Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Remind us what frequent flyer programs used to be like?
Speaker 2: Is I remember it? They used to be a lot simpler.
Speaker 3: You're absolutely right. I mean, frequent fly programs have been
Speaker 3: around for quite a while, and the original idea was,
Speaker 3: let's somehow create a loyalty bond between the traveler and
Speaker 3: the airline.
Speaker 2: That's Benedict Camel and he oversees Bloomberg's coverage of aviation worldwide.
Speaker 3: So the idea was quite simple. You took a number
Speaker 3: of flights from A to B, let's say, from Berlin
Speaker 3: to London, or from East coast to West coast in
Speaker 3: the US, and if you did five of those flights,
Speaker 3: the airline would reward you for your loyalty and give you,
Speaker 3: let's say one free flight. That's a slightly over simplistic
Speaker 3: way of putting it, but that's sort of how it worked.
Speaker 3: That was the original contract. You could fly to Paris
Speaker 3: free or to London.
Speaker 2: In a TV commercial from nineteen eighty eight, American Airlines
Speaker 2: emphasize the simplicity of its frequent flyer program.
Speaker 3: Then see how fast you can fly free.
Speaker 2: Benny and several members of his team have taken a
Speaker 2: deep dive into how airline incentive programs have changed. And
Speaker 2: this may surprise you, but he personally is not a
Speaker 2: rewards program nerd.
Speaker 3: I have colleagues on my team who really try and
Speaker 3: game the system. They look at this and say, Okay,
Speaker 3: if I take this flight from London to Aberdeen, don't
Speaker 3: even get off the other end and just fly right back.
Speaker 3: I'm gonna and this number of points will get me
Speaker 3: into this test status. They've really got it figured out.
Speaker 3: I'm not that guy, not because I don't care, but
Speaker 3: really it's just too complicated for me.
Speaker 2: Too complicated. Today you can accrue points by flying, but
Speaker 2: increasingly the rewards program economy is driven by credit card spending,
Speaker 2: so the way you can earn points has changed, and
Speaker 2: the way you can spend them has gotten much more confusing,
Speaker 2: so confusing that it's nowt at the attention of consumer
Speaker 2: advocacy groups and the US government.
Speaker 3: Buddhajic, the Secretary of Transport, actually launched an investigation in
Speaker 3: September into frequent flyup programs, and his starting point was Hi, on, guys,
Speaker 3: how far is it these days?
Speaker 2: Buddha Judge talked to us about this on the Big
Speaker 2: Take a few weeks later.
Speaker 1: There's real value in these rewards balances. I think a
Speaker 1: lot of us think of our points and miles as
Speaker 1: part of our savings. But unlike savings in cash in
Speaker 1: a bank account, the value of your points in miles
Speaker 1: could be changed arbitrarily by the airline that controls them.
Speaker 2: I'm David Gerat and this is the big Take from
Speaker 2: Bloomberg News today. On the show, a Bloomberg investigation into
Speaker 2: how frequent flyer programs have evolved into a complex financial
Speaker 2: system that's left customers confused and the government skeptical. Can
Speaker 2: we start with the way that we earn rewards? The
Speaker 2: first big change that the airlines made what changes did
Speaker 2: they put in place in terms of how we earn miles.
Speaker 3: So the traditional system of earning miles was always you
Speaker 3: earn miles for distance flown or for times flown. These days,
Speaker 3: miles are far more connected to the notion of spending,
Speaker 3: so spending on your credit card that is sort of
Speaker 3: the underlying payment system to your miles as it were,
Speaker 3: And most people these days actually earn their points through
Speaker 3: spending and through consumption rather than through flying. That's one
Speaker 3: of the big changes that's happened.
Speaker 2: So even though they're called frequent flyer programs, these rewards
Speaker 2: are mostly being given to consumers based on their use
Speaker 2: of credit cards.
Speaker 3: Absolutely right, Yeah, So you go to Starbucks, you earn points.
Speaker 3: You buy something on Amazon, you earn points. You buy
Speaker 3: something at your local supermarket, you earn points. So sort
Speaker 3: of the breadth of points has become far greater, and
Speaker 3: the number of points in circulation as a result has
Speaker 3: also become greater, but spending those points has become more complicated.
Speaker 2: At the same time, talk a bit more about that.
Speaker 2: The way that the opportunities for us to redeem these
Speaker 2: points has changed.
Speaker 3: So it used to be fairly straightforward. There were lists,
Speaker 3: you knew how many flights you had to take to
Speaker 3: earn a number of points that you could then redeem
Speaker 3: on a flight. These days, we've gone from the static
Speaker 3: to the dynamic model, which means that you can use
Speaker 3: your points on certain routes on certain days. And that's
Speaker 3: one of the areas where a lot of consumers feel
Speaker 3: they're getting short changed on their points. They're not really
Speaker 3: getting the sort of we give you something, I you
Speaker 3: we buy a ticket and we get something in return.
Speaker 3: Ieu free flight. At some point that sort of link
Speaker 3: has been broken in the minds of a lot of people.
Speaker 2: What was wrong with the system so much so that
Speaker 2: airlines decided they had to reinvent things.
Speaker 3: So the idea was, or the problem was that airlines
Speaker 3: noticed a lot of people were actually then booking their flights,
Speaker 3: they weren't really paying for them because we're using their rewards,
Speaker 3: and they felt, there's a way we can do this better.
Speaker 3: We can somehow apply an algorithm and make sure that
Speaker 3: we're awarding the flights for people who aren't paying and
Speaker 3: who are using the rewards in a way that is
Speaker 3: more efficient to us.
Speaker 2: Airlines made this change, Billy says, because there are fewer
Speaker 2: free seats on planes than there used to be a
Speaker 2: couple decades ago.
Speaker 3: The load fact is so sort of a number of
Speaker 3: people on a cabin was often sixty percent, so you know,
Speaker 3: it was fairly easy to then say, Okay, we've got
Speaker 3: a bunch of empty seats, let's fill them up with
Speaker 3: people who are using their points rather than paying cash
Speaker 3: for their tickets. These days, most of the time you
Speaker 3: have load factors of eighty ninety percent, So the wiggle
Speaker 3: room that you have to get on these people who
Speaker 3: aren't actually paying for their flights is much smaller.
Speaker 2: In other words, the more people who buy tickets with cash,
Speaker 2: the viewer seats are available for frequent flyers who want
Speaker 2: to use their points. By controlling how customers can use
Speaker 2: those points, Earlines can make sure rewards customers don't get
Speaker 2: in the way of paying customers.
Speaker 3: That's why they've gone from this very static model, should
Speaker 3: we say, to the more dynamic one, because it lets
Speaker 3: some sort of breathe people in and out of the cabin.
Speaker 2: What is it meant for regular consumers, flyers like you
Speaker 2: and me?
Speaker 3: It got a lot more complicated. That's essentially what happened.
Speaker 3: So previously you would even have something like a chart
Speaker 3: that you could look at so you knew, Okay, I've
Speaker 3: earned let's say twenty five thousand miles with my flights
Speaker 3: that I've taken. I look in my chart and I'll say, oh, okay,
Speaker 3: twenty five thousand miles. That gives me a free flight
Speaker 3: from Berlin to Paris. Gonna book it. Yeah, Alines did
Speaker 3: away with those charts so they said, okay, this is
Speaker 3: no longer useful for you guys as flyers. We are
Speaker 3: moving to dynamic pricing and therefore became much harder for
Speaker 3: the average consumer to know when you could use your
Speaker 3: points for a ticket, how you could fly. And that's
Speaker 3: something that a lot of people have lamented that the
Speaker 3: previously fed, straightforward, easy system has become so complicated that
Speaker 3: in some ways you almost need like a you know,
Speaker 3: an advanced maths degree to be able to figure out
Speaker 3: where you can use the points, when you could use them,
Speaker 3: and in essence, what they're worth.
Speaker 2: Who wins here and who loses with the shifts that
Speaker 2: you were talking about and how frequent flyer programs work.
Speaker 2: Is this a pretty cut and dry thing or is
Speaker 2: it more complicated?
Speaker 3: Well, like everything, it's complicated. But the airlines are definitely
Speaker 3: net winners in this plan because the loyalty point programs,
Speaker 3: the frequent flyer programs have become such a big part
Speaker 3: of their business these day, some of these loyalty programs
Speaker 3: are bigger than the market value of the airlines behind them. Yeah,
Speaker 3: so these are huge, multi billion dollar programs for these
Speaker 3: airlines are very important.
Speaker 2: Say that again, I'm just astopped just second, I can't
Speaker 2: believe that the market cap is how huge.
Speaker 3: Well, it's the value of the point programs. Yeah, so
Speaker 3: the revenue generated on them in the you know, five, six, seven,
Speaker 3: moving up to like ten billion dollars. Some of these programs,
Speaker 3: the market value of a lot of airlines is inferior
Speaker 3: to that. So these programs are massive, and they're hugely profitable.
Speaker 3: We're talking about profit margins in some cases of fifty percent.
Speaker 3: So these are big businesses that the airlines want to protect.
Speaker 2: Coming up after the break, the US government is undertaking
Speaker 2: a big investigation into frequent flyer programs, and so did Bloomberg.
Speaker 2: What Benny and his team found when they looked at
Speaker 2: the real value of airline points. As Bloomberg's Benedict Cammell's
Speaker 2: been saying, airline rewards programs changed from being focused on
Speaker 2: rewarding customers for how many miles they've traveled to rewarding
Speaker 2: them for using their credit cards. That shift has attracted
Speaker 2: the attention of the US Department of Transportation, and it's
Speaker 2: been something Benny and his team here at Bloomberg have
Speaker 2: been looking into. You and some other college of ours
Speaker 2: did a pretty extensive analysis of the way the big
Speaker 2: frequent flyer programs work. First of all, what did you
Speaker 2: set out to do. What did you want to find out?
Speaker 3: Well, the starting point really was an investigation by the
Speaker 3: Department of Transport Pete Buddhagij, the Secretary of Transport. Airlines
Speaker 3: are putting something out there that is pretty opaque, you know,
Speaker 3: and most people today really struggle to get a sense
Speaker 3: of what's the underlying value of that product. And that's
Speaker 3: something that the government took quite seriously and continues to
Speaker 3: take quite seriously, like, okay, our consumers getting a fair shake?
Speaker 3: Here are they getting a good deal? And a lot
Speaker 3: of people feel that's no longer the case. For us,
Speaker 3: that was the starting point.
Speaker 2: Walk us through the mechanics of the analysis of how
Speaker 2: it worked and what you discovered.
Speaker 3: So we discovered, looking at about six thousand flights, that
Speaker 3: the value of points is roughly one point one cent
Speaker 3: per mile flown, So in some ways that's pretty close
Speaker 3: to what you get on a normal cash back card
Speaker 3: these days, and that for us, this was an interesting
Speaker 3: discovery because you realize, you know, it's not worth nothing,
Speaker 3: but it's not necessarily a greater value that would make
Speaker 3: you want to stick with one particular airline. So those
Speaker 3: are some of the things that we discovered. A the
Speaker 3: opaqueness of the system, the dynamic pricing, just how it
Speaker 3: works and how complex it is be the points and
Speaker 3: the value of each point per mile isn't actually that
Speaker 3: much better a deal. In some ways, it's worse a
Speaker 3: deal than what you would get on a cash back program.
Speaker 3: And see if you're new to the program, then you
Speaker 3: know you better be patient.
Speaker 2: As you mentioned, these changes are attracting scrutiny from regulators
Speaker 2: and consumer advocates. What specifically are they looking into?
Speaker 3: So the investigation is ongoing and we as part of
Speaker 3: the series, had an interview with Pete Budhajij, the Secretary
Speaker 3: of Transport, and they are essentially looking at how fair
Speaker 3: a deal is this.
Speaker 2: Here's a Secretary Buddha judge on this show back in
Speaker 2: September explaining the Department of transportations concerns.
Speaker 1: We want a better sense of how airlines manage and
Speaker 1: maintain the value of these points and miles when there
Speaker 1: are situations where they are being devalued, what's behind that
Speaker 1: and making sure that there's a level of transparency and fairness,
Speaker 1: because again you've got folks who decide which airline to
Speaker 1: take sometimes pay more for a ticket in order to
Speaker 1: have it be on their preferred airline. Because of the
Speaker 1: mileage program, some consumers are not just choosing a certain
Speaker 1: credit card, but choosing a credit card with a higher
Speaker 1: annual fee and a higher interest rate, which is a
Speaker 1: choice that could affect them to the tune of hundreds
Speaker 1: or thousands of dollars just based on these points and
Speaker 1: miles if they're if a consumer is putting that much
Speaker 1: stock into points and miles, we want to make sure
Speaker 1: that they're getting what they were promised.
Speaker 2: In the meantime, the Consumer Financial Protection Bureau published a
Speaker 2: memo in mid December saying that some credit card companies
Speaker 2: might be breaking the law if they devalue airline miles
Speaker 2: after customers earn them. But its belly points out the
Speaker 2: future of the DOT investigation is uncertain.
Speaker 3: You know. The big question now, obviously, is does it
Speaker 3: still have a life after January When we have a
Speaker 3: new administration coming in with a new mind frame that
Speaker 3: might continue. They might think, well, this is something that
Speaker 3: interests people across a political spectrum. But maybe they'll come
Speaker 3: in and say, well, hang on, maybe we should be
Speaker 3: thinking more about how much of an advantage is this
Speaker 3: to airlines and to passengers and maybe we'll give a
Speaker 3: fresh look at this. That's something that we don't know
Speaker 3: the answer to at this point, but that'll be very
Speaker 3: interesting to keep an eye on.
Speaker 2: You've anticipated my next question, and Pep put to Judge's
Speaker 2: successor maybe Sean Duffy, the former congressman, who, if I recall,
Speaker 2: has been doing a good deal of lobbying in part
Speaker 2: for the airline industry.
Speaker 3: Yes, exactly right. And you know President elect Donald Trump
Speaker 3: at one point ran an airline, so you know it's
Speaker 3: short lived, but at the same time, he has a
Speaker 3: thing or two for the airline industry. He's very pro business,
Speaker 3: pro derais. So anything that withsolved sort of being at
Speaker 3: a disadvantage to Alan's to growth, that's something that they
Speaker 3: might take a hard look at and reconsideric. Thank you
Speaker 3: very much, Thank you.
Speaker 2: This is the Big Take from Bloomberg News. I'm David Gura.
Speaker 2: This episode was produced by Alex tie. It was edited
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