If someone offered you a $10 bill in exchange for $30, you probably wouldn’t take it. Who would?
But that’s akin to what’s happening when you pay for extra miles to boost your airline rewards balance, says Ganesh Sitaraman ’08, a Harvard Law School alumnus and faculty member at Vanderbilt University Law School. Even worse, your favorite carrier can choose to restrict your use of those points any time they want — or even slash their value, he says.
Last month, the U.S. Department of Transportation announced that it was investigating four major airlines for possible anticompetitive or unfair practices related to their frequent flyer, or loyalty, programs. In a press release, the agency, led by Secretary Pete Buttigieg, said that it was probing Delta, Southwest, American, and United Airlines to understand whether the companies devalue their rewards points or tack on excessive fees for their use. The inquiry will also look at whether the programs reduce competition or eliminate consumer choice, especially in regions of the country dominated by a single carrier.
Sitaraman says that frequent flyer programs might seem like strings-free bonuses to promote customer loyalty, but they have become big business for the airlines and their partnered credit card companies.
This, he says, does not always benefit consumers.
“The challenge with this system is that it works great for airlines, but doesn’t always work great for cardholders or for the country,” says Sitaraman, the author of “Why Flying is Miserable: And How to Fix It.”
That’s because while airline rewards programs and associated credit cards, such as Delta’s American Express cards, have ballooned in popularity, so has the list of customer grievances. Some complain that the value of their points is opaque and can fluctuate wildly. Others say it is difficult to find qualifying flights or upgrades, or expensive to transfer their points to others.
For their part, the airlines — alongside their industry trade group A4A — have indicated that they will comply with the department’s inquiry. They have also defended their programs, pointing to their popularity with the public: One estimate from A4A suggests that airline credit cards generated $23 billion in economic activity in 2022.
In an interview with Harvard Law Today, Sitaraman explains how frequent flyer programs came to be, why they — and their credit card partnerships — could be problematic, and what he hopes the DOT’s investigation will uncover.
With more information, Sitaraman hopes, the public can make better choices, and airlines can focus on their main mission — getting customers where they want to go.
Harvard Law Today: How did frequent flyer programs come about?
Ganesh Sitaraman: The story goes back to airline deregulation in 1978. After Congress deregulated the industry, the airlines devised new tactics to capture the market, and frequent flyer programs were one of the ways they gained a competitive advantage. In 1981, when American Airlines developed AAdvantage, the idea was to give frequent flyers additional benefits. People at the time saw this as a way to forestall competition: The goal was to stop people from traveling on other airlines.
Early on, the programs were a more like what we normally think of as kind of rewards programs. ‘Buy 10 sandwiches, get the 11th one free’ — that kind of thing. But they have since changed a great deal.
HLT: How and why did the programs change?
Sitaraman: There were three big shifts that transformed these programs. The first was in the 1980s, and that was when American partnered with Citibank to offer a credit card that was co-branded. The second was in the 1990s, when airlines started creating multiple different fare classes for seats, rather than charging the same price. By charging differential prices for tickets, it became increasingly clear that the number of flights you took or the distance you flew didn’t matter as much as the amount you were spending.
Then came the third change, which happened in the late 2000s when Virgin America introduced a loyalty program that was all about spending, not about mileage. That meant a full shift to these programs being about spending money, not about frequent flying. It took a while for the other airlines to catch up, but most of the airlines have now moved in the direction of valuing spending on the credit card, not the number of trips you take or how many miles you fly.
HLT: So, what’s the problem, in your view?
Sitaraman: The challenge with this system is that it works great for airlines, but doesn’t always work great for cardholders or for the country. The reason it’s great for airlines is that they keep more people on their airline and they make money from it in a bunch of different ways. It’s also a great deal for the banks that are co-branded with the credit cards.
For cardholders, it can be more problematic, because a lot of these programs are not transparent. The airlines can change the terms of the deal anytime they want. There’s been a lot of outcry about that recently. About a year ago, Delta announced changes to its SkyMiles program, making it harder to get status, making it harder to take advantage of perks. Other airlines have done similar things. The Points Guy even declared at one point that he was going to stop chasing airline status. This is The Points Guy, the preeminent rewards online commentator! And the reason is because it’s getting harder for people to use these things in ways that make sense. Are you really getting a significant number of benefits? Can you take the flights that you want using points? Are you getting the upgrades when you do fly? To the extent you’re not getting those benefits, then chasing status is a lot of effort for little benefit.
“The challenge with this system is that it works great for airlines, but doesn’t always work great for cardholders or for the country.”
HLT: What kinds of practices do the airlines engage in related to their rewards programs that some might object to?
Sitaraman: There are a number of practices that the airlines engage in that are unfair and deceptive and arguably should be regulated as such by the Department of Transportation. Here is an example: Sometimes, after you buy an airline ticket, you see an offer for a mileage multiplier. This is a little pop up that asks whether you want to buy 1,000 extra miles for, let’s say, $30. Online estimators will estimate that the value of those miles on that airline is about a cent or 1.2 cents per mile. But if you do the calculation of how much they’re charging you for those extra miles, it can be up to three cents. Effectively, the airlines are saying, “Give me $30 and I’ll give you $10 back.” No one would take that deal, if there was transparency about the value.
Another example is how much it costs, including additional fees, to transfer your miles to someone else. The process is all electronic, which doesn’t cost the airline much, yet they usually charge a flat fee to transfer points plus a percentage for every point that you transfer. On Delta, you have to pay a $30 fee to transfer points, plus one penny for every point. So that’s 1% of your total. That means, if you’re going try to transfer $120 worth of points — 10,000 points — to a spouse, and each point is worth an estimated 1.2 cents, you’re going to end up paying Delta $130 to transfer $120 worth of points.
HLT: Are airlines allowed to make any changes they want to their rewards programs? Are they restricted at all?
Sitaraman: The primary thing that prevents airlines from making changes is public outcry. You saw that with Delta last year, where the company announced a bunch of changes to their SkyMiles program, and there was a huge public outcry, causing them to walk the changes back a little bit. However, they didn’t walk them back fully, and there’s nothing to stop them from making incremental changes every year or two in a way that people don’t really notice or don’t think is that bad, but that cumulatively add up, over time, to dramatic changes. Without regulation, I think what we will end up seeing is continued changes along those lines — smaller, and more incremental. But the overall effect will make these programs less valuable to consumers.
HLT: You mentioned that some airlines have partnered with credit card companies, and that card spending is often rolled into their loyalty programs. What concerns do you have about these types of programs?
Sitaraman: One of the big concerns here is that, unlike other markets, credit cards are not contracts that you can easily get out of without any downsides. The general advice that people in consumer finance will give you is you shouldn’t open and cancel credit cards right and left, because you’ll take a hit on your credit score. But if you decide that the credit card is a bad deal, you have to cancel and that’s a downside. Some people might say, well, just cut up the card and don’t use it, but the problem is a lot of these cards charge you an annual fee, so you may be paying a lot of money just to not take the hit on your credit score.
HLT: Are there other downsides to these partnerships, from the consumer perspective?
Sitaraman: A second challenge arises when you live in a city with a fortress hub. To stick with Delta as an example, if you live in Atlanta, do you really have that much of a choice on who you fly? The answer is no, not without big inconveniences. Sure, you could fly United and connect through Newark, or try to fly American and always connect through Dallas, but when you can get direct flights everywhere on Delta, you’re probably going to take Delta more often than not. What that also means is that, for people in these fortress hub cities, you’re likely locked in, not only to the airline, but to the credit card that’s associated with it.
HLT: What is the Department of Transportation going to be looking for in its investigation of frequent flyer programs?
Sitaraman: I think the primary thing that they’re doing is trying to get information, and I think that’s the right way to start. This is an area that is surprisingly opaque in how it operates, and I think the DOT’s initial questions to the airlines are largely about collecting information on what they’re doing, and how they’re doing it. That will be the foundation for whether the department goes forward and tries to regulate in this space. It will also be very illuminating for the public, because we know so little about how these programs actually work.
HLT: On the other hand, airlines are not obligated to offer rewards programs, which one could argue are just bonuses and extra perks for those loyal to their company. They could instead choose to offer nothing, or consumers could choose not to participate. Aren’t these programs just the free market at work?
Sitaraman: The federal government is involved in regulating commerce in a lot of different industries. We do that when there are important harms to markets — using antitrust law and regulated industries law — and we do it when there are important harms to consumers, to safety, to the environment, and to a wide range of other social goals. I think this is a place where we have consumer protection laws on the books that prevent abusive, deceptive, and unfair practices, and we have competition rules on the books too. When airlines engage in the marketplace in ways that are potentially harmful to consumers these laws apply, just like they apply to any other businesses.
HLT: In your book, you also make the case that frequent flyer programs distract carriers from their actual business purpose — getting people to where they want to go. Can you expand on that argument?
Sitaraman: If the airlines are focused primarily on making money from credit cards and rewards programs and online travel portals, are they really taking the time and attention needed to improve service in their core business, which is flying airplanes safely, effectively, and reliably throughout the country? We’ve had a number of problems in the airline industry in the last few years. Before COVID, the airlines were making money hand over fist. CEOs were saying they didn’t think they would ever lose money again. And then, when COVID hit, they came hat in hand to Congress, asking for public support. In the years afterwards, there were still tens of thousands of flight cancellations, there has been loss of service to cities around the country — some cities have lost all service from major carriers. And we have less competition in the system. That’s not to mention the safety problems in the industry. When you put these things together, this is an industry that has some serious problems in its core business of flying.
HLT: What impact could the investigation have on customers and the public?
Sitaraman: There are two things that could come out of this. The first is that we simply learn a lot more about these programs. It’s possible that in knowing more, it turns out that they are not as bad as some people think, including myself. But the other thing that could happen is that, upon disclosing some of their practices, the airlines will have to make changes. Maybe voluntarily because of public outcry. Maybe the Department of Transportation will get involved and regulate some of the practices, if they view them as unfair or deceptive. But regardless of the outcome, more information is a good thing, because we’ll either find out that there are problems to solve, or we’ll find out that there aren’t problems, in which case there’ll be more public confidence in these programs.
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