High Flyer or Big Spender

High Flyer or Big Spender

When frequent flyer programs first began over 30 years ago, prior to deregulation, fares were highly correlated to distance flown. The airlines created mileage-based programs when developing their FFPs, and until a few years ago, nearly all programs in the U.S. were based on earning miles–members earn one FFP mile for one mile flown. When Virgin America launched its Elevate program in 2007, it introduced a revenue-based scheme where members earn points (not miles) according to the price paid for a ticket, regardless of the distance flown. Since then, JetBlue TrueBlue and Southwest Rapid Rewards have relaunched and aligned their programs to revenue spent instead of mileage flown.

The legacy carriers continue to use the mileage-based model, but American AAdvantage started testing the revenue-based award model when it launched its “Dynamic Air Awards” program last year, available to elite members only, where the price of an award ticket correlates to the fare cost. With Dynamic Air Awards, elite members can redeem miles online for coach tickets within the mainland U.S. and the price in miles is variable, based on published fares.

With a different take on a similar theme, United and Delta offer ways for co-branded credit cardholders to redeem miles for revenue tickets. United introduced its “Choices” program in 2006 where members can redeem miles at essentially a penny per mile for a statement credit to cover the entire or partial cost of a flight. Delta launched a similar redemption option with its “Pay with Miles” program in 2008.

While American, United and Delta all offer award redemption options that are based on the revenue cost of the ticket, earning miles with these programs is still primarily based on miles flown. Below, we look at the differences between mileage-based and revenue-based FFPs and see which model has distinct advantages according to different types of travelers.

Where Do Miles Come From?
FFPs have evolved over the years, to the point that the name “frequent flyer program” is somewhat of a misnomer, since the majority of miles in members’ accounts aren’t earned from flying. In American Airlines’ most recent 10-K financial report, the airline stated that AAdvantage issued 167 billion miles last year, of which approximately 65 percent (over 108 billion miles) were sold to program participants.

In other words, the miles sitting in members’ accounts that have been earned from flying the airline are a minority and most miles are actually earned from credit card spending and other partner transactions. Because of this, the programs have been dubbed “frequent buyer programs” in recent years.

And, partner miles are revenue-based. Most of these transactions (excluding bonus offers) offer one mile per $1 spent. If the industry itself is moving more to a revenue-based system, then it makes sense for airlines to adopt a revenue model. After all, that’s how most industries run their businesses. They recognize their most loyal customers by the amount of money they spend. Retail loyalty programs reward the buyers who spend the most money. The retail store which has the most volume of sales is considered the best store–there aren’t any other measurements other than revenue. In every industry, money wins.

Rewarding Revenue
By moving to a revenue model, the airlines are simply moving to the mainstream, which operates by determining the value of a customer according to how much revenue they bring in. The miles system can be viewed as outdated and can easily be exploited. The Internet allows members to use tools such as Hipmunk, ITA and FareCompare to find unique fares and construct mileage runs to maximize the greatest number of miles they can earn for the least amount of money. The aim of the mileage runner is to acquire miles cheaply and redeem them for high-fare tickets. But the aim of the loyalty program is to recognize and reward an airline’s most valued customers. In some cases, mileage programs end up over rewarding low-fare travelers and under rewarding high-fare travelers.

The move to a revenue-based system more accurately measures customer value and seems like a reasonable and fairer system. The customer who spends the most money with you is more valuable and you want to reward that customer. Loyalty programs are about rewarding an airline’s best customers and we can see why programs might choose to adopt a revenue model. Many foreign carriers have modified their mileage-based systems by decreasing the number of miles members earn on low coach fares and increasing the earn rate on first and business class fares. Milepoint member jbcarioca thinks that all the airlines will eventually move to a revenue-based system, “While I suspect all programs will retain some aspects of both, I regard a revenue-based model as inevitable and desirable. The airlines do this to make money and the most money spent should have the best rewards.”

Rewarding Frequent Travel
The customers spending the most revenue aren’t always the most frequent flyers. If you look at corporate America, business travelers employed by typical small businesses are frequently told they have to fly on the cheapest airfare. The road warrior traveling the most, but not spending the most money because they are required to go with the cheapest fares, is sometimes a more frequent flyer than the guy whose company purchases higher fares. Do the airlines then reward the flyer who flies the most or the one who brings in more revenue? And if the business traveler doesn’t get to choose which airline to fly on company business, why should they be rewarded for loyalty? And how do airlines retain that customer when they are paying for their own travel?

Milepoint member and frequent leisure traveler, javacodeguy, acknowledges that he may not be one of the airline’s most profitable customers, but he does fly a lot and says the mileage-based model keeps him loyal to an airline. “For 100,000 miles a corporate flyer might spend five times what I spend in a year. But, in the current system I’m in the same pool as him since status and rewards are just based off mileage. I’m sure people like me are not the norm and that most 100,000-mile flyers are also high spenders. The airline has to weigh people like me into the equation. I fill cheaper flights on the weekends and stay loyal to them because of the mileage-based rewards and status.”

By moving to a revenue-based system, frequent flyers who aren’t high spenders will have less of an incentive to remain loyal to an airline. Milepoint member Sean Colahan says, “I much prefer the legacy carrier way of frequent flyer miles based on distance flown as opposed to revenue spent. This allows me to redeem for flights I wouldn’t otherwise be able to afford and stay loyal to an airline. If they were based on how much I spent I would have to reconsider my loyalty to a single airline/alliance.” Without the incentive of an aspirational first class international award, many potentially loyal members may look elsewhere.

Gary Leff of View from the Wing explains that revenue-based programs suffer from, “the Greyhound Road Rewards problem–where 10 bus trips gets you … a free bus trip. Mileage-based programs from alliance or network carriers offer the possibility of travel that one couldn’t normally afford on their own. There’s a pot of gold at the end of the rainbow, it isn’t just a rebate punch card.”

BoardingArea blogger, The Global Traveller, says that revenue-based programs are inherently flawed because of their transparency. Mileage-based programs inspire loyalty “in large part because they give rise to an appearance of getting something for nothing. The program rules are deliberately set to muddy the value equation for consumers–i.e. allow FFPs to appear to give more value than they cost the airlines, overall. A true revenue-based FFP with earning, status and redemption as functions of revenue makes the value equation transparent. This is not good for airlines.” Leff has a similar viewpoint and likes that the “programs are a bit obscure and convoluted and I believe that both carriers and consumers benefit from that.”

The Bonus Equation
While mileage-based programs aren’t based on revenue, they have class-of-service bonuses to reward travelers paying for more expensive fares. MSPeconomist prefers the mileage model, “but with some extra miles for more expensive tickets. I like the Delta model with 100 percent for most coach fares but 150 percent for M, B and Y coach fares plus business and first class. This is simple but does reflect revenue too. Basing it on miles is just more fun than keeping track of money spent and seems more fair given that many expensive tickets are not paid by the traveler. To some extent, miles flown are a measure of pain!”

Elite benefits such as bonus miles, priority treatment, complimentary upgrades and lounge access are offered to keep members loyal to an airline. And the promise of a free flight is an equally alluring incentive to retain customers, especially when that free seat comes with gourmet meals, champagne, first class treatment and a comfortable seat that fully reclines. Of course, not everyone redeems their miles for business and first class and some just want a roundtrip domestic coach ticket. The Wandering Aramean points out, “for many people the aspiration is simply an extra trip to visit family, not necessarily to travel around the globe.”

The Availability Equation
The ability to earn miles with co-branded credit cards and other mileage-earning partners has put more miles into circulation. American reports that their 69 million members have 591 billion miles sitting in their combined accounts. While members accrue more miles, the airlines aren’t opening up a corresponding number of capacity controlled seats for awards and a common complaint from members is that they aren’t able to use their miles at the lowest award levels when they want to fly. Revenue-based programs have solved this problem by eliminating blackout dates and seat restrictions and opening up all seats for redemption. If there is a seat available, you can redeem points for it. With both types of programs, it’s going to cost more to fly when demand is high. Revenue programs can be more flexible with award pricing and the cost in points may be higher on popular flights, but possibly not as high as the Anytime awards of mileage-based programs, where there are only two or three award tiers.

Mileage-Based Programs
The majority of frequent flyer programs in the U.S. and Canada are mileage-based, including Aeroplan, Alaska Mileage Plan, American AAdvantage, Delta SkyMiles, Frontier EarlyReturns, HawaiianMiles, Spirit Airlines FREE SPIRIT, United MileagePlus and US Airways Dividend Miles. Mileage-based programs are fairly straightforward. Members earn miles based on the distance flown, plus any class of service, minimum mile and elite status bonuses. Award charts are based on fixed zones so members always know how many miles are required to redeem for an award. Programs periodically change their award charts but for the most part, members know how many miles they will need when it comes time to redeem.

Most programs with mileage-based programs offer two or three-tiered award charts where the cheapest awards are capacity controlled and members can pay more miles for award seats when the capacity-controlled award inventory sells out. While seats booked according to fixed award charts don’t fluctuate like the awards of revenue-based programs, the tiered approach mimics revenue-based programs to some extent. If demand on a route is high, members may only be able to book an award at a mid-tier or high-tier level. And if it gets close to the flight date and there are many open seats that are unlikely to sell, an airline may decide to release a number of awards at the lowest level. Even with fixed award charts, the mileage required for a seat on a particular route may fluctuate, but only between low and high or low, medium and high levels.

The majority of frequent flyers we asked prefer mileage-based programs. According to our online poll, 71.6 percent said they preferred mileage-based programs compared to the 12.1 percent who favored revenue-based programs. The remaining 16.3 percent didn’t have a preference.

Revenue-Based Programs
While mileage-based programs tend to have similar earn and burn structures, there is more variety in how revenue-based programs are structured. Revenue-based programs don’t have blackout dates or capacity controls, so if there’s a seat available, you can book it with miles. But if you want to travel when demand is high or book a day or two before the flight, award prices follow the pattern of fare prices and will be more expensive at those times. Likewise, if there’s a fare sale, you may be able to snag a cheap ticket with points.

Virgin America Elevate launched with a fairly simple revenue-based program in 2007. Members earn five points per dollar spent on the base fare. The number of points required for a flight is based on the fare price and increases in direct proportion to the cost of a flight.

When JetBlue launched the new TrueBlue program in August 2009, their basic earn/burn model moved to a revenue-based system. Members earn up to eight points per dollar spent on the base fare (three points per dollar on the fare, another three points for online booking and two points for booking with a JetBlue AMEX). There are also bonuses built into the program. Go Big bonuses are offered to members who reach the following point thresholds in a calendar year: reach 3,000 points and earn 500 bonus points; 6,000 points for 1,000 bonus points; 9,000 points for 2,000 bonus points; 12,000 points for 4,000 bonus points and an additional 4,000 bonus points for every 3,000 points earned beyond 12,000 points. And members who take 10 one-way flights (minimum flight distance of 1,600 miles) within a calendar year will receive a Go Long bonus of 10,000 points.

With Southwest Rapid Rewards, relaunched on March 1, 2011, members earn six points per dollar spent (not including taxes) on Wanna Get Away fares, 10 points per dollar spent on Anytime fares and 12 points per dollar spent on Business Select fares. The more expensive the fare class, the higher the earning rate. The same is true for award tickets. The more expensive fare classes require more points. Wanna Get Away awards can be redeemed for 60 points per dollar (not including tax) of the fare, Anytime awards can be redeemed for 100 points per dollar and Business Select awards can be redeemed for 120 points per dollar.

Who Wins?
When we asked which type of program offers a better redemption value, 45 percent of respondents voted for mileage-based programs, but 45 percent also said that it depends on your flying patterns and how you earn and redeem miles. And nine percent voted for revenue-based programs. Some travelers will earn more free travel with revenue-based programs while others will fare better with mileage-based programs. A few of the key variables that will determine which program will be most rewarding for you include how often you travel, how far you travel, whether you fly in coach or business class and how much you spend on flights. Wandering Aramean says, “If you’re flying on full-fare tickets then the value proposition of a revenue-based program is much higher. If you’re traveling on a tighter budget then it is clearly better to have a distance-based program where the cheap seats can have their value increased through the redemption process.”

Equally important is how you like to spend your miles–whether you are saving for a dream vacation in first class or like to save your cash and redeem miles instead of spend money for domestic trips to visit family and friends.
We will narrow down the variables and look at three hypothetical travelers to see which type of program is most rewarding for each. To simplify matters, we won’t take into account miles earned from bonus offers, credit cards and partners, although in any real-life scenario, these miles are a significant factor. Class-of-service and elite bonuses were included. And we limited our travelers to business travelers who primarily fly within the United States.

TRAVELER 1
District sales representative. Primary flies short-haul coach class.
Miles flown per year: 25,000 miles; 21 flights
Average cost per ticket: $250
Total spent: $5,250
Average roundtrip flight distance: 1,200 miles
Miles earned with mileage-based programs: 31,250 miles
Miles earned with revenue-based programs: 26,250 points with Virgin America; 31,500 points with Southwest (Wanna Get Away fares); 59,000 points with JetBlue (booked online but not with a JetBlue AMEX).
Examples of the number and types of awards possible with mileage-based program: One roundtrip domestic ticket.
Examples of the number and types of awards possible with revenue-based program:There are no award charts for revenue-based programs and prices fluctuate widely, making it difficult to predict the number of awards members can redeem for. We searched for a flight from New York to Las Vegas and found roundtrip rates as low as 23,500 points with JetBlue (two roundtrip flights) and 15,000 points with Southwest (two roundtrip flights). We found a roundtrip Virgin America flight between New York and Las Vegas for 15,600 points (one roundtrip flight, plus one, one-way flight).

This short-haul traveler flies mostly short distances on inexpensive coach fares. Even though he completes 21 flights and earns the lowest level elite status, he only earns enough miles for one roundtrip coach ticket with a mileage-based program, from New York to Boston or Los Angeles to Fairbanks, Alaska. While he can go anywhere in the U.S. and Canada with those miles, he can only take one roundtrip. For short-haul coach flyers with a revenue-based program, the points earned for those 21 flights have more flexibility and can possibly be redeemed for more than one flight, depending on where and when they fly.

TRAVELER 2
Regional Project manager. Primary flies medium-haul business class.
Miles flown per year: 50,000 miles; 20 flights
Average cost per ticket: $1,000
Total spent: $20,000
Average roundtrip flight distance: 2,500 miles
Miles earned with mileage-based programs: 112,500 miles with American, 100,000 miles with US Airways, 112,500 miles with United and 125,000 miles with Delta
Miles earned with revenue-based programs: 100,000 points with Virgin America, 480,000 points with Southwest (Business Select fare), 267,500 points with JetBlue (booked online but not with a JetBlue AMEX).
Examples of the number and types of awards possible with mileage-based program: Four roundtrip coach 25,000-mile awards (five with Delta), two off-peak coach awards to Europe or Southern South America with American (40,000 miles) and US Airways (35,000 miles); one business class flight to Europe or South America (100,000 miles) and additional international destinations with Delta (120,000 miles).
Examples of the number and types of awards possible with revenue-based program: We found a roundtrip flight from New York to Cancun for 32,600 points on JetBlue, which would be eight roundtrip flights. New York to Cabo at 26,100 Virgin America points would be three roundtrip flights and with Southwest, a flight from Los Angeles to Ft. Lauderdale could be booked for 25,560 points on Wanna Get Away Fares, which would be 18 roundtrip flights. But just as fares vary widely, so do point costs and travelers who are less flexible will get fewer flights for their points.

For business travelers flying in business class and redeeming for coach, revenue-based programs, which are designed to reward high spenders, can offer more award flights. Southwest offers the most number of awards, but travelers are limited to Southwest’s route network, which doesn’t include international destinations. To redeem points for international flights, members can sign up for the co-branded Chase Rapid Rewards credit card. JetBlue has a limited number of destinations outside the U.S. and Virgin America partners with Virgin Atlantic and Virgin Australia, which just this month introduced award flights across the Virgin network of airlines. If long-haul international awards are your preferred awards, the mileage-based programs are your best bet but for coach travel, the revenue programs come out ahead for the business class traveler.

TRAVELER 3
Software consultant. Flies long-haul coach.
Miles flown per year: 100,000 miles; 22 flights
Average cost per ticket: $400
Total spent: $8,800
Average roundtrip flight distance: 4,500
Miles earned with mileage-based programs: 200,000 miles with American, US Airways, United and Delta.
Miles earned with revenue-based programs: 44,000 points with Virgin America, 66,000 points with Southwest (Wanna Get Away fares), 148,300 points with JetBlue (booked online but not with a JetBlue AMEX).
Examples of the number and types of awards possible with mileage-based program: Eight roundtrip coach awards or two roundtrip business class trips to Europe or one roundtrip business class trip to anywhere in the world.
Examples of the number and types of awards possible with revenue-based program: Roundtrip awards with JetBlue start at 10,000 points (14 flights), 12,000 points with Southwest (five flights) and 5,000 points with Virgin America (eight flights). For travelers flying in coach and redeeming for coach, the mileage-based programs offer eight flights anywhere the airline and its partners fly within the U.S. and Canada whereas it would be a stretch to squeeze out eight flights on the cheapest award flights with Virgin America. JetBlue has Go Big and Go Long bonuses that bump up members’ account balances to competitive levels, but for travelers covering lots of miles in cheaper coach seats, the mileage-based programs have more to offer.

A Final Look at Mileage-Based vs. Revenue-Based FFPs
The majority of frequent flyers who responded to our queries favor mileage-based programs, but both types have their advantages. In general, people do not like change and some will cling to the mileage-based model because of familiarity. For members who want to redeem for long-haul international travel in premium seats, then mileage-based programs are definitely preferable. But for travelers who primarily redeem for short-haul domestic flights, revenue-based programs are more rewarding. RestlessLocationSyndrome said he likes both types of programs, “since I utilize the strengths of each individual program and earn points based on the trips that I expect to take in the future: With mileage based, I accumulate miles to use for more aspirational travel that is quite expensive to purchase (e.g. first and business class from the U.S. to Asia). With revenue-based, I accumulate the points to use for inexpensive travel that makes little sense to use miles for (e.g. Los Angeles to San Francisco, Las Vegas or Phoenix on Southwest).”

The big question here is, will mileage-based programs survive or will they all eventually go toward revenue-based programs? As with all big questions, time will tell. Many airlines have shifted or are considering shifting to revenue-based frequent flyer programs. Hotels and retailers have introduced revenue-based rewards programs to better recognize and reward customer value. It was relatively easier for Southwest Rapid Rewards, for example, to switch to a revenue-based program because there original program was based on credits, not miles. And Virgin America was starting from scratch so had free reign to design the program as they wished. It will be much harder for mileage-entrenched legacy airlines to make the change and it’s expensive to overhaul the technology and build a new system. But we’re not going to say that they won’t.

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