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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Remind us what frequent flyer programs used to be like?

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Speaker 2: Is I remember it? They used to be a lot simpler.

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Speaker 3: You're absolutely right. I mean, frequent fly programs have been

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Speaker 3: around for quite a while, and the original idea was,

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Speaker 3: let's somehow create a loyalty bond between the traveler and

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Speaker 3: the airline.

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Speaker 2: That's Benedict Camel and he oversees Bloomberg's coverage of aviation worldwide.

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Speaker 3: So the idea was quite simple. You took a number

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Speaker 3: of flights from A to B, let's say, from Berlin

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Speaker 3: to London, or from East coast to West coast in

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Speaker 3: the US, and if you did five of those flights,

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Speaker 3: the airline would reward you for your loyalty and give you,

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Speaker 3: let's say one free flight. That's a slightly over simplistic

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Speaker 3: way of putting it, but that's sort of how it worked.

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Speaker 3: That was the original contract. You could fly to Paris

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Speaker 3: free or to London.

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Speaker 2: In a TV commercial from nineteen eighty eight, American Airlines

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Speaker 2: emphasize the simplicity of its frequent flyer program.

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Speaker 3: Then see how fast you can fly free.

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Speaker 2: Benny and several members of his team have taken a

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Speaker 2: deep dive into how airline incentive programs have changed. And

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Speaker 2: this may surprise you, but he personally is not a

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Speaker 2: rewards program nerd.

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Speaker 3: I have colleagues on my team who really try and

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Speaker 3: game the system. They look at this and say, Okay,

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Speaker 3: if I take this flight from London to Aberdeen, don't

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Speaker 3: even get off the other end and just fly right back.

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Speaker 3: I'm gonna and this number of points will get me

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Speaker 3: into this test status. They've really got it figured out.

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Speaker 3: I'm not that guy, not because I don't care, but

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Speaker 3: really it's just too complicated for me.

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Speaker 2: Too complicated. Today you can accrue points by flying, but

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Speaker 2: increasingly the rewards program economy is driven by credit card spending,

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Speaker 2: so the way you can earn points has changed, and

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Speaker 2: the way you can spend them has gotten much more confusing,

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Speaker 2: so confusing that it's nowt at the attention of consumer

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Speaker 2: advocacy groups and the US government.

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Speaker 3: Buddhajic, the Secretary of Transport, actually launched an investigation in

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Speaker 3: September into frequent flyup programs, and his starting point was Hi, on, guys,

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Speaker 3: how far is it these days?

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Speaker 2: Buddha Judge talked to us about this on the Big

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Speaker 2: Take a few weeks later.

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Speaker 1: There's real value in these rewards balances. I think a

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Speaker 1: lot of us think of our points and miles as

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Speaker 1: part of our savings. But unlike savings in cash in

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Speaker 1: a bank account, the value of your points in miles

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Speaker 1: could be changed arbitrarily by the airline that controls them.

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Speaker 2: I'm David Gerat and this is the big Take from

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Speaker 2: Bloomberg News today. On the show, a Bloomberg investigation into

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Speaker 2: how frequent flyer programs have evolved into a complex financial

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Speaker 2: system that's left customers confused and the government skeptical. Can

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Speaker 2: we start with the way that we earn rewards? The

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Speaker 2: first big change that the airlines made what changes did

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Speaker 2: they put in place in terms of how we earn miles.

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Speaker 3: So the traditional system of earning miles was always you

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Speaker 3: earn miles for distance flown or for times flown. These days,

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Speaker 3: miles are far more connected to the notion of spending,

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Speaker 3: so spending on your credit card that is sort of

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Speaker 3: the underlying payment system to your miles as it were,

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Speaker 3: And most people these days actually earn their points through

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Speaker 3: spending and through consumption rather than through flying. That's one

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Speaker 3: of the big changes that's happened.

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Speaker 2: So even though they're called frequent flyer programs, these rewards

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Speaker 2: are mostly being given to consumers based on their use

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Speaker 2: of credit cards.

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Speaker 3: Absolutely right, Yeah, So you go to Starbucks, you earn points.

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Speaker 3: You buy something on Amazon, you earn points. You buy

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Speaker 3: something at your local supermarket, you earn points. So sort

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Speaker 3: of the breadth of points has become far greater, and

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Speaker 3: the number of points in circulation as a result has

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Speaker 3: also become greater, but spending those points has become more complicated.

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Speaker 2: At the same time, talk a bit more about that.

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Speaker 2: The way that the opportunities for us to redeem these

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Speaker 2: points has changed.

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Speaker 3: So it used to be fairly straightforward. There were lists,

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Speaker 3: you knew how many flights you had to take to

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Speaker 3: earn a number of points that you could then redeem

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Speaker 3: on a flight. These days, we've gone from the static

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Speaker 3: to the dynamic model, which means that you can use

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Speaker 3: your points on certain routes on certain days. And that's

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Speaker 3: one of the areas where a lot of consumers feel

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Speaker 3: they're getting short changed on their points. They're not really

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Speaker 3: getting the sort of we give you something, I you

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Speaker 3: we buy a ticket and we get something in return.

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Speaker 3: Ieu free flight. At some point that sort of link

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Speaker 3: has been broken in the minds of a lot of people.

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Speaker 2: What was wrong with the system so much so that

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Speaker 2: airlines decided they had to reinvent things.

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Speaker 3: So the idea was, or the problem was that airlines

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Speaker 3: noticed a lot of people were actually then booking their flights,

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Speaker 3: they weren't really paying for them because we're using their rewards,

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Speaker 3: and they felt, there's a way we can do this better.

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Speaker 3: We can somehow apply an algorithm and make sure that

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Speaker 3: we're awarding the flights for people who aren't paying and

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Speaker 3: who are using the rewards in a way that is

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Speaker 3: more efficient to us.

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Speaker 2: Airlines made this change, Billy says, because there are fewer

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Speaker 2: free seats on planes than there used to be a

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Speaker 2: couple decades ago.

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Speaker 3: The load fact is so sort of a number of

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Speaker 3: people on a cabin was often sixty percent, so you know,

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Speaker 3: it was fairly easy to then say, Okay, we've got

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Speaker 3: a bunch of empty seats, let's fill them up with

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Speaker 3: people who are using their points rather than paying cash

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Speaker 3: for their tickets. These days, most of the time you

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Speaker 3: have load factors of eighty ninety percent, So the wiggle

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Speaker 3: room that you have to get on these people who

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Speaker 3: aren't actually paying for their flights is much smaller.

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Speaker 2: In other words, the more people who buy tickets with cash,

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Speaker 2: the viewer seats are available for frequent flyers who want

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Speaker 2: to use their points. By controlling how customers can use

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Speaker 2: those points, Earlines can make sure rewards customers don't get

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Speaker 2: in the way of paying customers.

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Speaker 3: That's why they've gone from this very static model, should

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Speaker 3: we say, to the more dynamic one, because it lets

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Speaker 3: some sort of breathe people in and out of the cabin.

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Speaker 2: What is it meant for regular consumers, flyers like you

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Speaker 2: and me?

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Speaker 3: It got a lot more complicated. That's essentially what happened.

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Speaker 3: So previously you would even have something like a chart

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Speaker 3: that you could look at so you knew, Okay, I've

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Speaker 3: earned let's say twenty five thousand miles with my flights

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Speaker 3: that I've taken. I look in my chart and I'll say, oh, okay,

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Speaker 3: twenty five thousand miles. That gives me a free flight

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Speaker 3: from Berlin to Paris. Gonna book it. Yeah, Alines did

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Speaker 3: away with those charts so they said, okay, this is

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Speaker 3: no longer useful for you guys as flyers. We are

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Speaker 3: moving to dynamic pricing and therefore became much harder for

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Speaker 3: the average consumer to know when you could use your

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Speaker 3: points for a ticket, how you could fly. And that's

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Speaker 3: something that a lot of people have lamented that the

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Speaker 3: previously fed, straightforward, easy system has become so complicated that

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Speaker 3: in some ways you almost need like a you know,

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Speaker 3: an advanced maths degree to be able to figure out

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Speaker 3: where you can use the points, when you could use them,

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Speaker 3: and in essence, what they're worth.

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Speaker 2: Who wins here and who loses with the shifts that

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Speaker 2: you were talking about and how frequent flyer programs work.

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Speaker 2: Is this a pretty cut and dry thing or is

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Speaker 2: it more complicated?

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Speaker 3: Well, like everything, it's complicated. But the airlines are definitely

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Speaker 3: net winners in this plan because the loyalty point programs,

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Speaker 3: the frequent flyer programs have become such a big part

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Speaker 3: of their business these day, some of these loyalty programs

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Speaker 3: are bigger than the market value of the airlines behind them. Yeah,

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Speaker 3: so these are huge, multi billion dollar programs for these

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Speaker 3: airlines are very important.

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Speaker 2: Say that again, I'm just astopped just second, I can't

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Speaker 2: believe that the market cap is how huge.

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Speaker 3: Well, it's the value of the point programs. Yeah, so

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Speaker 3: the revenue generated on them in the you know, five, six, seven,

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Speaker 3: moving up to like ten billion dollars. Some of these programs,

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Speaker 3: the market value of a lot of airlines is inferior

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Speaker 3: to that. So these programs are massive, and they're hugely profitable.

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Speaker 3: We're talking about profit margins in some cases of fifty percent.

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Speaker 3: So these are big businesses that the airlines want to protect.

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Speaker 2: Coming up after the break, the US government is undertaking

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Speaker 2: a big investigation into frequent flyer programs, and so did Bloomberg.

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Speaker 2: What Benny and his team found when they looked at

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Speaker 2: the real value of airline points. As Bloomberg's Benedict Cammell's

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Speaker 2: been saying, airline rewards programs changed from being focused on

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Speaker 2: rewarding customers for how many miles they've traveled to rewarding

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Speaker 2: them for using their credit cards. That shift has attracted

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Speaker 2: the attention of the US Department of Transportation, and it's

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Speaker 2: been something Benny and his team here at Bloomberg have

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Speaker 2: been looking into. You and some other college of ours

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Speaker 2: did a pretty extensive analysis of the way the big

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Speaker 2: frequent flyer programs work. First of all, what did you

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Speaker 2: set out to do. What did you want to find out?

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Speaker 3: Well, the starting point really was an investigation by the

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Speaker 3: Department of Transport Pete Buddhagij, the Secretary of Transport. Airlines

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Speaker 3: are putting something out there that is pretty opaque, you know,

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Speaker 3: and most people today really struggle to get a sense

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Speaker 3: of what's the underlying value of that product. And that's

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Speaker 3: something that the government took quite seriously and continues to

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Speaker 3: take quite seriously, like, okay, our consumers getting a fair shake?

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Speaker 3: Here are they getting a good deal? And a lot

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Speaker 3: of people feel that's no longer the case. For us,

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Speaker 3: that was the starting point.

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Speaker 2: Walk us through the mechanics of the analysis of how

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Speaker 2: it worked and what you discovered.

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Speaker 3: So we discovered, looking at about six thousand flights, that

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Speaker 3: the value of points is roughly one point one cent

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Speaker 3: per mile flown, So in some ways that's pretty close

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Speaker 3: to what you get on a normal cash back card

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Speaker 3: these days, and that for us, this was an interesting

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Speaker 3: discovery because you realize, you know, it's not worth nothing,

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Speaker 3: but it's not necessarily a greater value that would make

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Speaker 3: you want to stick with one particular airline. So those

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Speaker 3: are some of the things that we discovered. A the

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Speaker 3: opaqueness of the system, the dynamic pricing, just how it

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Speaker 3: works and how complex it is be the points and

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Speaker 3: the value of each point per mile isn't actually that

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Speaker 3: much better a deal. In some ways, it's worse a

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Speaker 3: deal than what you would get on a cash back program.

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Speaker 3: And see if you're new to the program, then you

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Speaker 3: know you better be patient.

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Speaker 2: As you mentioned, these changes are attracting scrutiny from regulators

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Speaker 2: and consumer advocates. What specifically are they looking into?

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Speaker 3: So the investigation is ongoing and we as part of

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Speaker 3: the series, had an interview with Pete Budhajij, the Secretary

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Speaker 3: of Transport, and they are essentially looking at how fair

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Speaker 3: a deal is this.

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Speaker 2: Here's a Secretary Buddha judge on this show back in

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Speaker 2: September explaining the Department of transportations concerns.

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Speaker 1: We want a better sense of how airlines manage and

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Speaker 1: maintain the value of these points and miles when there

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Speaker 1: are situations where they are being devalued, what's behind that

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Speaker 1: and making sure that there's a level of transparency and fairness,

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Speaker 1: because again you've got folks who decide which airline to

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Speaker 1: take sometimes pay more for a ticket in order to

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Speaker 1: have it be on their preferred airline. Because of the

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Speaker 1: mileage program, some consumers are not just choosing a certain

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Speaker 1: credit card, but choosing a credit card with a higher

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Speaker 1: annual fee and a higher interest rate, which is a

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Speaker 1: choice that could affect them to the tune of hundreds

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Speaker 1: or thousands of dollars just based on these points and

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Speaker 1: miles if they're if a consumer is putting that much

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Speaker 1: stock into points and miles, we want to make sure

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Speaker 1: that they're getting what they were promised.

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Speaker 2: In the meantime, the Consumer Financial Protection Bureau published a

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Speaker 2: memo in mid December saying that some credit card companies

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Speaker 2: might be breaking the law if they devalue airline miles

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Speaker 2: after customers earn them. But its belly points out the

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Speaker 2: future of the DOT investigation is uncertain.

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Speaker 3: You know. The big question now, obviously, is does it

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Speaker 3: still have a life after January When we have a

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Speaker 3: new administration coming in with a new mind frame that

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Speaker 3: might continue. They might think, well, this is something that

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Speaker 3: interests people across a political spectrum. But maybe they'll come

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Speaker 3: in and say, well, hang on, maybe we should be

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Speaker 3: thinking more about how much of an advantage is this

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Speaker 3: to airlines and to passengers and maybe we'll give a

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Speaker 3: fresh look at this. That's something that we don't know

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Speaker 3: the answer to at this point, but that'll be very

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Speaker 3: interesting to keep an eye on.

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Speaker 2: You've anticipated my next question, and Pep put to Judge's

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Speaker 2: successor maybe Sean Duffy, the former congressman, who, if I recall,

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Speaker 2: has been doing a good deal of lobbying in part

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Speaker 2: for the airline industry.

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Speaker 3: Yes, exactly right. And you know President elect Donald Trump

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Speaker 3: at one point ran an airline, so you know it's

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Speaker 3: short lived, but at the same time, he has a

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Speaker 3: thing or two for the airline industry. He's very pro business,

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Speaker 3: pro derais. So anything that withsolved sort of being at

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Speaker 3: a disadvantage to Alan's to growth, that's something that they

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Speaker 3: might take a hard look at and reconsideric. Thank you

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Speaker 3: very much, Thank you.

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Speaker 2: This is the Big Take from Bloomberg News. I'm David Gura.

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Speaker 2: This episode was produced by Alex tie. It was edited

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Speaker 2: by Aaron Edwards and Naomi Shaven, who's our senior producer.

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Speaker 2: It was fact checked by Adriana Tapia and mixed and

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Speaker 2: sound designed by Alex Sagura. Our senior editor is Elizabeth Ponso.

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Speaker 2: Our executive producer is Nicole Beemster bor Sage Bauman is

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Speaker 2: Bloomberg's head of podcasts. If you liked this episode, make

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Speaker 2: sure to subscribe and review The Big Take wherever you

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Speaker 2: listen to podcasts. It helps people find the show. Thanks

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Speaker 2: for listening. We'll be back next week.