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Corporate strategies for frequent-flier programs.

Since their introduction in the early 1980s, airline frequent-flier programs have been widely acclaimed as one of the most successful marketing innovations in history.(1) However, Stephenson and Fox raised questions about the impact of these programs on businesses.(2) Their research, which was based on a December 1986 national survey of corporate travel managers, found that travel managers estimated that these promotions inflated business travel costs by an estimated $4.17 billion annually.(3) Most respondents claimed that frequent-flier programs resulted in business travelers paying higher fares than necessary, taking unnecessary trips, using more expensive hotel accommodations, and wasting time in their pursuit of frequent-flier benefits.(4)

Based on the number of subsequent academic articles, Stephenson and Fox were not alone in questioning these programs. Other studies addressed the traveling habits and attitudes of frequent fliers,(5) carrier marketing strategies,(6) program advantages and problems,(7) ethical considerations,(8) competitive strategy issues,(9) corporate strategies to control frequent-flier abuses and costs,(10) and the possibility of taxing frequent-flier benefits.(11)

While the pros and cons of frequent-flier programs continue to be debated, as of July 1991, every major airline flying scheduled jet-aircraft service in the United States had a frequent-flier program. Further, no carrier, other than those that had discontinued flight operations, had ever terminated its program. Despite corporate frustrations and a variety of public criticisms, it appears that airlines intend to continue frequent-flier programs indefinitely.


The primary purposes of the research reported herein were to determine whether corporate attitudes had changed since the Stephenson/Fox study conducted four years earlier and to update these findings. An additional objective was to determine the extent to which companies were adopting formal policies to retrieve frequent-flier benefits earned by their employees while traveling on company business, as noted in recent periodicals.(12) The intent is to provide guidance and insights to decision makers--corporate travel managers as they strive to make airline purchasing decisions and control travel costs, airline executives trying to shape future marketing strategies, and government policy makers concerned with the health of the U.S. airline industry and its customers.


From the beginning, frequent-flier programs have been targeted toward business travelers because carriers depend so heavily upon the revenues of this, the industry's most important airline passenger segment.(13) By definition, business travelers are patrons flying at employers' expense. Program rules never prohibited personal and pleasure (P&P) travelers--those paying their own way--from participation in these promotions, but the real intent has always been to develop membership and create brand loyalty among the people who fly the most--business travelers. The importance of this group is evident from recent airline passenger revenue and traffic statistics.

During calendar year 1990, U.S. registered airlines had total sales of $76 billion, of which passenger revenues were $58 billion.(14) Cargo, mail, and other revenues accounted for the remaining $18 billion. The industry flew an estimated 57 million adults who took at least one airline trip in 1990. Business travel, which represented only 34 percent of all adults who flew (19.5 million), accounted for 48 percent of all the trips (83 million) and, more important, an estimated 70 percent of all passenger revenues ($40.9 billion). Personal and pleasure travel represented more adults (37.9 million and 66 percent) and more trips (90 million and 52 percent), but far less revenues ($17.5 billion and 30 percent).

Most enlightening is a comparison of the 1990 business traveler's average ticket price, an estimated $493, to the average P&P traveler's fare of $194. In other words, the business traveler's average airline ticket price was about two and one-half times (254 percent) the amount of the average P&P fare. By comparison, the 1990 price differential is about the same as it was in calendar year 1986, when the average ticket prices were $378 (business) and $155 (P&P), for a 244 percent factor. In these four years, the estimated average airline business trip price increased 30.7 percent, compared to an increase of 26.5 percent for the P&P ticket purchaser's fare, while the Consumer Price Index rose only 15.7 percent from December 1986 to December 1990.(15)

To a degree, business travelers should pay higher ticket prices than P&P travelers do. The former generally fly at peak load times, do not purchase tickets weeks in advance, and often book seats at the last minute. They also demand flexibility in rescheduling flights and need the option of canceling travel. On the other hand, many P&P travelers purchase nonrefundable tickets weeks in advance to fly at non-peak times with no rescheduling flexibility. Nevertheless, the magnitude of the average price difference is hard to rationalize by such value-added service explanations. Further, many business fliers exceed this level by a wide margin. A case in point is a trip between Atlanta and San Francisco where a full-coach "Y" fare ticket was priced at 427 percent of the lowest nonrefundable fare and a first-class seat cost 668 percent of the lowest coach price.(16)

Collectively, the revenue numbers imply that airlines have developed a bipolar pricing system that markets enhanced services at considerably higher prices to the business-traveler market, where travel is to a great extent nondiscretionary, and simultaneously targets P&P travelers, whose use of airlines is basically discretionary, with low prices. As an added inducement to business travelers, airlines offer frequent-flier programs, with apparent success. About 60 percent of all frequent-flier members today are business travelers, and 70 percent of all business travelers have joined at least one frequent-flier program.(17)

The flip side of this situation is the corporate-customer perspective. As previously stated, business travelers pay much higher fares than P&P fliers do and have experienced ticket price escalation beyond what could be attributed to inflation alone. Between 1986 and 1990, businesses paid an additional $13.9 billion for airline tickets, representing an increase of 51 percent.(18) Therefore, corporate travel managers are under pressure to reduce costs. At stake is a minimum savings of $400 million for each percent America's businesses can cut airline ticket costs.(19)

The individuals who are members of frequent-flier programs likewise have a considerable stake in any changes made in these promotions. By mid 1991, an industry-wide estimated 50 million members (approximately 22 million different individuals)(20) had accumulated more than 950 billion mileage credits.(21) If all of the latter could be cashed in, members would receive the equivalent of 43 million free continental U.S. round trips.(22) Toh and Hu found that frequent fliers traveling out of SeaTac International Airport (Washington) cashed in their mileage credits for an average of one free flight and two service upgrades annually.(23) If 22 million members on average redeemed at this level, they would annually derive $22 billion in value from service upgrades from coach to first class and $7.5 billion in free trip benefits.(24) Further, this $29.5 billion benefit would be tax free, making its value even greater.


In January 1991, questionnaires were mailed to all 714 direct members (as differentiated from allied, honorary, and retired members) of the National Business Travel Association (formerly the National Passenger Traffic Association) who did not work for an airline or a government agency. A second mailing of the same questionnaire was conducted in February 1991. A total of 506 usable questionnaires were received for a response rate of about 70 percent. The unusually high response rate compared TABULAR DATA OMITTED to the 1986 survey (46 percent) was likely due to a letter endorsing the study from the National Business Travel Association. The letter was included in both mailings as a second cover letter to the questionnaire. The response in 1991 may also reflect a higher interest level in the frequent-flier debate than in 1986.

Questionnaires were color-coded so that those replying to the first mailing (319) could be differentiated from those replying to the second (187). There was generally very little difference in responses to the questionnaire between these two groups of respondents. For example, 81 percent of those responding to the first questionnaire felt that frequent-flier travel programs cause higher than necessary costs for employees traveling on business, versus 77 percent for those responding to the second questionnaire. Hence, results for the two groups were combined. Further, the lack of differences in response between the two groups allays any fear of a high non-response bias operating in the study.

As indicated in Table 2, almost all respondents (93 percent) reported corporate travel expenses of at least $1 million annually. The average annual expense reported was $17.2 million, and close to one quarter of the respondents reported corporate annual travel expenses in excess of $25 million. Hence, airline travel and associated frequent-flier costs represent substantial expenditures for the respondents.

One of the most important findings of the January 1991 survey is the remarkable similarity between the 1991 results and those obtained four years earlier in December 1986. As previously noted, the overwhelming majority of respondents, 80 percent, which is the exact percentage observed in the 1986 survey, felt that frequent-flier programs had caused higher than necessary overall travel costs for employees traveling on company business. Respondents were asked how these programs had increased travel costs. Table 3 shows the percentages of respondents who felt that each of the listed items had negatively affected travel costs at their companies and, for comparative purposes, includes the same figures for the 1986 survey. As in 1986, the primary problem areas are higher than necessary air fares (87 percent), wasted employee time (68 percent), use of more expensive hotel accommodations to gain frequent-flier points (67 percent), and unnecessary air travel (59 percent).
Table 2. Annual Company Travel Expenses of Survey Participants

 (Base = 506)

Response %

Less than $500,000 2.4
$ 500,000 - $ 999,999 4.9
$ 1,000,000 - $ 5,000,000 30.8
$ 5,000,000 - $10,000,000 18.8
$10,000,000 - $25,000,000 19.4
$25,000,000 - $50,000,000 12.1
more than $50,000,000(*) 11.5
Don't know/no answer .2

Total 100.0%

Mean(*) expense $17.2 million

* $60 MM used for over $50 MM category for calculation of mean


Each of these travel managers was also asked to identify the single item among the problem areas mentioned that most concerns his or her company. As in 1986, higher fares than necessary (56 percent) was overwhelmingly TABULAR DATA OMITTED cited as the major frequent-flier concern. Table 4 shows the percentages of the respondents selecting each potential cause of travel cost increases as most critical for the 1991 and the 1986 studies.

As in 1986, about 60 percent of the travel managers felt that somewhere between 1 and 10 percent of corporate travel expenses was waste resulting from frequent-flier programs. The average percentage of waste (calculated using the midpoints of the intervals shown in Table 5, and 27.5 percent for the |is greater than~25 percent category as in 1986) is 7.9 percent, slightly higher than the 6.4 percent reported in 1986. For the 506 corporate travel managers responding to the 1991 survey, this annual added cost for their companies was just under $700 million.(25)

The travel managers were also asked to estimate how much of their total corporate travel expenses were allocated to airline ticket costs. The responses to this question are contrasted in Table 6 with the 1986 survey results for the same question. The mean percentage (using interval midpoints) is 51.3 percent, which is considerably higher than the 41.6 percent obtained in 1986. This difference is due at least in part to the fact that the scale used in 1986 contained a single category (|is greater than~50 percent) for all responses in excess of 50 percent. However, the percentage of participants reporting that airline ticket costs exceed 50 percent of total travel expenses (excluding "no answers") is statistically significantly higher for the current results than for the 1986 results (46.8 percent vs. 27.9 percent for a "Z statistic" of 4.55). This indeed suggests that airline ticket costs have increased disproportionately to other travel costs since the last survey.
Table 5. Estimated Percentage of Total Annual Corporate Travel
Expenses Believed to be Waste due to Frequent-Flier Programs

 Percentage of Respondents
 (Base = 506)
Category %

None 5
 1 - 5% 34
 5 - 10% 28
10 - 15% 18
15 - 20% 6
20 - 25% 4
More than 25%(*) 1
No response 4


Mean level of waste 7.9%

* Value of 27.5 used for calculating mean
Table 6. Airline Ticket Costs as a Percent of Total Travel

 (1986) (1991)
Category (Base = 204) (Base = 506)
 % %

 0 - 10% 1 1
10 - 20% 5 1
20 - 30% 11 5
30 - 40% 21 13
40 - 50% 32 32
50 - 60% 17
60 - 70% 15
70 - 80% 27(*) 10
80 - 90% 3
90 - 100% 1
Don't know/no answer 3 2

Mean percent 41.6 51.3

* These five categories were combined into one response
category (|is greater than~50 percent) in the 1986 survey, and
all responses falling into this category were assigned the
value 55 percent for the purposes of calculating a mean value.

Total business airline revenue in 1990 was reported to be about $40.9 billion. If this figure represents 51.3 percent of total corporate travel expenses as estimated above, then total corporate travel expenses are estimated to be about $79.7 billion. If 7.9 percent of this amount is waste due to frequent-flier programs, as projected earlier from the survey results, then a total of about $6.3 billion is estimated to be the annual waste associated with frequent-flier programs. This represents a 50 percent increase from the approximate $4.2 billion in 1986, as estimated in the same way from the 1986 survey results.

Participants were also asked what specific corporate actions their respective companies had taken to control travel costs and were asked to rate the effectiveness of those actions taken. Table 7 shows the percentage of respondents taking each listed action as well as the percentage of those taking the action who felt that it had "a substantial impact" on controlling corporate travel costs. Once again, the results are compared to 1986. The most dramatic difference between the two surveys is the significant increase in the percentage of companies negotiating corporate discounts with airlines--53 percent in 1986 versus 83 percent in 1991. Further, significantly more of the respondents who reported taking this action in 1991 felt that it had a substantial impact when compared to those responding in 1986 (61 percent vs. 28 percent). There also has been a significant increase in companies requiring employees to use specified travel agencies to obtain rebates (68 percent to 76 percent) and a significant increase in the perceived effectiveness of this action (76 percent vs. 55 percent related this action as having produced a substantial impact). Finally, about the same percentage of respondents in each survey reported that their companies required employees to use specified car rental agencies (88 percent vs. 91 percent), but far more respondents in 1991 than 1986 reported that this action had a substantial impact (63 percent vs. 40 percent).

In the 1986 survey, 94 percent of the respondents agreed or strongly agreed with the statement "attempts by a company to share or use TABULAR DATA OMITTED frequent-flier travel benefits accumulated by employees will meet considerable employee resistance."(26) In this current study, 87 percent agreed or strongly agreed with the same statement. Apparently, feelings have changed little in this respect. Nonetheless, some strategies have been enacted to attempt to achieve full, or partial, recovery of frequent-flier benefits.

Travel managers were asked directly whether their companies had established a formal policy with respect to using frequent-flier benefits for corporate, as opposed to personal, travel. A total of 172 firms (34 percent) had established a formal policy, and these respondents were questioned regarding specifics of the respective policies which had been established. Slightly over one third (38 percent) reported that their companies required employees to use frequent-flier benefits for business travel in the future, and most of these 65 companies (59 percent) relied on an honor system to enforce the regulation.

It is interesting to note that 37 percent of these 65 companies required employees to establish separate frequent-flier accounts for business travel as opposed to personal travel. To illustrate how this is done, Sam Jones could join a program listing his home address (for the accumulation of points for personal travel) and join the same program again as S.D. Jones, listing another address, such as a corporate postal box, for the accumulation of business travel points. It is virtually impossible for an airline to know the two accounts are for the same person. Another 28 percent reported that a computerized information system was used to monitor employee travel and to enforce the policy, and 9 percent reported that they relied on an external agency to monitor employee travel and redeem benefits.

About 16 percent (twenty-eight) of the companies which had established formal policies reported that they reimbursed employees for using frequent-flier benefits to travel on company business. The majority of these companies reported that employees received about 50 percent of the value of the ticket. Moreover, the value of the ticket was determined in a number of ways, ranging from the lowest available fare to the "Y" fare.


Only four companies (2 percent) reported that they required employees to reimburse the company a percentage of the value of a pleasure trip obtained with frequent-flier points earned from business travel.

In both the 1986 and 1991 surveys, respondents were asked to agree or disagree with the statement, "frequent-flier programs are receiving considerable attention from my company's upper level management." Forty percent of the 1991 respondents answered that they agreed or strongly agreed with the statement, compared to 42 percent with the same answers in 1986. The similar, and yet relatively low, "agreement" levels indicate that not much has changed. Senior support on the frequent-flier issue continues to be relatively weak. Questions, unfortunately, did not ask travel managers to evaluate the impact of implemented travel policies or the absence of a greater commitment on the part of senior management to resolving frequent-flier problems.

When the travel managers were questioned about a solution to the conflict-of-interest problem created by frequent-flier programs (what's best for the employee is not necessarily best for the company), over half (54 percent) said that the elimination of frequent-flier programs would be the best solution. This finding clearly reinforces the general feeling among the airlines' biggest customers--America's businesses--that the disadvantages of frequent-flier programs far outweigh the advantages.


Corporate travel managers' attitudes toward frequent-flier programs have changed very little since 1986. The vast majority believe the promotions inflate corporate travel bills primarily due to employees paying higher fares than necessary. On average, they estimate that frequent-flier programs cost their companies an additional 7.9 percent annually. This translates into a yearly $700 million cost overrun for the 506 survey respondents and, if projected to the total U.S. market, $6.3 billion for all the organizations whose employees travel for business purposes.
Table 9. Best Solution to Conflict of Interest Problem Created
by Frequent-Flier Programs

Solution Percentage
 (Base = 506)

(*) Elimination of frequent-flier programs 54%
(*) Corporate polices to control
frequent-flier abuses 38
Miscellaneous 7
No answer 1

* These were the only two options given. However, space was
provided in the questionnaire to give an alternative solution.
Only 7 percent of the respondents gave a solution other than
the two provided.

The views expressed as well as the extremely high response rate to the survey (70 percent) convince the authors that frequent-flier problems are real and a matter of much concern to corporate travel managers. Further, rapidly rising business air travel expenditures are intensifying travel managers' efforts to find solutions to frequent-flier problems.

Travel managers perceive that frequent-flier programs encourage their traveling employees to place personal gain ahead of employers' needs. A majority of corporate travel managers see ending frequent-flier programs as the best remedy to this conflict-of-interest situation, but this is not likely to happen soon. Airlines appear to be "locked in" to frequent-flier programs. Also, airlines question both the accuracy of the estimates of cost overruns and the intensity of travel managers' complaints. Carrier executives believe that the vast majority of traveling employees are honest individuals who do not abuse the programs.(27) Their perception is that, instead of hurting employers, frequent-flier programs reward an airline's loyal customers and help the productivity of the traveling employees and their companies by improving worker morale.

One view is that corporate travel managers are perhaps not empathetic enough to the stresses of frequent airline travel. Do they properly consider the hassle and employee time that can be wasted when a traveler is routed through a hub of a lower-priced competitor rather than non-stop by another carrier? There are price/service tradeoffs in business travel that may be motivating carrier choice as much as, or more than, frequent-flier membership.

Carrier managers believe that travel managers may not have a full understanding of airline costs and pricing needs. If airlines are truly gouging business patrons, then why have so many carriers filed for bankruptcy lately and why did the U.S. airline industry lose $3.9 billion in 1990? Airlines need the steady traffic of business travelers and see frequent-flier programs as a key to retaining these important customers and protecting revenues.

In order to appraise the accuracy of cost overrun estimates, it is useful to examine 1) other projections of economic waste blamed on frequent-flier programs, 2) the importance of frequent-flier membership in carrier and flight choices, and 3) evidence of travel privilege abuses attributed to the programs. Tretheway, who documented several estimates that deal with the waste created by frequent-flier programs, said:

* "The magnitude of the overpayment for and overuse of airline services can be quite large. In Canada, it is estimated that 13-20% of business travel is unnecessary."(28)

* "Frequent Flyer estimates that ticket prices are 10-15% higher than they would be without frequent flier programs."(29)

* "Layer and Reid estimate that frequent flier programs may be costing American businesses as much as $7 billion a year in added travel costs."(30)

These estimates are consistent with the numbers reported in this study (7.9 percent and $6.3 billion).

Airline managers question the sources of the estimated waste. They reason that for business travel costs to be so inflated, there would need to be widespread use of unnecessary trips and numerous purchases of higher than necessary fares. With so few unrestricted discount airlines left in business, the logic continues, it does not seem possible that many business travelers are bypassing low fares in order to build frequent-flier points on higher-priced carriers. The rebuttal argument is that it does not take many abusers of the system to generate a 7.9 percent level of waste. It is widely known that there are "professional" players of the frequent-flier game.(31)

How important are frequent-flier programs to carrier choice? Several studies address this issue:

* An Advertising Age/Gallup Organization poll asked business travelers to indicate which factor is most important in their selection of an airline. Only 4 percent selected "frequent flier program"; safety record (19 percent), schedule convenience (18 percent), on-time performance (16 percent), and ticket price (13 percent) were all cited more often.(32)

* In a survey of airline passengers, Toh et al. found that 67 percent of business travelers who were members of frequent-flier programs agreed strongly or were inclined to agree that membership in a mileage program influences their choices of an airline,(33) but they rated convenience of schedule and three other variables higher.(34) Also, 62 percent of the respondents thought frequent-flier programs were important to airline choice if they get to keep benefits, but if the company gets them, only 8 percent thought they were important.(35) Finally, 69 percent agreed strongly or were inclined to agree with the statement that concentrating on one mileage program yields the best prizes.(36)

* A survey by Deane of frequent-flier business travelers found that 77 percent answered "yes, often" or "sometimes" to the following question: When you choose an airline for a particular business trip, is your frequent-flier membership ever a consideration?(37)

* "More than 80 percent of travel agents surveyed by the U.S. General Accounting Office said business travelers choose a particular airline more than half the time in order to accumulate frequent-flier mileage. Fifty-seven percent of agents said business clients always or almost always base carrier selection on frequent-flier considerations."(38)

There is enough evidence obtained in prior and present research endeavors to conclude that frequent-flier membership is an important factor in the way business travelers select an airline and that personal gain is a central objective.

Are abuses as rampant as believed? There is some evidence in the secondary literature:

* An industry survey reported that 25 percent of the frequent travelers polled admitted taking trips that were totally unnecessary in order to build up point awards.(39)

* Deane's survey of frequent fliers asked, "How often have you taken a business flight because it offered more frequent flier points, even though there may have been another more direct, or more convenient flight at the same fare?" A total of 40 percent answered: "often" (8 percent), "seldom" (13 percent), and "rarely" (19 percent).(40) All three answers imply some level of abuse.

The evidence suggest that enough business travelers play the frequent-flier game that the resulting waste in corporate travel dollars is neither insignificant nor unrealistic. Abuse is not necessarily widespread, but in this case a little (7.9 percent waste) goes a long way ($6.3 billion) because of the magnitude of the nation's estimated corporate travel budget ($80 billion). At the same time, abuse is in many cases too strong a word. Much of the waste may simply result from business travelers considering only the airlines whose frequent-flier clubs they belong to instead of shopping for the best fare when making travel plans.

Corporations are beginning to take steps to curb wasted travel spending associated with frequent-flier programs, and, simultaneously, to better control their travel budgets. Approximately one third of the 506 respondents, and also 43 percent of the respondents who claimed that frequent-flier programs were causing higher than necessary overall travel costs, had adopted formal policies for using frequent-flier benefits earned by employees while traveling on business for future business trips. An appropriate question might be why a greater percentage of travel managers who saw cost overruns did not enact policies.

The answer may lie in the degree of difficulty faced in retrieving or sharing benefits. As noted earlier, 87 percent agreed or strongly agreed that attempts by a company to share or use frequent-flier benefits accumulated by employees would meet with considerable employee resistance. Of those companies enacting policies, the most common strategy was to require employees to use benefits earned from business travel for future business trips.

Corporations are also taking actions to directly control travel costs, their primary concern. Most respondents' companies now demand use of the lowest available air fares (88

percent), require that employees use specified car rental agencies (88 percent), have entered agreements with airlines to obtain corporate discounts (83 percent), and require that employees use specified travel agencies to obtain corporate rebates (76 percent). Noteworthy is the substantial increase in the number of respondents who have obtained corporate discounts with carriers since 1986.(41) Not only do many of these corporate actions help to control travel costs in general, they specifically reduce abuses/mistakes associated with frequent-flier programs.

These actions notwithstanding, the percentage of corporate travel managers who felt that frequent-flier programs were causing higher than necessary travel costs remains today at about 80 percent. It is obvious that corporate travel managers have little control over the future of frequent-flier programs. Decisions are in the hands of the airlines unless, as some believe, the programs have become so huge that the airlines have no more power to end them than corporate travel managers do. For the first time there is evidence that several (unnamed) airlines have lost their enthusiasm for these promotions and have admitted privately that they would like to end them.(42)

What prevents an airline from ending its frequent-flier program is the great risk associated with being the first to announce the shutdown of the promotion. The fear is that some, or even one, competitor will continue the promotion. A TWA memo projected that the carrier would have lost as much as $309 million in 1985 in business to competitors without its program, representing about 10 percent of its revenues that year. American estimated that its $369 million operating profit in 1984 would have been $54 million lower without its Advantage program.(43) The risk is more acute for the least financially stable carriers, who would face the greatest loss of traffic once their more generous frequent-flier programs ceased.

While anything is possible in business, it would appear that the only way frequent-flier programs will end in the near future is through an industry agreement. However, it would take a federal decision to allow carriers to collectively agree to abandon the programs, and even if a meeting was government-sanctioned, it is doubtful that the millions of program members would accept a decision to end the programs without a court battle.

At one time there was talk of an IRS proposal to tax benefits.(44) Perhaps such a move would decrease the perceived value of program benefits to members to the extent that it would open the door for an eventual end of the programs. Interest in this suggestion seems to have diminished, however. Also, direct federal intervention to ban frequent-flier programs seems unlikely despite mounting concern over the barrier to industry entry, and hence restraint of competition, they present. In fact, the likelihood of any federal intervention in the form of economic reregulation of the airline industry is currently low, but continuing concentration and economic woes in the industry and increasing concern among American businesses that they are being charged unfairly by the airlines could change the situation in the future. History shows that Congress will regulate an industry vital to the public interest if it believes that industry is incapable of policing itself. In the interim, it looks as if frequent-flier programs will continue, and corporate travel managers should plan accordingly.


Frequent-flier programs have provided tremendous benefits for travelers. Unlike other long-term promotions such as S&H trading stamps, Raleigh cigarette coupons, or Betty Crocker coupons, which provide awards valued at a few cents per dollar of consumer spending, these airline promotions provide trips worth hundreds of dollars. Further, in the vast majority of cases, the recipient of the award paid little, if any, of the cost of the travel which earned the benefit because the travel was business-related. The programs also have increased the costs of corporate air travel and have driven a wedge between employer and employee over the ownership of program awards.

Airlines claim that frequent-flier programs have helped corporations by improving the morale of business passengers. Although the programs at first may have improved attitudes and productivity, they now have been running for more than ten years, benefits are expected and taken for granted, and any efforts to share awards with employers produce negative employee morale. Also, is it not a corporation's business, and not the airlines', to determine how employees should be motivated?

As much as corporate travel managers may object to frequent-flier programs, these promotions will likely continue into the near future and perhaps longer. Even if a carrier desires to terminate its programs, the risk is too great for any carrier to be the first to do so. Consequently, companies need to develop strategies to deal with these programs.

What makes the most sense is for businesses to focus on the broader objective of controlling wasted dollars associated with business travel rather than just frequent-flier concerns. One key objective of such a strategy is to purchase low-priced airline tickets. Many companies would also benefit from additional support from top management for cost-saving efforts. Chairmen, presidents, and CEOs need to provide visible endorsements of this activity. Equally important is a reduction in the autonomy of business travelers to arrange their own travel. Cost reductions will come faster if experts are responsible for planning employee trips, including purchasing airline tickets. As for retrieving frequent-flier benefits, perhaps a compromise solution, such as offering employees financial incentives (e.g., 50 percent of the ticket value) to use their frequent-flier benefits to travel on business is best. Efforts to obtain all benefits for the company may become counterproductive.

There are no easy answers to the frequent-flier debate. With airline profitability at an all-time low, carrier managers are under considerable strain to increase passenger revenues. Certainly, they will not want to take any action that might have the opposite effect, such as terminating frequent-flier programs or giving frequent-flier awards to businesses. On the other hand, corporations are the airlines' most important customers, and they not only are demanding price reductions but also are expecting corporate travel managers to control escalating air travel budgets. Somehow in this difficult environment, carriers and companies must listen to each other to find some win-win solutions. Airlines can ill afford to ignore the needs of their biggest customers who continue to look for alternatives to air travel such as telecommunications, automobiles, and reduced travel. Businesses are also at risk if airlines fail to earn equate returns necessary for the maintenance and improvement of air transportation services.

Finally, since evidence is mounting that frequent-flier programs have caused a number of problems such as increasing the costs of airline travel and deterring competition, federal intervention of some form may eventually be required.


Several areas remain open for future frequent-flier research. One is a more complete study of the costs and effectiveness of these programs from the carriers' perspective. There is a great deal of euphoria in the literature about these programs, but proof of their success or failure is not well documented. Clearly, there is a need for a detailed assessment of airline profitability derived from these programs.

A second area of needed research pertains to the competitive effects of these promotions. Some work already has been done in this area by the General Accounting Office, but as the airline industry becomes a more concentrated business, it is important to assess thoroughly what role these programs have played in limiting competition and discouraging new carrier entry and the growth of small airlines.

Finally, there is a need to document the pros and cons of frequent-flier programs as well as other long-term promotions so that companies contemplating similar patronage reward programs can assess their value prior to implementation. Past experience can be a great teacher.


1 Robert Levy, "Flap Over Frequent Flyers,", Dun's Business Month, January, 1985, p. 49.

2 Frederick J. Stephenson and Richard J. Fox, "Corporate Attitudes Toward Frequent-Flier Programs," Transportation Journal Vol. 28 No. 1 (Fall 1987), 10-22.

3 Stephenson and Fox, p. 15.

4 Stephenson and Fox, p. 14.

5 Rex S. Toh and Michael Y. Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," Transportation Journal Vol. 28 No. 2 (Winter 1988), 11-22.

6 Rex S. Toh and Michael Y. Hu, "A Multiple Discriminant Approach to Identifying Frequent Fliers in Airline Travel: Some Implications for Market Segmentation, Target Marketing, and Product Differentiation," The Logistics and Transportation Review Vol. 26 No. 2 (June 1990), 179-197.

7 Michael Y. Hu, Rex S. Toh, and Stephen Strand, "Frequent-Flier Programs: Problems and Pitfalls," Business Horizons Vol. 31 No. 4 (July-August 1988) and Michael W. Tretheway, "Frequent Flyer Programs: Marketing Bonanza or Anti-Competitive Tool?" Journal of the Transportation Research Forum Vol. XXX No. 1 (1989), 195-201.

8 Richard H. Deane, "Ethical Considerations in Frequent Flier Programs," Journal of Business Ethics, Vol. 7 No. 10 (1988), 755-762.

9 Terrence J. Kearney, "Frequent Flyer Programs: A Failure in Competitive Strategy, with Lessons for Management," The Journal of Consumer Marketing Vol. 7 No. 1 (Winter 1990), 31-40.

10 Richard J. Fox and Frederick J. Stephenson, "How to Control Corporate Air Travel Costs," Business (July-Sep. 1990), 3-9.

11 Lee S. Garsson, "Frequent Flyer Bonus Programs: To Tax or Not to Tax -- Is This the Only Question?" Journal of Air Law and Commerce Vol. 51 No. 4 (Summer 1987), 973-1009.

12 For instance, see (1) Reggie Ann Dublin, "Guess Who Wants Your Frequent-Flier Coupons," Business Week, August 5, 1985, p. 37 and (2) Christopher Winans, "Tracking Travel," Wall Street Journal, December 21, 1989, p. B1.

13 For a more detailed review of the history and particulars of frequent-flier programs, see Stephenson and Fox, "Corporate Attitudes Toward Frequent-Flier Programs."

14 Information supplied by the Air Transportation Association of America (ATA), Spring 1991.

15 U.S. Department of Labor, Bureau of Labor Statistics, December 1986, CPI Detailed Report, p. 1 and U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report, December 1990, p. 1.

16 On July 23, 1991, United Airlines offered a nonrefundable fare of $318, a "Y" fare of $1,358, and a first-class fare of $2,036, all of which are round-trip fares. Information was supplied by Classic Travel, Athens, Georgia, July 23, 1991.

17 Toh, Hu, and Strand, "Frequent-Flier Programs: Problems and Pitfalls, p. 53.

18 In 1986, business travel produced $27 billion in airline revenues, compared to an estimated $40.9 billion in 1990. Derived from data provided by the ATA.

19 One percent of $40.9 billion in business travel costs.

20 The 50 million figure was projected from "Travel Marketing: Spotlighting Frequent-Flier Programs: Who Spends the Most, Who Leads the Pack, Who Offers the Most Perks," Advertising Age, November 5, 1990, p. S-10. Toh and Hu found that frequent-flier members belong to an average of 2.26 programs. See Toh and Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," p. 14. Therefore, an estimate of the actual number of people is more likely to be closer to 22 million different individuals.

21 The 950 billion estimate is projected from information in "Whose Frequent-Flier Miles" Fortune, March 12, 1990, p. 11.

22 This assumes a free domestic continental U.S. round trip is earned for every 22,000 miles accumulated and is based on a review of various airlines' program specifications. Most airlines rewarded trips based on 20,000 mileage points as of late 1990. See "Travel Marketing...," Advertising Age, November 5, 1990, p. S-10.

23 Toh and Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," p. 16.

24 This assumes that the minimum value of a free upgrade is the difference between the first-class "F" fare and the highest coach, or "Y" fare. Normally this differential is a 50 percent price increase, which we value conservatively at $500 per round-trip upgrade if a passenger had to pay for it. As an example, on April 23, 1991, the Y round-trip fare from Atlanta to San Francisco was $1,384, whereas the round-trip F fare was $2,070--a $686 difference. The $22 billion is computed by multiplying 22 million by 2 upgrades by $500. The $7.5 billion value for free trips is based on the average 1990 fare of $340 (Table 1) multiplied by 22 million patrons by one trip. This seems reasonable. People who earn free trips are not likely to use them for short trips of low value. In fact, many choose Hawaiian or international trips of much higher value.

25 Derived as follows: (.079) (506 companies) (17.2 million in average travel costs) = $688 million.

26 Stephenson and Fox, p. 16.

27 The airlines are not the only ones who believe this. Toh and Hu said, "Corporate suspicions, reported in the Stephenson and Fox study, that frequent-flier programs result in higher fares, unnecessary air travel, and wasted employee time due to either inconvenient flight schedules or indirect routes to gain frequent-flier mileage credits, are questionable, according to this study. Frequent fliers, most of whom are business travelers, are quite responsible." Toh and Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," p. 19.

28 Tretheway, "Frequent Flier Programs: Marketing Bonanza or Anti-Competitive Tool?" p. 197, citing C. French, "Will Frequent Flyers Still Get the Point?" Globe and Mail, February 4, 1989, p. 11.

29 Tretheway, p. 197, citing "Will the Airlines and Corporations Fight it Out?" Frequent Flyer, November 1986, p. 79.

30 Tretheway, p. 197, citing R. Layer and D.R. Reid, "Have the Frequent Flyer Programs Defeated the Purpose of Deregulation and How Much Are They Costing Your Firm?" Business Travel Review, June 1988, p. 16.

31 "Flying First-Class Despite the Rules," Wall Street Journal, December 1, 1987, p. 39 and Robert L. Rose, "Frequent-Flier Plans Become Obsessions," Wall Street Journal, September 6, 1988, p. 33.

32 "Safety First!" Special Report, Travel Marketing, the Airlines, Advertising Age, November 5, 1990, p. S-2.

33 Toh and Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," p. 18.

34 Hu et al., "Frequent-Flier Programs: Problems and Pitfalls," p. 53.

35 Hu et al., p. 54.

36 Toh and Hu, "Frequent-Flier Programs: Passenger Attributes and Attitudes," p. 18.

37 Deane, "Ethical Considerations in Frequent Flier Programs, p. 759.

38 Judi Bredemeier, "User Booking Patterns Tied to FF Mileage," Business Travel News, September 24, 1990, p. 22.

39 Deane, p. 756 citing Judith Dettinger, (interview), U.S. News and World Report, April 22, 1985, pp. 78-79.

40 Deane, p. 759.

41 American Airlines, in April 1992, restructured its domestic air fares. A part of this new plan called for the elimination of corporate discounts (see Bridget O'Brian, "AMRs Bid for Simpler Fares Takes Off," Wall Street Journal, April 10, 1992, p. B1). Most carriers subsequently matched American's fare restructuring plan calling for the end of corporate discounts.

42 Kearney, "Frequent Flyer Programs: A Failure in Competitive Strategy, with Lessons for Management," p. 39.

43 Francis C. Brown III, "Unused Awards Mounting," Wall Street Journal, July 15, 1987, p. 31.

44 Garsson, pp. 973-1009.

Mr. Stephenson, EM-AST&L, is associate professor of distribution, and Mr. Fox is associate professor of marketing, University of Georgia, Athens, Georgia 30602. The authors appreciate the help of graduate research assistants Jeff Dawson, Rick Hoe, and Craig Norman, who contributed to this article.
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Author:Stephenson, Frederick J.; Fox, Richard J.
Publication:Transportation Journal
Date:Sep 22, 1992
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