The price of loyalty

The lure of frequent flyer rewards can cloud judgment, says David Churchill

Whether or not the charismatic George Clooney wins an Oscar this month for his role as the business traveller addicted to collecting frequent-flyer miles, there is little doubt that Up in the Air has generated a much-needed buzz for airline and hotel loyalty programmes.

Clooney's hunt for the supposed Holy Grail of frequent travellers - earning more than 10 million miles - firmly reinforces the image the airlines have carefully fostered for the past three decades of the elite status and benefits such loyalty schemes can bring. Whatever your view about his role in the film as a corporate hatchet-man, flying across America to fire employees the local management are too wimpish to 'downsize', there can be few regular business travellers who would fail to envy his style in racking up the mileage points.

Which is just what American Airlines (AA) and Hilton had in mind when they provided Paramount with all the facilities for filming they needed - from aircraft and airport terminals to hotel lobbies and rooms. For free. This was the ultimate product placement, brokered by US PR firm Rogers & Cowan, in a film that is firmly upbeat about air and hotel travel and the perceived benefits of loyalty schemes. "A film like this has a truly global reach and allows global marketing," says Andrew Flack, Hilton's VP for global brand marketing.

The reality of this Hollywood fantasy, however, is rather different. Frequent-traveller reward programmes are unregulated, lack real transparency and members can see their true value eroded at an inflation rate that would make a Central American banana republic blush. There is more hype around reward schemes than virtually any other part of the travel and marketing mix.

An increasingly popular wheeze, for example, has been for airlines to cancel mileage reward points in accounts that have been inactive for as little as 12 months. This is a deliberate move to reduce the airlines' liability for the 20 per cent of the estimated 14 trillion or so frequent-flyer miles that are never used. Members of multiple schemes can easily get caught out. This highlights the bald truth; while airlines and hotels talk about loyalty, the reality is that it is loyalty to themselves. Frequent travellers do not 'own' their points, nor are they a convertible currency. The US courts have made it clear that reward scheme members have no legal rights to resell or barter points accumulated, or use them in any manner not specified by the hotel or airline.

When Continental Airlines switched late last year from SkyTeam to the Star Alliance, for example, members of its OnePass frequent flyer programme lost access to SkyTeam partners such as Delta and Air France and had to accept the different 'prices' and rules of their new partners, including Lufthansa and United Airlines. Bmi's Diamond Club members also were hit by new points and restrictions when Lufthansa took control of the airline last year.

Hotels have not been immune from such arbitrary behaviour. Earlier this year Hilton imposed a hike in redemption rates of up to 25 per cent for reward nights, a move that infuriated many members of its HHonors scheme who used the power of the web to make their feelings abundantly clear. Hilton defended its move on the grounds that the changes brought it in line with its competitors, failing to impress those affected.

What it does emphasise, however, is just how complex these schemes have become. Even Randy Petersen, the veteran commentator on frequent flyer schemes, admits: "It's really confusing out there, especially as the average person gets carried away with all the (special) bonuses, which means they're not looking at the details."

The rules for earning and using frequent-traveller schemes are significantly more complex than for choosing a mobile phone tariff, for example, but the intent is the same. If the regulations were simple and transparent then it would be much easier for scheme members to assess the value they are paying for by choosing a particular airline or hotel rewards scheme. But, as with choosing a mobile-phone tariff, the more complicated the procedure, the harder it is to make true comparisons.

The Independent newspaper tried this recently, calculating that it would take 26 return flights between Manchester and Hong Kong on British Airways (BA) and Air France to earn 'free' flights, but only half as many on Lufthansa, including taxes and charges. But few travellers would want to bother with the maths involved with making similar comparison calculations on every trip, especially as it is often impossible to compare.

It all seemed so much simpler nearly 30 years ago when, in 1981, AA laid claim to being the innovator of the world's first frequent-flyer programme. Whether it actually was first is open to some controversy but, as with its involvement in the George Clooney movie, the US carrier has always shown savvy marketing sense.

Although promotional 'loyalty' schemes have been used in most consumer-focused industries for many years before frequent-flyer miles were introduced, the airlines' decision to embrace them during the 1980s reflected the extra capacity of a new generation of jet aircraft being developed. This left airlines with unsold seats on most flights, which they could 'sell' on to regular clients.

But it was not long before airline executives decided on a different approach. Rather than just rewarding the loyalty of frequent flyers, they saw the benefits of targeting frequent buyers as well. Combining the glamour of flying with the appeal of a bargain, airlines sold 'miles' on to third parties - including hotels, credit-card companies, car-rental operators and retailers - and virtually any business that was prepared to pay for them as a promotional tool.

As a result, it is now estimated that more than half of all mileage points are earned on the ground rather than in the air. Tesco, for example, has found the favourite reward for customers collecting its Clubcard points are BA flights available via Air Miles. Chase, the US bank now part of JP Morgan Chase, recently offered one of the most lucrative deals to lure new customers to its BA co-branded credit card: 100,000 BA Miles - sufficient for two transatlantic return trips.

BA quickly recognised, back in the 1980s when Air Miles was set up to handle its frequent-flyer programme, that giving people the chance to get free flights when shopping or using their credit card was a potential business in its own right.

Hence the airline developed Air Miles as a stand-alone retail rewards scheme linked to its flights, (renaming the subsidiary last year as The Mileage Company although the Air Miles trading name remains) while also developing an Executive Club scheme focused on business travellers earning BA Miles to redeem against flights.

The Chase credit-card deal, however, shows that BA is still not averse to making money out of its executive mileage programme. (New Chase cardholders are automatically enrolled in the Executive Club.) While airlines were quick to develop frequent-flyer schemes, hotels were slower to adopt their own versions partly because the technology was not in place. Yet InterContinental Hotels Group (IHG), Hilton, Marriott and Starwood now dominate the frequent-guest schemes with programmes every bit as complex as the airlines.

But they have responded to the key gripe of most business travellers who use reward schemes: failure to get rooms when they want. The major chains generally no longer operate restrictive periods when rooms cannot be claimed on reward points, although this still does not guarantee success as hoteliers generally only make a limited amount of rooms available.

Yet the recession has helped quell some of the complaints about getting free flights or rooms, simply because the downturn reduced the number of business travellers on the road. Not surprisingly, however, reward operators have seen an increase in the use of points as individuals (and companies) seek to gain extra value.

In a survey last year, The Mileage Company found that nearly a third of travellers who collected reward points were: "More likely to redeem them for a flight than in 2008, due to the economic downturn".

IHG, which claims to operate the oldest and biggest hotel rewards scheme with its Priority Club, said that members accounted for almost 40 per cent of all room nights in its hotels last year, up from a quarter two years ago. "We saw a record uptake in enrolments and redemptions last year, with three million new members in the final quarter, taking us from 44 to 47 million members," says Peter Tippen, IHG's director of relationship marketing.

The popularity of hotel reward schemes, however, is not necessarily good news for corporate travel buyers. While the airlines have recognised for some time the rather crucial fact that companies actually pay for business flights and so should get some benefits (such as the On Business rewards scheme for corporates offered by BA, or Virgin Atlantic's Flying Co), the hotels have in most cases have ignored such arrangements (although Hyatt does have a corporate rewards scheme available if requested).

Hotels do not appear to have come under the same sort of pressure from travel buyers as the airlines to offer corporate rewards, partly due to problems with capturing data but also because of the lower absolute value of hotel costs compared with flights. Travel management companies also report little change in this approach in spite of the recession. Ray Ollivere, corporate land product leader at FCm Travel Solutions, says: "Travel policies I've seen and worked on recently stipulate that the points earned from hotels can be used for personal stays... And we haven't seen any changes to this."

The real issue, says HRG's Director of Global Hotel Relations Margaret Bowler is compliance. Employees who go outside the travel policy when booking a particular hotel in order to earn extra points are clearly acting against the best interests of the company and negotiated hotel deals. "This is something companies are looking at because compliance is such a major factor in the current economic climate," she says.

But it remains the case that most corporates seem to prefer not to rock the boat and continue to allow their employees to benefit from reward schemes, adopting the traditional argument that this is an accepted 'perk' to compensate for having to be away from home on business.

But there are exceptions; anecdotal evidence from TMCs and other sources suggests that companies that have struggled during the recession have insisted that reward points are used only for company travel.

Probably the only way there could be real change to this generally laissez-faire approach is if the tax authorities decided to tackle the issue of individuals receiving untaxed benefits paid for by their employer. But there is no sign of any willingness to do so in the UK or US in spite of the potential of raising new tax revenues.

Yet while there seems to be no stopping the inexorable growth of frequent-traveller reward schemes, they are not as all-powerful as they seem. Britain's biggest hotel chain Premier Inn, for example, has so far avoided a 'loyalty' scheme, although it says that this is under review. Rival Travelodge does offer Business Account cardholders the rather down-market opportunity to earn points to spend in Argos stores, but not for free hotel nights.

Neither Ryanair nor easyJet, two of Europe's biggest and most successful airlines, offer a reward scheme as they believe it would dilute their low-fare business models. Ryanair did operate a loyalty scheme once, but a fledgling director called Michael O'Leary ditched it in 1989 for losing money - the start of a new trend for the airline. But few other airlines seem likely to follow in O'Leary's footsteps.