will remember that American Airlines was exceptionally generous during its bankruptcy, and that we saw loyalty programs doubling down on value during the Great Recession, at a time they loaded up on debt from their cobrand partners through the ‘pre-sale’ of miles.

We’ve seen devaluations from United and Delta during the pandemic, those have focused on conserving cash, not paying partner airlines for awards. United began devaluing once they eliminated award charts, and that happened before the pandemic started. It continued not driven by debt but from a liquidity preservation stand, along the lines of why they refused to give refunds for flights where consumers were entitled to them (until the DOT stepped in).

The only way airlines will survive their debt is growing revenue and cost controls aren’t a long-term strategy for doing that. Devaluations aren’t going to make a huge difference on the balance sheet assumptions, either, which are mostly driven by own-metal airline awards – and are constrained by ASC 606’s requirement that miles for trips taken be valued at what they’ll buy in future travel. Airlines book these miles at around 1 cent apiece, partner award prices aren’t a driver of this.

Industry Challenges Reduce The Need To Devalue Miles

Redemptions are down now. Airlines simply aren’t having to spend money on flight redemptions the way they do during normal times, because program members aren’t booking travel at normal levels – either with cash or with miles.

Furthermore the pressure to devalue comes from too many miles chasing too few seats. When flights are full a redemption would come at the expense of a paying customer, so programs require more miles. However there are now more seas available than passengers. Capacity is roughly back to 50%, while travel demand is off by two-thirds. And that’s with fares lower than usual, too.

Reduced travel demand from the pandemic relieves the pressure airlines used to feel to devalue miles to balance supply and demand, or access seats that would otherwise be sold for cash. In other words, there’s less need to devalue miles now than there was a year ago.

Airlines Need To Keep Members Engaged In The Programs To Pay Back Debt

Airlines have been clear they’re pulling back capital spending. That’s true across the board, and United CEO Scott Kirby has been clear that capital investing won’t be restored until they’ve paid down debt.

But there’s nothing about debt that inherently means a devaluation of miles. Delta’s $9 billion raise against SkyMiles, United’s $6 billion raise, and American’s pledge of AAdvantage to the government for $7 billion in subsidized loans demonstrates the value of the programs. And while airlines can devalue award pricing along certain margins, financial instruments they’ve executed preclude doing so to the extent it makes the program less attractive to consumers.

Wholesale devaluation reduces the revenue streams from bank partners, because it reduces the incentive for consumers to spend on their co-brand cards. And that makes it harder, not easier, to pay down debt.

Regulation In Exchange For Bailouts Gets Us Nothing

Under Northwest v. Ginsburg you largely can’t sue frequent flyer programs except where they explicitly violate their own terms. The Supreme Court found that causes of action based on ‘good faith and fair dealing’ are effectively state-level claims that are pre-empted by the Airline Deregulation Act.

The only avenue consumers have against unfair loyalty program practices is the Department of Transportation, but the DOT’s own inspector general found that it improperly ignores complaints about frequent flyer programs – and this was the Obama-era DOT that ignored consumers, not the DOT under Elaine Chao.

Delta represented it wouldn’t devalue SkyMiles as part of mortgaging the program for $9 billion, and then devalued partner awards a month later. The limitation on devaluations precludes Delta from changes that can “reasonably be expected to materially impair repayment” and they’d argue partner awards are only a small portion of those redeemed and that they wouldn’t have made the changes if they expected consumer behavior to materially shift.

Any such regulation is likely to suffer similar defect, and not to be enforced by DOT in any case.

Devaluations Should Be Shamed, And Neither Debt Nor Covid Are An Excuse

The best way for airlines to recover is to attract revenue from loyal customers, both by incentivizing incremental spend and by gaining an outsized portion of customer wallet share. The way to do that is to lean into the loyalty program, not to gut it. That’s even more true as an airline gets desperate for business, though making the mileage printing presses go brrr does suggest devaluations that will follow.

If an airline chooses to stick it to its best customers during a pandemic, that’s an argument against saving it. Customers should punish the program accordingly.

Ultimately neither government bailouts nor high debt cause frequent flyer devaluations. Devaluation is a strategy that a given airline may choose to pursue – at its own peril – but not one that inexorably follows.