The idea for frequent flier miles originated in 1981 at American Airlines. Initiated to build brand loyalty among airline travelers, frequent flier programs gradually expanded beyond providing free miles for airline travel.
A major charity raised the average contribution from its direct-mail campaign from $46 to $126 in one year.
By offering one American Airlines frequent flier mile for every dollar donated, the charity increased not only the amount given but also the percentage of those donating (from 10 to 35 percent
In the mid – 1980s airlines began selling miles to “travel partners,” such as car rental agencies, credit card purveyors, and hotels.
In the early 1990s the list of firms giving away frequent flier miles expanded exponentially. By mid-decade, miles could be obtained from restaurants, mortgage firms, investment houses, and even roofing companies.
By the 21st century, the Internet has worked to expand these opportunities for miles.
In 2000, a number of web sites, like Webflyer.com, offer a virtual trading place were consumers can go to swap ideas for gaining additional miles.3
For some people, accumulating frequent flied miles has become an obsession. One consumer described collecting frequent flier miles as a compulsion. As he described it, “I live, eat, and breathe the United Airlines Mileage Plus Program.”4 In the late 1980s, the problem of mileage maniacs grew to epidemic proportions for the airlines.
Before 1995, some frequent flier junkies even cheated by enlisting people to ride airlines under their names. How to deal with such rule flouters, who ultimately drove up costs for everyone, was a major problem at the time
Even absent the cheating, the airlines suffered huge revenue losses as a result of all the free miles passengers were racking up. In the early 1990s the estimated total cost of frequent flier programs approached $940 million.6
. By 1995, nearly half the miles were being sold to other companies at a rate of $.02 per mile. American Airlines earned roughly $300 million this way.
Because frequent fliers fill seats that would otherwise by empty, this revenue is virtually pure profit. For example, at $.02 per mile, a 25,000-mile round trip domestic ticket earns the airline $500. The extra cost for that additional passenger ranges from about $43 to $93, depending on the airline. So selling frequent flier miles has become a profit center for the airline industry
What makes consumers act as though frequent flier miles are worth more than their actual value? One explanation offered by the Wall Street Journal is that the miles have “…become a jar of mad money for families, a vacation-enabling fund untouchable for paying bills, saving for college, or providing for retirement.” Indeed, when United Airlines offered consumers a choice of free miles or a cash rebate in a promotional campaign, most consumers chose the miles. One consultant said, “Cash is not what consumers want anymore.
The whole lure of something for nothing is very powerful. Miles are almost a second national currency.
From a consumer welfare perspective, define the problem that frequent flyer miles pose for some consumers.
What are the consumer behavior concepts that apply to the problem. Describe how each concept applies.
Based upon the case, identify two strategies for reducing the problem.