by Gary Leff
Do large airlines’ rewards programs hurt competition? That’s the question that the Biden administration is asking. The Department of Transportation, and the Consumer Financial Protection Bureau under the leadership of an administration appointee, held a hearing that was in part pushed by Senator Dick Durbin (D-IL) who is doing the retail lobby’s bidding by trying to regulate credit card swipe fees. The purpose was to investigate the ‘anti-competitive behavior’ of frequent flyer programs.
Ironically, frequent flyer programs seem to increase airline competition for two reasons.
- Airline seats are in large measure a commodity business, and with the amount of government regulation there’s limited room for product differentiation. Airports are government owned, security screening is provided by the government, and where planes go from push back to gate arrival is dictated by the government. Interiors are constrained by regulation and signed off on by the FAA.
Frequent flyer programs are a key way airlines differentiate their product. Far from being anti-competitive, they were originally created to foster competition.
- Flying makes a card more relevant and acquisition easier. The programs make flying more profitable. That increases the supply of seats and drives down fares.
We also know that there really aren’t significant barriers to entry for an airline to offer a competitive program, and even for banks and others to do so. Spinning up of new programs like Chase Ultimate Rewards and the entry of Capital One and Wells into the transferable points space, plus Bilt Rewards, shows that there aren’t meaningful barriers to competition.
There are bad practices within airline loyalty, however. And there’s little that consumers can do about it even if such practices border on fraud. But that’s the result of government policy!
- Successive Supreme Court rulings held that consumers basically can’t sue frequent flyer programs for duties of good faith and fair dealing.
- That’s left the Department of Transportation as sole regulator, with airlines immune from suits for anything other than violating their own terms and conditions
- But DOT’s own Inspector General found that the agency improperly ignored complaints about the programs.
The Airline Deregulation Act, successful court decisions, and DOT inaction has meant loyalty programs have little legal liability to customers. Now the DOT wants to know whether their own inaction has been abused?
What’s weird though is the focus on anti-competitive behavior in frequent flyer programs because that’s about the only charge that falls totally flat.
The smallest airlines say the big airlines are anti-competitive but of course they do because they want the government to crack down on competitors, and the tools they use to compete. Spirit Airlines benefits if they don’t have to offer a compelling value proposition in Free Spirit.
Discussion about the topic was driven by Spirit chief commercial officer Matt Klein, who said that consolidation, with American, Delta, Southwest and United controlling approximately 80% of the domestic airline market, drives flyers to Big Four loyalty programs.
“Customers sort of get trapped,” Klein said. “They’re in cities dominated by certain airlines, which means you have to fly those airlines in those cities. That then gets you into these loyalty programs, and that gets you hooked into [thinking], ‘Well, I guess I need to fly American’ or ‘I guess I need to fly United.'”
…Executives for Allegiant and Breeze agreed with Klein, while emphasizing measures they’ve taken with their loyalty and credit card programs to counter the Big Four’s advantages.
This is such a strange take.
“The notion that a frequent-flyer program is a tool to stifle competition is pretty silly,” Gary Leff, who writes frequently about rewards programs on his View From the Wing blog, said in an email. “There’s little barrier to entry in offering an attractive program. Not every airline is smart about doing so, however.”
Spirit, Leff pointed out, has benefited heavily from its Free Spirit loyalty program, including leveraging it for $1.1 billion of borrowing.
Still, he said, Free Spirit pales in some ways to other airline rewards programs, including having points that expire after 12 months. Points don’t expire at several other U.S. carriers, among them giants Delta, Southwest and United.
“Any relative disadvantage is of their own making,” Leff said. “Sure, they’re an undersized airline. Grow the airline, and its relevance in key markets, and they can grow the value of their loyalty program.”
Customers may choose to fly United out of Denver instead of Southwest because they prefer United’s first class product, or its club lounges. Or they may prefer the bundle that Southwest offers.
But there’s nothing inherent in size of a loyalty program that creates market dominance. Spirit has something of a me-too program, having copied some parts of what Frontier has done. Historically Spirit’s program has been frankly awful. Compare Spirit’s points expiration to United, Delta, Southwest and JetBlue where points don’t expire.
Small programs can win business! Frontier was the first airline – before American – to make all cobrand card spend count towards status. This fee-based airline waives nearly all of its fees for top customers. If you live in a city Frontier serves heavily, their program is actually really attractive for many.
They don’t have global points-redemption opportunities like United or Delta, but this too is a choice. Small airlines partner with larger ones worldwide, and AirTran used to let you use their credits on other airlines – for twice the number of credits as travel on their own planes they’d buy you a ticket on another airline.
One thing we see in hotel programs is that the smaller they are, the more work they need to do on the loyalty side to win business. Hyatt has to offer a better program that Hilton, IHG and Marriott because those chains are ubiquitous. You need to work to stay loyal to Hyatt.
If you’re a U.S. consumer you’ll get great value out of foreign loyalty programs, and banks and hotel programs make points in lucrative foreign programs accessible to U.S. consumers. Alaska Airlines is smaller than the ‘big four’ but many consider it to have a superior loyalty program (and that was true even before Alaska joined the oneworld alliance). Build a better program, attract customers, and there’s the opportunity both to grow the competitiveness of the airline and to earn more through co-brand credit card reach.
