Are frequent flyer programs fair to their members?
That was the subject of Thursday’s hearing in Washington, D.C., jointly organized by the U.S. Department of Transportation and the Consumer Financial Protection Bureau.
The hearing, announced last month follows Report at the end of December that DOT is investigating frequent flyer programs, is considered an informational, fact-finding event rather than a formal investigation.
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“The joint hearing is an opportunity for DOT and CFPB to gather additional information to determine whether additional action is needed to ensure fair competition in these industries and provide a fair and transparent experience for law enforcement. customers and cardholders or not,” the agencies said in a statement last month. hearing.
Along with remarks from Transportation Secretary Pete Buttigieg and CFPB director Rohit Chopra, the hearing also featured comments and discussion with several airline and banking industry representatives.
But one group was conspicuously absent from the hearing: the largest airlines and banks that control the largest frequent flyer programs.
Instead, participants include:
- Scott DeAngelo, executive vice president and chief marketing officer of Allegiant Air
- Morgan Harper, director of policy and advocacy at the American Economic Freedom Project
- Andrew Grimm, president and CEO of Apple Federal Credit Union
- Sara Nelson, international president of the Association of Flight Attendants-CWA
- Lukas Johnson, commercial director of Breeze Airways
- Erin Witte, director of consumer protection at the Consumer Federation of America
- Robert Patrick Cooper, senior vice president and general counsel at OneUnited Bank
- Matthew H. Klein, executive vice president and chief commercial officer of Spirit Airlines
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At least one of the “big four” US airlines – American Airlines, Delta Air Lines, United Airlines and Southwest Airlines – was not invited to participate, an aviation source familiar with the matter confirmed to TPG .
A DOT representative told TPG that every airline except American and United had been invited — those two airlines were omitted because they were originally scheduled to have representatives appear at a session. controversial congressional hearings at the same time, but in the end they did not appear. Delta and Southwest declined to share the reason for their absence.
The two agencies’ view is to focus on frequent flyer programs and credit card rewards primarily to ensure that consumers get the value they expect and are treated fairly, the two stand the dealer said.
Rewards have evolved and expanded significantly since they were first introduced in the 1980s, with some consumers factoring in points savings and future reward potential when giving their broader financial decisions.
“Point systems like frequent flyer miles and credit card points have become a meaningful part of our economy,” Buttigieg said in his opening remarks. “It is clear that these programs hold a significant amount of value and like anything of value that is traded in our economy, it is important that it is handled fairly .”
“These programs have evolved over the years, from rewards for the most loyal airline customers to the multi-billion dollar money market where credit card companies Apps and airlines buy, sell, convert and award miles and points across all sectors of the economy. more.
Most speakers said they generally support the programs and the value they bring to consumers and engage with them directly. For example, Buttigieg described how his family used frequent flyer miles to visit family abroad when he was growing up. Buttigieg previously told TPG that he is a frequent user of points and miles and maintains elite status in various loyalty programs.
Related: DOT Seconds. Pete Buttigieg is a fan of points and miles — but he tells TPG he refuses free upgrades
With points and miles increasingly acting as a currency, the idea is to ensure that consumers get a level of protection.
Throughout the 90-minute hearing, two clear themes emerged, offering clues as to how the DOT and CFPB might plan to carry out the project.
The first is whether changes to frequent flyer programs are fair to consumers. Speakers touted the track record of major airlines cutting prices on their frequent flyer programs, offering fewer rewards and increasing redemption rates.
“Our initial review of all the fine print suggests that credit card companies and airlines have the ability to quickly and significantly reduce point values by making redeeming points becomes more difficult or by limiting the inventory that can be purchased with points.”
Witte believes that dumping should be completely banned.
“Devaluing something that a person has earned and the reason they are in that program — retroactive devaluation, where they invested their time and money — is really problematic,” Witte said.
The second recurring theme at the hearing was the ways in which incentive programs contribute to – or harm – competition between airlines and banks.
On the airline side, in particular, larger airlines can rely on revenue from their frequent flyer programs to subsidize less profitable flights. The largest airlines earn billions of dollars each year from their frequent flyer programs. In some cases, they can make more money from the shows than from flying.
The majority of that revenue comes from selling miles in bulk to its banking partners, which issue co-branded credit cards. Banks pay airlines for miles they distribute to cardholders as rewards for spending.
Co-branded credit cards have become big business for airlines over the past decade, enhancing the value of their frequent flyer programs and generating billions of dollars in annual revenue for airlines.
For example, Delta says nearly 1% of US gross domestic product is spent on its co-branded credit cards. Airlines earn $1.7 billion from co-branded credit card partnership with American Express in the first quarter of this year.
In 2020, during the height of the COVID-19 pandemic, United used its MileagePlus loyalty program to secure a $5 billion loanvaluing the program at nearly $22 billion.
Several speakers said Thursday that because larger airlines make so much money from these programs, they can afford to compete more aggressively when a new or smaller airline tries to trying to gain a foothold in a certain market.
“We would be particularly concerned if there was evidence that certain programs were being operated in a way that had the potential to prevent the entry or growth of smaller airline competitors, which would prevent the entry or growth of smaller airline competitors,” Buttigieg said. This could ultimately limit options for consumers.”
Nelson said airlines reward flight attendants about $50 to $100 when someone is approved for a credit card using an application they submit during the flight.
“There are some flight attendants who are subsidizing their income by $10,000 to $15,000 per year through these programs,” Nelson said.
Buttigieg said the departments’ overall process for reviewing loyalty programs is still in the preliminary stages as they are focused on gathering information and learning the finer points.
It’s unclear whether anything will follow after the hearing. However, one thing seems obvious: Programs provide overall value to users.
Even as some consumers express frustration about the complexity and lack of transparency of frequent flyer programs, the programs still have value, according to a report released Thursday by the CFPB. .
The report said consumers earned $40 billion in rewards from credit cards in 2022, up 50% from 2019. Although costs associated with the programs increased mainly due to increased spending , but the value of rewards earned also increased from 1.4 cents per dollar spent in 2019 to 1.6 cents per dollar spent in 2022.
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