America Division of Transportation (DOT) has introduced that it’s going to be investigating the frequent flyer applications of the 4 greatest airways in the US. I’m unsure what precisely to make of this…
Unfair and misleading airline rewards practices beneath investigation
Transportation Secretary Pete Buttigieg has simply despatched a letter to the CEOs of the 4 greatest US airways — American, Delta, Southwest, and United — informing them that the DOT is investigating their frequent flyer applications. The thought is that factors and miles maintain actual financial worth, and the federal government is having a look at these applications to verify they’re clear and truthful to shoppers.
Right here’s the principle a part of the letter that was despatched to airline CEOs:
Airline rewards applications have turn into a significant a part of the U.S. economic system and a significant a part of the airline enterprise mannequin, by some measures creating a monetary significance that rivals and even outweighs the operation of flights. These applications can form how prospects work together with airways, and plenty of People reportedly have level balances substantial sufficient that they quantity to a part of their financial savings.
Given the financial significance of rewards within the aviation sector, the Division of Transportation (DOT or Division) has initiated a evaluate to look at the equity, transparency, predictability, and competitiveness of airways’ rewards applications. DOT has authority beneath 49 U.S.C. § 41712 to research and take motion in opposition to airways and ticket brokers for unfair or misleading practices and unfair strategies of competitors in air transportation or the sale of air transportation.
The rewards applications of the biggest 4 U.S. carriers – American Airways, Delta Air Traces, Southwest Airways, and United Airways – play an outsized function in shaping the insurance policies, practices, and participation within the airline rewards market resulting from their measurement, scale, scope, and membership. Accordingly, as a part of our evaluate, the Division is looking for extra particular knowledge to higher perceive the biggest rewards applications and establish potential competitors or client safety points or dangers, and I’ve enclosed an order to file a report conscious of our questions. Our objective with this inquiry is to make sure that buyer rewards are protected against any practices that may diminish their worth, profit, or availability.
It’s fascinating to see the info that the DOT is requesting. Amongst different issues, the DOT needs airways to clarify how they value award flights, what adjustments they’ve made to their pricing since 2018, the rationale for program adjustments, and what number of members had been impacted by these adjustments.
After all these days many loyalty applications have dynamic award pricing, they usually’ll even have to clarify that intimately. Airways can’t simply state that they value flights dynamically based mostly on provide and demand, however they’ll have to clarify how variables to dynamic award pricing have modified over time, and the monetary impression this has had on shoppers.
Airways will even have to clarify the small print of their co-brand bank card agreements, together with for a way a lot they promote their factors to banks. They’ll even need to reveal how they reply competitively to adjustments at different applications.
As you’d count on, many of the data shared with the DOT received’t be made public, for apparent aggressive causes.
My tackle the DOT’s frequent flyer program investigation
I’m fascinated by what the DOT is doing right here, and I’m of two minds with regards to this type of investigation, and what might probably come of this.
Loyalty applications are large companies for US airways, and are arguably probably the most worthwhile a part of the “large 4” US airways, give how low margin flying is. Regardless of their financial significance, they’ve largely been unregulated. The dearth of regulation is a double edged sword.
The nice factor is that the shortage of regulation has meant that factors currencies aren’t taxed, since they’re considered as a rebate on airfare (or a rebate on bank card spending, if issued by co-brand bank cards). The rewards are additionally considered as property of the airline, and the airline can change the worth of these currencies at will, since shoppers don’t really personal their rewards.
The dangerous factor is that the shortage of regulation can also be what has allowed airways to so drastically change the worth of rewards over time. There’s no denying that many individuals do accumulate miles with the objective of utilizing them a few years down the street as a part of their “financial savings,” solely to learn the way a lot they might have been devalued. That’s why I all the time advocate an “earn and burn” technique, since holding onto miles is like retaining cash in a checking account with out incomes curiosity (and is even worse).
My preliminary take is that I believe it’s completely truthful for the DOT to attempt to accumulate some extra knowledge on these applications, since this can be a multi-billion greenback business that will get little scrutiny. That being mentioned, I believe that it in all probability wouldn’t be in the perfect curiosity of shoppers if we noticed materials adjustments to how these applications are regulated. We actually don’t wish to see factors taxed.
I believe the one sensible factor that might come from this, which might be in the perfect curiosity of shoppers, is to maybe require airways to extra clearly disclose that they’ll change the worth of rewards at any level. That is said in this system phrases and situations, however after all most individuals don’t learn these. It needs to be said extra clearly in advertising and marketing supplies as effectively.
With applications more and more shifting to dynamic award pricing, there’s additionally not likely a sensible technique to implement advance discover of adjustments to pricing. Simply as airways can value flights dynamically in money, they’ll additionally accomplish that with factors.
Backside line
The DOT is investigating airline frequent flyer applications, and is having a look at American AAdvantage, Delta SkyMiles, Southwest Speedy Rewards, and United MileagePlus. The main target is on unfair and misleading practices.
There’s no denying that many shoppers really feel that airways don’t act in good religion with these applications. I’m all for the DOT trying into it, although, since that is such a large business that has such little regulation. That being mentioned, I’m unsure any adjustments would actually be to the good thing about shoppers.
What do you make of the DOT investigating frequent flyer applications?
