The Department of Transportation has just sent letters to United Airlines, American, Delta and Southwest demanding significant information about their frequent flyer programs – how they’ve changed the price of awards, whether they give advance notice of program changes to members, and how the value of their points has changed over the past six years. Each of the four largest U.S. carriers must respond in detail by December 4.
The thrust of this effort – which so far is just collecting data – is consumer protection. According to Transportation Secretary Pete Buttigieg,
Points systems like frequent flyer miles and credit card rewards have become such a meaningful part of our economy that many Americans view their rewards points balances as part of their savings.
These programs bring real value to consumers, with families often counting on airline rewards to fund a vacation or to pay for a trip to visit loved ones. But unlike a traditional savings account, these rewards are controlled by a company that can unilaterally change their value. Our goal is to ensure consumers are getting the value that was promised to them, which means validating that these programs are transparent and fair.
United has consistently devalued its miles since eliminating award charts in 2019. Delta will charge more than 4 times as many miles for the same exact seat compared to its partners. Southwest has devalued its points 43% in twelve years.
DOT Is The Only Regulator Of Frequent Flyer Programs, But They’ve Rarely Acted
The Department of Transportation is given the power to regulate ‘unfair and deceptive’ practices by airlines. That includes frequent flyer programs.
The Supreme Court ruled in 2014 that consumers can’t sue loyalty programs for acting in bad faith or unfair dealing – only for violating their own program terms. That’s because loyalty programs were seen as providing rebates on airfare, and because the Airline Deregulation Act precludes states from involving themselves in airline schedules and pricing, and because common law claims of implied covenants of good faith and fair dealing were deemed state-level claims.
That left only the Department of Transportation policing loyalty programs, and according to the DOT Inspector General the agency has improperly ignored complaints about frequent flyer programs for years.
What DOT Is Demanding From The ‘Big 4’ Airlines
The details each airline has to provide are extensive – and show a clear direction for what the agency is concerned with. They’re worried about the devaluation of airline points, and the lack of notice and transparency with program members about how changes affect the value of their miles and status. For instance,
- Airlines have to identify how they price awards.
- Airlines are required to list all changes made to their programs since July 31, 2018 and the reason for the change.
That’s not just changes to redemption costs and elite status – the airline is going to have to identify the number of customers “in each membership level or status category” who were affected by the change and how many co-brand card customers were affected, as well as ‘the total number of rewards points that were affected’ by each change, including broken out by status level and how many of those points were earned via co-brand, plus how much money the airline received for those points.
- DOT also wants to know whether each change included advance notice, and how each change affected membership numbers at each status level.
Showing skepticism of dynamic award redemption prices, it’s not enough to say that ‘we haven’t changed our pricing, we just price dynamically’ – DOT wants to know “what, if any, changes have been made to [dynamic pricing] variables since the value became dynamic for that rewards point; the financial impact on an average rewards customer for each variable change.”
- Each airline has to calculate the value of one of their points and how that value has changed over the past six years. They’re also required to reveal how much they sell their miles to banks for.
I’m on record that roughly speaking an airline’s cost per mile is around 3/4ths of a cent and that they sell miles to banks for around 2 cents while discounting that to about a penny for initial card bonuses. There’s nuance here of course, for instance the airline might subsidize the cost of a mile for foreign transactions and for purchases made from the airline itself (and that receive bonuses).
- They want copies of co-brand contracts, analysis of the value of those deals, and details on how loyalty programs were merged and then changed as part of airline mergers. They also want airline partnership agreements, for instance between airlines that are joint venture partners or are just earning and redemption partners.
- And they want to know how airlines respond competitively to changes at other carriers.
DOT is also concerned with extra fees associated with the use of points – and while American and Delta have added surcharges to certain awards, fees to use points are more closely associated with foreign carriers and with low cost carriers than with these airlines.
A sample of the letter sent by DOT is here (.pdf). The order doesn’t just apply to the main loyalty programs, but to “any consumer incentive programs affiliated with” with the airline). Are small business programs like Delta Sky Bonus and United Perks Plus consumer programs, since they are customer programs?
Expect Much Of The Data To Remain Secret
It’s unclear exactly what information will be returned and made publicly available.
The DOT order says that airlines “should not seek any responsive information and data from separately incorporated subsidiaries or affiliates” but offer only information in their direct possession. The loyalty programs of United, American and Delta are all separately incorporated entities.
Airlines need to respond within two weeks to identify questions that this makes them unable to answer. They can also request confidential treatment of the information.
Why Is The Federal Government Concerned With Frequent Flyer Miles All Of A Sudden?
Word got out back in December that the Department of Transportation would do something like this. It took until now for them to actually request data. There’s no notice of regulation pending, although the demand for information suggests there could be a rule proposed in the future – in the next administration.
There are two roots to interest by the Department of Transportation in airline frequent flyer programs.
- This was precipitated by Senators Durbin and Marshall pushing for frequent flyer programs to be investigated as retribution for airlines speaking loudly and publicly against their credit card interchange legislation (especially United CEO Scott Kirby).
Durbin and Marshall became concerned about how consumers are treated by loyalty programs, even as their proposed law would gut those programs. But if they can paint the programs as unfair, perhaps they moot some of the criticism or concern that they reduce the value of those programs.
- This is also timed to become a campaign issue, part and parcel of a ‘middle class pocketbook’ agenda. It’s possible that nothing happens on this front unless the Vice President is President, although the Republican nominee is non-traditional in that his policies frequently diverge from laissez-faire so it’s possible that a change in control of the Executive Branch wouldn’t put an end to this inquiry – especially if it proves popular.
Where Should This Effort Go Next?
It’s unclear what becomes of this effort. I’d prefer that the Supreme Court revisit its Ginsberg ruling, recognizing that loyalty programs aren’t just price rebates on airfare (indeed, most points aren’t earned from flying) and also that common law torts are distinct from state regulation.
However in the absence of access to the courts, the DOT – assigned as the consumer’s only avenue of redress – shouldn’t ignore its role in addressing unfair and deceptive practices.
It should, however, recognize that frequent flyer programs are the most successful marketing innovation in history, that they have tremendous value, and that they even saved major airlines from bankruptcy during the pandemic. United, Delta and American all borrowed more than $5 billion apiece against the value of their programs during Covid. Southwest sold large chunks of miles to Chase to generate liquidity (and other airlines used this strategy during the Great Recession). It’s wise to approach any future rule with great care.
Hello I’m here from the gov. and I’m here to help.
That’s pretty rich coming from the US government who debases the value of the US dollar via reckless spending that results in higher interest rates, out of control inflation and massive debt burden for future generations.
Yes it’s terrible that the government wants to protect consumers from corporations scamming them, next thing you know they’ll say 14 year old kids who have a history of making threats on line about shooting up schools shouldn’t be allowed to have access to AR 15’s!
Good. At this point all that is simply being asked is for some transparency. If airlines were running legit programs they should have no reason to oppose this request.
will go nowhere other than a political rallying cry
Devaluations, valuations… I absolutely see this as a precursor to making miles and points taxable on a 1099.
I was with you until the argument that airlines shouldn’t treat points as rebates. We’ll get 1099 s on miles if that comes to pass, just like credit card referral bonuses
Grandstanding
All political grandstanding. I’m sure each airline will be able to document their basis for valuation. They use dynamic pricing so a supply/demand situation like it should be in a capitalistic country. Also the bylaws of each program pretty much give the airlines the ability to change it at will. We really don’t want the government trying to oversee this. Now I don’t have a problem with some advance notice but that would only apply if a material change to the overall basis for the program (or maybe the miles/points to earn a certain elite level). IMHO that wouldn’t apply if Delta went from charging 200,000 skymiles for J to Europe to 340,000 skymiles – that is simply a market dynamic based on their current valuation process.
I suspect much of this has to do with the election. Since airlines now do dynamic pricing when it comes to redemptions how would that work? It would be like the government requiring airlines to give disclosure on how they set fares. Typical government morons that know very little about the real world.
Isn’t it about time for Mayor Pete to go out on another paternity leave? In any event I expect he will be out of the administration by January regardless of who wins the Presidential election since the vast majority of cabinet secretaries turn over after 4 years.
It is about time that the Consumer has some representation. Devaluation of points is the worst thing that the programs do.
Honestly I think airline companies should be exposed for screwing over travellers with the travel points points and other stuff
Fantastic news
It looks like Mayor Pete doesn’t take airline industry bribes.
Nail the crooks and let us know when they certify a class action.
So you expect what airlines to publish a bunch of complex algos that identify how airlines price a redemption as they do with fares? And that would benefit consumers how? Typical travel blogs full of people that think airlines can charge $49 fares and be successful enterprises.
For those who say there will be 1099s… Well if we have to pay taxes on redeeming points then we can then take deductions on the cost of obtaining these points.
Yes, Yes, YES! At an absolute minimum, frequent flyer programs should base redemption price on what an award cost when the miles were earned, not redeemed. That would do a lot to mitigate the bait-and-switch we’ve all gotten screwed by in the past. An ancillary effect of that would be that award charts would be required. I understand periodic moderate devaluations will happen but engaged loyalty members have been getting royally screwed for years now. Any efforts by the government to remedy that situation is most welcome.
At the very minimum, tax all points earned on OPM, or on trips deducted as a business expense as income.
My prediction will be that airlines will be made to disclose set redemption rates and not hide behind dynamic pricing. With that, miles accrued at those rates must be honored at the posted redemption rates of that time. In other words, they can’t get you to earn all these miles and then devalue them later. It’s amazing they have gotten away with it for this long. It’s blatently fraudulent to me as a bait and switch for consumers.
The opaqueness of frequent flyer “value” leaves it rife for abuse and the DOT is warranted in reviewing it. But isn’t the easy solution for airlines to say, ok well if you don’t want us to be opaque we’ll just change dynamic rewards to equal a set value of the price of the ticket. And I’m sure that value will be super generous to frequent flyers…
@Darin. Possible but not likely. With that approach consumers will know exactly what they are getting into…which is that FF programs are pretty much a scam these days. The programs will become less relevant to people and the airlines will suffer. Add in the gutting of elite benefits and there will be virtually no incentive anymore for credit cards or loyalty flying. The only thing that will differentiate airlines would be service and frequency. And we all know how that is in the U.S.
The rich should be punished. If you are gold or platinum, you should be earning 5 miles per dollar. If you are poor and not elite, then earn 9 miles per dollar. Maybe 7 miles for dollar if you are silver. That is helping the working people. Harris says she wants to help the working people so do it.
In a way I liked the old days when I could use the miles earned on Northwest Airlines for almost free roundtrip flights from LAX to BKK about every two and a half paid roundtrip flights. That kept my loyalty with Northwest and my average cost per ticket down. The only problem at that time was that the miles had to be used within a few years of being awarded so I ended up taking extra trips to use miles that I would otherwise lose. If airlines can borrow against their mileage programs, the banking industry sees value in them. The SEC should put limits that don’t allow the programs to lose value too quickly, undermining the value of the loans or mileage purchases.
Those that are calling for redemption rates to match the dates for redemptions at the time the mileage is earned will ensure that there will be very short expiration dates on mileage.
As usual, all of the suggestions that some think will make loyalty programs “more fair” will just ensure they become less generous.
It won’t take long before regulators and lobbyers find out that what they want will have the opposite effect of what they are seeking.
Mayor Pete is such a disgrace. He needs to go on permanent leave, which is hopefully coming in January. I mean, what cabinet member takes “leave”. Do your damn job.
@Brian – Watching out for the public like this IS his job. It’s nice to see a DOT Secretary taking that seriously for once.
I have become a fan of how this DOT Secretary is operating. I had previously found him to be a smart guy who was a quick study, but I thought he was making a mistake to take on a position which is generally a dead-end and thankless position that is more career-killer than career-builder in politics. He is turning out to be a smarter player than I had anticipated he would be after what I thought was a mistaken rush to get a headline position in what I had always expected to be a one-term President’s administration.
Brian seems to not appreciate what good leadership is really like. Good leadership sets things up so the ship operates smoothly even during the absence of the entity’s top leadership. And AFAIK, he’s never stopped being available even while he was signaling to the public that there is nothing wrong with any parents taking parental leave when a newborn comes into their life. I think it shows even stronger leadership to know and act in a way that recognizes that maybe a person is not at their best at work if they are in the process of adjusting to a young baby in their life that may not exactly respect traditional adult sleep schedules. 😉
@Tim Dunn. That’s interesting, as they used to do it just fine. That is they didn’t devalue every six months and kept things equitable. Perhaps it will lead them to devalue less to avoid all the chaos. And we get a printed redemption chart to know what we get…like the old days.
Frankly, isn’t an expiration date in these cases a better solution? Who banks miles for years anymore? At least the consumer will understand where they stand and when to use them.
Less generous? How could your beloved Delta be any less generous? The redemptions are beyond insulting. Especially when partners have the same flights and service for a fraction. Delta leads the way in making a loyalty program virtually non-existent. They might as well just do away with it entirely. And I bet they would if not for the credit cards that they make so much money on by luring people into thinking they will achieve business class tickets after a few months of spend.
Here is my solution:
1. Airlines are required to print standard redemption rates. Consumers deserve to understand what their miles are worth at any time. Dynamic is done away with. Airlines can control seat allocation at those reward levels (like before) but they must be consistent and without dynamic pricing. You earn miles, you know what they are worth when a seat is made available. Otherwise, as is now, this all verges on a gambling game. A sort of Japanese Gacha for those who are familiar.
2. Miles accrued under a printed redemption level are honored at those rates. That is, if the airline chooses to raise its redemption rates any miles achieved during the previous can be booked at the previous rate. No expiration so long as there is continued activity on the account within every 24 months.
3. Airlines are required to give a 90 day notice to any redemption rate changes. That way consumers can better plan their travel and credit card spends as to which airline offers the best redemptions.
See? It’s really not that complicated.
Just no end to the meddling of these incompetent morons running the government. It’s flat out none of their business. If the consumers don’t like it, they can take their business elsewhere. Change cannot come soon enough!!!
It’s about time!!! We’ve been ripped off for years by these airlines. It started with Delta throwing out its award chart around 2015 and going full steam ahead with its dynamic pricing scheme. The others followed suit quickly. It’s an outrage. For years passengers planned overseas vacations and holidays with families based on the known prices for the award seats airlines advertised. Changes surely took place, but with notice to customers, and reasonable. Gone in a flash. Greed took over. Fairness and reasonableness for loyal customers out the window. Outrageous amounts being required for International award travel. Awards became even more outrageous over the years, for themselves and their partner airlines. Look at today’s redemption numbers across the board on the vast number of flights one would want to purchase. Total disgrace.
Interesting to see how FlyerTalk wants to marginalize or even delay/disappear timely discussion of this topic about the airline frequent flyer programs coming under overdue scrutiny. Weird to say the least, but a sign of the site having been co-opted by corporate apologists from the top down.
The devaluation of the miles/points has far outpaced the major airline programs’ cash outlays/direct costs to pay for the flights flown on mileage tickets. Sort of the same thing with hotel loyalty program points. Instead of the loyalty program currency being a consistent rebate as at the time of issuing the rebate, the airlines and hotels have been driven to run up profit margins and profits in the programs themselves and make the programs more profitable for the program owners by devaluing previously-issued rebate currency even when the program owner’s direct cost of accommodating an award customer using the rebate currency is largely unchanged.
Absolutely. Nothing. Will. Happen.
The govt wants ALL the customer miles-earned,… and they don’t want it to help you… they want it for TRACKING the customer and tracking the level of income the customer receives from “miles”. There is NO OTHER REASON THE FED GOVT WANTS THIS, THAN TO TRACK YOUR FREQ.FLYER “INCOME” so they can tax you on it.
This is absoultely a TRACKING SCHEME, and has nothing to do with cracking down on any airline.