How Frequent Flyer Programs Really Work (What Travel Writers Tell You is Wrong)

I love that consumer ombudsmen like Chrstopher Elliott exist. They can get attention for people that are trapped in bizarre bureaucracies, out real cash after trips have gone awry and who are getting nothing but runaround.

What frustrates me is that he seems to think that everything travel providers do is inherently ridiculous and unreasonable, and that consumers ought to be entitled to pretty much anything they wish.

He reminds me of the Saturday Night Live fake commercial for a personal injury law firm that featured Phil Hartman — “Sure the sign said no trespassing, but how much did that really mean when you were as drunk as I was?”

And Elliott makes crazy, over-the-top claims that even he can’t possibly believe, presumably to get clicks and generate controversy. That’s often how online writers get paid.

He also doesn’t often understand how the subjects he covers work.

His new column is shocked to find that airlines sell lots of miles and they don’t even have to spend money to redeem them all, since some miles wind up expiring. And that makes them a scam.

I do think there are unfair practices like devaluing miles without notice (:cough: Delta :cough:).

But there’s nothing especially novel here, and in making the magnitude of the dollars sound really scary, Elliott shows that he doesn’t know how to read an airline financial statement.

Make no mistake — Elliott’s big example, United’s MileagePlus, is a multi-billion dollar business. They sell miles:

  • To themselves (when a member of the program buys a ticket, a portion of the ticket revenue is attributed to the loyalty program for the miles)
  • To their partners (partner airlines buy miles from them when frequent flyers credit travel on those partners to a United account)
  • To their credit card partner, a plurality of miles earned come from credit card spending
  • To other partners, such as hotel chains, rental car companies, insurance companies, floral vendors, even sites like Milepoint of which I’m a co-founder (United miles were part of the most recent Milepoint premium offering).

The cost they charge partners for their miles, which varies by partner, is the basis they use to attribute how much revenue goes to miles versus other activities when the sale of multiple things are bundled together. Chase, which issues the United co-brand credit card products, doesn’t just buy miles. They buy checked bag fees for their card holders, they buy lounge access, and other services. The cost of miles to their partners is also a metric used for internal pricing of miles between the loyalty program and the airline. That’s a number that will change somewhat as they gain and lose partners (like US Airways which is dropping out of Star Alliance in a couple of months).

United sells miles, takes in revenue. And it redeems miles and those redemptions cost money.

83% of miles redeemed in 2012 – 4.7 million awards – were for travel or upgrades on United (this represented 7.4% of United’s revenue passenger miles for the year).

1.6 million awards were issued in 2012 for travel on other airlines, for United lounge memberships, for hotel and car awards, and for merchandise.

So while Chris Elliot says,

A look at United Airline’s latest annual report shows why it’s no longer entirely accurate to call it an airline. In 2012, it sold $5.1 billion worth of frequent flier miles to credit cards and other third parties.

You can find United’s 10-K filings on its website.

On page 92 of the 2012 10-K filing we see the amount United brought in from the sale of miles — and a lower figure representing the sale of miles (“other revenue recognized during the period from the sale of miles to third parties, representing the marketing services component of the sale” meaning the portion of a deal not counting checked baggage, lounge access, etc). The chart is in millions of dollars.

The figure that Chris sees in United’s annual report as $5.1 billion is actually less than $1 billion.

Others have mistaken numbers like the total liability of unredeemed miles outstanding at the end of a year for the number of miles sold during a year. I won’t speculate on whether he’s reading the financials wrong, or not actually reading them as he says and taking someone else’s mistaken read for what they say.

United MileagePlus is a multi-billion dollar business, but they didn’t sell $5 billion worth of miles to third parties in 2012. That’s just plain wrong.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. […] View from the Wing is no fan of Elliott and rightly criticizes some of the facts in the latter’s post. But Elliott’s argument was always too extreme for me and wasn’t what caught my attention. Instead, I find it more interesting that the term everyone is using (in posts by Elliott and his critics) is “loyalty program.” […]


  1. Gary, have you ever directly tried to contact this guy to get a reaction from him about any of this?

  2. Gary, I think you’re exactly right. I like the idea of consumer advocates because there are occasions where business employ tactics that can screw even the most wary consumer, and it’s nice to have someone advocating for you.

    However, Elliott has gone way past that, and into the “businesses are inherently bad” territory. In my opinion, Elliott has totally lost credibility for the exact reasons you mention above. His claims are so outrageous, and he understands so little about some of the subjects that he covers.

  3. Well said, both Gary and Taylor. I stopped reading Elliott’s column last year because I found the sensationalism and lack of understanding so off-putting that it overshadowed the good work he does helping people truly caught in bureaucratic quagmires.

  4. Chris Elliot and milevalue are a lot alike… Making sensational, incorrect claims to get hits.

    Keep calling them out as you see em

  5. ok, but he’s right about miles expiring and devaluation of the miles you already have are terrible practices from the airlines. it’s like if you had money in the bank and the government would confiscate your $$ because you haven’t done anything with it for 18 months… absurd.

  6. It is counterintuitive to most people (i.e. non-accountants) that the proceeds from miles sold is not “revenue” at the time of the transaction but rather when they are redeemed by the customer (or expired). I’m a CPA and have tried explaining this but people don’t get the concept of deferred revenue.

    Aeroplan is a bit more transparent because its financial statements are not burdened by having an actual airline in them. They use the terminology “gross billings” for the cash inflow and while it can’t go at the top of the GAAP P&L they do put it at the top in their MD&A.

  7. I agree about CE. His articles in WaPo are usually off the mark & his advice in the q&A are equally lame. He must not be very good at redeeming miles 🙂

  8. Chris Elliott is like the Goodyear blimp – full of hot gas. If you do the exact opposite of what he says, you’ll be right more often than not.

  9. The 10K seems to suggest something different than your explanation.

    For United’s own tickets, United takes the fare and defers part of the fare that represents the value of miles. I didn’t see them call this miles “sold” in their footnotes.

    So the miles sold are to partners and third parties. Cash proceeds to United from this activity was $2.8B for 2012.

    As you noted, some of that money buys other things, like lounge access, bag fees, etc. That is what the $816M represents – things that United *earned* in the year and can count as current revenue. The rest – $2B or so – is cash proceeds from miles sold that should go into deferred revenue. They have issued the miles, and the value of those miles have not been redeemed. So, they have not recognized the revenue for that yet, but they have taken in the cash.

    To an outsider, those are “sold” miles. $2B is the value of miles “sold” in 2012 alone. From United’s accounting angle, it’s a prepayment of those miles. So your dispute with Chris Elliott is that he says United sold $5B of miles and you think it’s $1B. I read it as $2B for 2012.

  10. To be honest, I don’t see much of a difference in the ways he tries to attract readers vs. how you do with nonstop credit card pushes.

  11. I think AS is on target here. Most of the US airlines treat miles sold as deferred revenue until those miles are actually redeemed or expire. In other words, they treat the miles as a liability until they provide the service promised, upon which time the liability is converted to revenue.

  12. Elliott writes for the mass market – people who go to Schenectady every other year to see the cousins or take a “once in a lifetime” trip to Disney World. He can be helpful to them, though I agree he always thinks “nonrefundable” means “unless you have a sad story to tell.” His ignorance of loyalty programs is profound, and he is simply not credible on that subject. Read Elliott if you want to whine about how awful everything is; read Gary Leff if you want to take great trips to great places.

  13. Gary, do you have any idea the price United charges Chase, or other airlines, for the miles they sell wholesale? Just curious. My guess is around 0.8 cents.

  14. Chris Elliott and Paul Krugman will be co-authoring a story soon: “The top 1% of mileage earners have as many miles and points as the bottome 47%!” 😉

  15. @Lantean — It’s really not that difficult, though. Miles only expire if there is no activity whatsoever in your account for 18 months. You could buy 1k miles for $30 and that would count as activity, extending your expiration date another 18 months. Spending as little as $30 every 18 months shouldn’t really be a challenge, and it’s hardly absurd or unfair.

  16. I happen to like CE even if I sometimes disagree with him. He has valid points that give me a reason to pause before I purchase. It is a benefit to me to hear several different voices out in the marketplace. And, I do think he provides a service to those who are in need. As I posted on one of his stories recently, I have benefitted greatly from my husband belonging to a loyalty program but I do miss than days when we were all treated as equal fliers.

  17. @Taylor — or you could even donate 500 miles to a charity and your expiration date would be instantly updated to 18 months from now. This would work on United Airlines, at least. Or, last time I looked at the United program rules, it would. 😉

    Unfortunately, very few people bother to read the details on earning and redemption of miles, even though the information is readily available on the airline websites. (The same is true for much other information. People just seem incredibly lazy. At no time in history has so much information been so readily available to so many, yet the “many” prefer to whine and B.S. about things rather than take a few minutes to do some easy research.)

  18. @CT I stopped to because he put his own views on the AA/US merger rather than reporting facts in one USA Today article. Ever see one of his video reports, he only owns polo shirt Buy a dress shirt and tie!

    @ Tyler yea the Gary uses for credit cards and what the rest of us use in real life are different. I mean I do not plan on putting $60,000 on my credit cards this year, do you?

    @AS and @Lamonster Looking at the footnotes to the financial statements under
    Summary of Significant Accounting Policies will tell you how the Deferred revenue is valued. Based on a number of factors including history of the program and participants and when miles expire

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