Theory of Evolution

Theory of Evolution

When deciding on the type of crystal ball to use to forecast the future of frequent travel programs for this month’s cover story, it occurred to us that it’s not so much a matter of forecasting the future but rather looking at the programs in relation to where they’ve been, where they are now and where we think they are going in a purely evolutionary way. So, we put the crystal ball away and picked up “The Origin of the Species”.

Simple to Complex
This past year there were several developments that show signs of evolution — as in Darwin’s Theory of Evolution — where complex creatures evolve from more simplistic ancestors naturally over time. Frequent flyer programs have certainly evolved into complex creatures over the years. One has to look no farther than the types of credit cards that airlines sponsor — for a good example of this, read Editor Randy Petersen’s Opening Remarks in this magazine. At the dawn of credit card offers from Continental Airlines’ frequent flyer program, members had a simple decision. You wanted a credit card to give you Continental miles, or not. Looking at Continental Airlines today, you have your choice of three species of the same credit card concept: a standard credit card earning miles in your OnePass frequent flyer account, a TravelBank credit card that earns cash toward future flights (similar in many ways to the OnePass credit card which uses miles to purchase future flights) and finally, the Continental Airlines Presidential Plus Card which, while also providing OnePass miles, is really more of a benefits credit card because its main focus and benefit is Continental’s popular President’s Club airport lounge system. Yes, simple to complex in a span of 21 years. And this is just one example of the frequent flyer program theory of evolution.

Natural Selection
And on to Darwin’s idea of “natural selection” — preserving beneficial mutations to save the species (in this instance, frequent flyer programs) — also holds true. This is an extremely intriguing part of the FFP evolution. The beneficial mutation which actually was not present at the dawn of frequent flyer programs in 1981, but has been preserved, is elite-level programs. This alone is reason enough that these programs still exist.

Natural selection in its truest definition is the preservation of a functional advantage that enables a species to compete better in the wild. In this example, the elite-level program and its desirable trait of upgrades. The “wild” refers to the competitive environment of the airline industry over the past decade. There is not an airline analyst or critic alive that has not forecast the extinction of the “legacy” carrier, owing to the success of the low-cost airlines. However, price has proved to not be a catch all for all passengers and while there is certainly growth in the low-cost airline segment, it has hardly caused the extinction of legacy carriers, owing in part to the continued success of the elite-level programs and yes, while the minor advantageous genetic mutation of upgrades has been diluted by the population of the species, they have still played an important part in natural selection. Upgrades have allowed legacy carriers to compete very well in the wild because low-cost carriers by nature do not have this minor genetic mutation (no extra space, better food and seats up front).

Natural selection is also about breeding, as over time breeding eliminates undesirable traits. A good example of this is the threshold bonuses of earlier variations of elite-level programs. In the early 90s, when these programs were at their fullest development, elite-level programs contained both mileage and threshold bonuses among the elite-level benefits. Today, mileage bonuses live on while threshold bonuses have to a large degree been eliminated. Why? They were seen by programs as a duplication. Members were earning 25-100 percent mileage bonuses for being among their most frequent customers, so why then add additional mileage bonuses for each 10,000 miles flown? After all, members earned basic mileage for actual flight miles regardless of the elite status. The undesirable trait? Too many miles being awarded.

Similarly, natural selection eliminates inferior species gradually over time and while this is not yet applicable to the topic of frequent flyer programs, it certainly can be viewed with interest when it simply comes down to airlines — Eastern, Pan Am and TWA come instantly to mind. All had excellent, and in fact you could say, world class frequent flyer programs but it was not enough to overcome what is called an “irreducibly complex system”. An irreducibly complex system is one composed of multiple parts, all of which are necessary for the airline to function. If even one part is missing, the entire system will fail to function and that’s simply what happened to these airlines. But for the evolutionary record — it wasn’t the frequent flyer part that failed to function.

New Organisms
Darwin believed that over time, the beneficial mutations can create entirely different organisms. And again, Darwin would be correct if we were to examine the Air Canada Aeroplan program. If we believe what is said about its future and its current direction, it seems destined to become a different organism that is a frequent flyer program making no bones about competing with and pursuing a general organization that is a “rewards program that includes travel.” Elsewhere in this magazine issue is a story about Aeroplan purchasing a general loyalty rewards program in the U.K., so indeed it would seem that several programs are mutating into different organisms. But we must make it clear that we see Aeroplan and perhaps a few others as merely mutations of the same species, the frequent flyer program.

Regardless of where the programs are in their evolution, no one can deny that evolution does occur in the world of miles and points and we’ll take a look at how this is unfolding.

Award Calendars, Flight Finder
Who would have ever thought that you would need a calendar to redeem your frequent flyer miles? Wasn’t it just a matter of picking out your dates from the free calendar you got from your bank and calling up to order the awards? Today that bank calendar has been replaced by your PDA or cell phone calendar and the reservation agent has been replaced by you. You are now the species that must book your own awards and airlines have provided all that you need in a single place. Calendar. Check. Reservation agent. Check. Award availability. Still mutating. Seriously, all programs today have evolved to online award booking. The mutation is that unlike in the past where you decided when you wanted to go, today, these calendars decide for you. They show you when the award seats you want are available and when you’ll be able to travel. Both American and Delta unveiled next generation tools for their members this year — along the path of a slow gradual process — as these were only the second generation. And slight variations of calendaring are already popping up. American Express Membership Rewards has a member benefit known as Flight (and Room) Finder which returns a list of available options from a number of programs, not a single view.

Expiring Miles
We’re not sure if there was a bigger story this year than the evolutionary change in how miles expire. For most readers of InsideFlyer, this was a non-story. But for a good portion of the media and others, it was major news. We see it as the industry trying to find that middle ground, that variation that will sustain the programs. For example, do you really think that Wall Street would be interested in investing in any frequent flyer spin-off of an airline in which there were no controls of measurable liability?

As we now know, there is absolutely no standard among the species for the mileage expiration issue. Over the past 27 years, mileage expiration has had four permutations. At first they were short term offers designed to last perhaps a year. They then morphed into long term programs with no boundaries for expiration of miles. Then in the late 80s, they presented mileage expiration with no recovery (while there are exceptions, both American and United had terminal three-year expiration policies for their miles), then in the mid-90s Delta introduced passive expiration in which miles did not expire with account activity over a three-year period. Today, whether it be 18-months or 24-months, miles do not expire with some sort of account activity. All are slight variations of the same policy –miles can expire if you are not an active frequent flyer participant.

Delta SkyChoice Restrictions
One possible sign of the evolution of frequent flyer programs this past year was when Delta SkyMiles changed the availability of their SkyChoice awards. In some ways it doesn’t make sense because it only effects last seat availability. Their SkySaver (25,000 miles) awards continue to be available on every flight, or so we assume.

The Delta SkyMiles program has struggled to find an identity and while most of the program is a me-too in terms of the benefits and award structure (remember that throughout most of the program’s lifetime they had different award levels and different benefits than most other programs), this particular rule could only be described as a mutation. There is nothing else in the species that even hints at such restrictions. During a period when many other programs are actually developing soft dollars for the value of their miles toward award reservations, Delta stands alone. Maybe they have a higher calling than other programs, but today they stand out with this policy as a mutation rather than evolution.

One-Stop-Shop Online Bookings
Evolution comes to these programs from their external environment as well. Airlines previously existed to sell you a seat on a flight, their flight. But we’ve seen some evolutionary change in this component in that many airlines, including Delta this year, are changing into a complete travel booking destination. visitors can now book and purchase car rentals, hotel accommodations, trip activities and even travel insurance online. Why not? After all, these are all travel-related purchases that a passenger on their flights might be making anyway. Beyond the idea of passenger convenience, they are also income streams for the airline, though not quite as revolutionary as the days when United Airlines (UAL under the name Allegis Corp.) actually owned Hertz, Westin and Hilton International Hotels. We see this as a natural evolution of the species because of the change in the relationship that airlines traditionally had with the travel agency business. In the online world, airlines own a far greater percentage of direct bookings than they previously enjoyed in the off-line world.

Hilton Experience Rewards
Are you experienced? This is becoming a typical question from your loyalty programs. The evolution from using loyalty miles and points toward “another” flight or hotel stay has seen a small variation over time and statistically these changes remain small, no more than single digits of typical award redemption. Typical of these changes, whether airline (think United Mileage Plus auctions) or hotel, are the Hilton Experience Rewards introduced this last year. They offer a seemingly endless variety of awards from which to choose. Riding a Harley, skiing, hang gliding, surfing, private cooking lessons, tandem skydiving, private yoga instruction, fighter pilot for a day or just wanting to look really, really good. For example, the “Guerilla Makeover” Experience Reward offers an elite San Francisco team dedicated to extolling the simple virtues of style, taste and class; in short, they will transform your look Queer Eye style. For three hours they will customize your makeover to make you into whatever you want to be: Urban Chic, Fashion Runway, Hippie Loose, Retro Punk, Rock Star? You tell them what you want, and they’ll apply their knowledge and experience to make it happen — all for 40,000 HHonors points. For most members, these types of awards won’t replace the wanderlust of an around-the-world trip, but they do provide “eye candy” for program award charts that really haven’t changed all that much over time.

Southwest Airlines and the A-List
While frequent flyer programs as a whole go through their own evolution, individual species do the same and no program has evolved more than Southwest Rapid Rewards over the past two years. Darwin states that these changes must be gradual and small, but when we consider that Rapid Rewards now has an alliance partner, that you can actually use your Rapid Rewards credits to get to Hawaii and they now have a pseudo-elite program (A-list) you know that there’s a time warp. Southwest went through what seems like eons without anything more than a name change (remember Company Club?). But their new Business Select fares and A-list boarding changes in 2007 highlighted the program for us and we see the changes as possible stunted evolution that has been due since 1971.

Selling Off Frequent Flyer Programs
Since we wrote the first article on this topic three years ago, it has very recently been deluged in lots of ink. But is it revolutionary or evolutionary? For most of those who really don’t follow the industry, it is revolutionary. For us, it is evolutionary. While much of the focus is on the spin-off of the Air Canada Aeroplan frequent flyer program, we see that as really just an evolution from the changes that American Airlines made in the mid-90s when they spun off their AAdvantage program from the daily operations of the airline, making it a stand alone operation with its own President and operating budgets.

So regardless of how we might look at the future of airlines selling off their frequent flyer programs, we certainly believe that for the species to survive, most will remain firmly attached to the airline as a valuable asset.

Talks of Mergers
Okay, who hasn’t heard a quote from the President of United Airlines or US Airways that speaks of airline mergers? We didn’t think so. Airline mergers are as much a part of the industry DNA as jet fuel. From the early days of aviation, mergers put together weaker airlines to create competitive, stronger airlines. But sometimes, mergers put weaker airlines together with stronger airlines to create not so promising results. Is there really anything left of TWA since its merger with American? We can still see the great international routes of Pan Am in today’s Delta Air Lines, but as we see it, any merger tomorrow will be yet another small gradual step of evolution. Having said that, we do believe in the possibility of a revolution (sorry, the crystal ball wasn’t actually put in the closet) on the day when a legacy airline actually buys a low-cost carrier, or, when a low-cost carrier buys a legacy carrier. These are distinct revolutionary concepts, and concepts that we believe could actually change the species. Mutations like Ted, Song and Continental Lite weren’t that much of a stretch.

Nickle and Dime Effect
We are now living through the evolution of the banking industry where every time you turn around a bank is adding or adjusting a fee for a service or benefit that was formerly free or at least came with an explanation about how it was a cost savings to the bank, which allowed them to offer you better service (we have yet to find an ATM that talks to us politely). Well, just as that species has evolved those particular traits, so too have some frequent flyer programs. None were more annoying than when AAdvantage introduced a nonrefundable co-payment of $150 to claim upgrade awards from most discount coach fares when traveling between the continental U.S., Canada, Mexico or the Caribbean and Hawaii. While these upgrade awards can still be claimed for 15,000 miles, members must also make the co-payment. Additionally, the co-payment that applies to upgrade awards between North America and Europe, India, Japan/Northern China and deep South America increased to $300 from $250. These awards are 25,000 miles plus the co-payment. The co-pays apply only to discounted coach fares — full fare coach and above fares do not incur a co-pay when using miles for an upgrade. (Are frequent flyer programs and banks close relatives?)

But rest assured since Continental OnePass first introduced the concept years ago, evolution of the various fees has been very slow, almost non-existent until the action by AAdvantage. But just four months after AAdvantage’s move (much too fast for Darwin’s theories) Alaska has a somewhat different take on the nickel and dime timeline of evolution by introducing their own version which uses more miles here and there rather than cash. Domestic Alaska Airlines coach roundtrip Saver awards stay at their current 20,000-mile redemption level but for members who find themselves not online, the award will be 25,000 miles when calling reservations. Other Alaska flight awards requiring more miles when not booking online include: 50,000 for a coach roundtrip Peak award, versus 40,000 miles; 12,500 miles for a coach one-way Saver award, versus 10,000 miles; 25,000 miles for a coach one-way Peak award, versus 20,000 miles; 45,000 miles for a first class roundtrip Saver award, versus 40,000 miles; 90,000 miles for a first class roundtrip Peak award, versus 80,000 miles; 22,500 miles for a first class one-way Saver award, versus 20,000 and 45,000 miles for a first class one-way Peak award, versus 40,000 miles. The evolution here is from awarding frequent flyers bonus miles for booking online to now penalizing when we do not book online.

Sneaking in Changes Without Due Notice
For the most part, changes to the rules have been evolutionary over time. Programs reserve the right to make changes and will give notice of program changes to their members so they can adjust their earning and redeeming activity as necessary. But in 2007, we’ve seen an aggressive mutant change to these rules. And these new changes are a bit more like watching The Predator movies than Teenage Mutant Ninja Turtles (both related to the evolution of a species). Originally when programs made changes, they gave members six months advance notice. Over time, the lead time was shortened to three months, then to 60 days. And most recently, the advance notice has morphed to a 30-day right of change while some programs reserve the right to change the rules of a program without notice.

As an example, Continental Airlines and OnePass “now reserve the right to change any aspect of the OnePass program at any time with 30 days’ notice to active members (previously, 60 days were required).” Sure, 30 days are better than a poke in the eye, but for those members who live precariously on the edge and aspire toward awards such as first class tickets to Asia and around-the-world flights, any increase in an award chart typically does not give a member the necessary notice to earn enough “shorted” miles to achieve their redemption goal. As a rule, we don’t like 30 days notice, preferring a more amenable length of 60 days, which would please both the member and the program (though each will be less than really happy).

Another extreme example is Priority Club, which in 2007 made changes to their award chart — without advance notice to members. Members were very unhappy that they were not given advance notice about the changes. Some Holiday Inn properties increased from 15,000 points per night to 25,000 and some InterContinental properties increased from the previous top-end redemption of 30,000 points to 40,000 points. While the changes were not all bad news, some properties decreased in points and Priority Club introduced PointBreaks — a standard 5,000-point redemption level that is available on an ongoing basis at select global destinations for a select period of time. We should point out, however, that some Priority Club members were able to book hotels at the former rates when asking the reservations agent. So, in the long run, we guess a couple of weeks warning is about the same as a couple of weeks reprieve, but without begging, who would have known?

What’s New is Old — The Return of Blackout Dates
Frequent flyer programs evolved from earlier years when award calendars contained blackout dates (dates on which no award travel was allowed) to a more general policy of simply controlling the inventory available on those same days. But as we know from Darwin, even when a species evolves, it can mutate back to previous traits at any time. In some respects, this is true with the new aforementioned limited Delta SkyChoice redemption policy, but more relevant is Frontier EarlyReturns new blackout date policy. The program added back in blackout dates for travel within the contiguous U.S., Canada, Mexico, Costa Rica and Anchorage. Members will be unable to redeem miles for award flights on days mostly around holidays when seats are in high demand. While their announcement seeks to balance this restriction by adding several more seats on non-peak days than the previous set amount, those are promises left to the imagination of individual members.

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