DOT Investigating Airline Frequent Flyer Programs

The United States Department of Transportation (DOT) has announced that it’s going to be investigating the frequent flyer programs of the four biggest airlines in the United States. I’m not sure what exactly to make of this…

Unfair and deceptive airline rewards practices under investigation

Transportation Secretary Pete Buttigieg has just sent a letter to the CEOs of the four biggest US airlines — American, Delta, Southwest, and United — informing them that the DOT is investigating their frequent flyer programs. The idea is that points and miles hold real economic value, and the government is taking a look at these programs to make sure they’re transparent and fair to consumers.

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Here’s the main part of the letter that was sent to airline CEOs:

Airline rewards programs have become a meaningful part of the U.S. economy and a major part of the airline business model, by some measures developing a financial significance that rivals or even outweighs the operation of flights. These programs can shape how customers interact with airlines, and many Americans reportedly have point balances substantial enough that they amount to part of their savings.

Given the economic importance of rewards in the aviation sector, the Department of Transportation (DOT or Department) has initiated a review to examine the fairness, transparency, predictability, and competitiveness of airlines’ rewards programs. DOT has authority under 49 U.S.C. § 41712 to investigate and take action against airlines and ticket agents for unfair or deceptive practices and unfair methods of competition in air transportation or the sale of air transportation.

The rewards programs of the largest four U.S. carriers – American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines – play an outsized role in shaping the policies, practices, and participation in the airline rewards market due to their size, scale, scope, and membership. Accordingly, as part of our review, the Department is seeking more specific data to better understand the largest rewards programs and identify potential competition or consumer protection issues or risks, and I have enclosed an order to file a report responsive to our questions. Our goal with this inquiry is to ensure that customer rewards are protected from any practices that would diminish their value, benefit, or availability.

It’s fascinating to see the data that the DOT is requesting. Among other things, the DOT wants airlines to explain how they price award flights, what changes they’ve made to their pricing since 2018, the reason for program changes, and how many members were impacted by these changes.

Of course nowadays many loyalty programs have dynamic award pricing, and they’ll even have to explain that in detail. Airlines can’t just state that they price flights dynamically based on supply and demand, but they’ll have to explain how variables to dynamic award pricing have changed over the years, and the financial impact this has had on consumers.

Airlines will even have to explain the details of their co-brand credit card agreements, including for how much they sell their points to banks. They’ll even have to reveal how they respond competitively to changes at other programs.

As you’d expect, most of the information shared with the DOT won’t be made public, for obvious competitive reasons.

My take on the DOT’s frequent flyer program investigation

I’m fascinated by what the DOT is doing here, and I’m of two minds when it comes to this kind of investigation, and what could potentially come of this.

Loyalty programs are massive businesses for US airlines, and are arguably the most profitable part of the “big four” US airlines, give how low margin flying is. Despite their economic importance, they’ve largely been unregulated. The lack of regulation is a double edged sword.

The good thing is that the lack of regulation has meant that points currencies aren’t taxed, since they’re viewed as a rebate on airfare (or a rebate on credit card spending, if issued through co-brand credit cards). The rewards are also viewed as property of the airline, and the airline can change the value of those currencies at will, since consumers don’t actually own their rewards.

The bad thing is that the lack of regulation is also what has allowed airlines to so drastically change the value of rewards over the years. There’s no denying that many people do collect miles with the goal of using them many years down the road as part of their “savings,” only to find out how much they may have been devalued. That’s why I always recommend an “earn and burn” strategy, since holding onto miles is like keeping money in a bank account without earning interest (and is even worse).

My initial take is that I think it’s totally fair for the DOT to try to collect some more data on these programs, since this is a multi-billion dollar industry that gets little scrutiny. That being said, I suspect that it probably wouldn’t be in the best interest of consumers if we saw material changes to how these programs are regulated. We certainly don’t want to see points taxed.

I think the only practical thing that could come from this, which would be in the best interest of consumers, is to perhaps require airlines to more clearly disclose that they can change the value of rewards at any point. This is stated in the program terms and conditions, but of course most people don’t read those. It should be stated more clearly in marketing materials as well.

With programs increasingly moving to dynamic award pricing, there’s also not really a practical way to enforce advance notice of changes to pricing. Just as airlines can price flights dynamically in cash, they can also do so with points.

Bottom line

The DOT is investigating airline frequent flyer programs, and is taking a look at American AAdvantage, Delta SkyMiles, Southwest Rapid Rewards, and United MileagePlus. The focus is on unfair and deceptive practices.

There’s no denying that many consumers feel that airlines don’t act in good faith with these programs. I’m all for the DOT looking into it, though, since this is such a massive industry that has such little regulation. That being said, I’m not sure any changes would really be to the benefit of consumers.

What do you make of the DOT investigating frequent flyer programs?