Frequent Flyer Miles: Perils of Unregulated Currencies

“Banana Republics.” That’s what some users of Frequent Flyer Miles (FFM) have been calling a number of the airlines which issue those currencies.

And, yes, they are currencies. Not just one aggregate currency system. Each airline establishes the terms and conditions for its own FFM program. Each is operated as independently as is the currency of the U.S. versus the currency of China or that of Germany.

Like each of those national currencies, the airline currencies have actual transactional value. For more than three decades they have been exchanged for airline trips, then for lodging. More recently, some of issuers allow their currencies to be used to purchase merchandise such as consumer electronics. In addition, more of the currencies have the same liquidity of cash. That’s happening via third-party payment systems such as Paypal and gift cards through Amazon. The cash can be spent at a retailer, transferred to someone else or deposited in a bank account. As payment technologies continue to evolve, there will be more options.

In some circles, the mood is turning ugly regarding FFMs because of the myriad changes a number of major airlines have made in the terms and conditions. They include United and Delta. Those airlines didn’t need government approval for this. Their currencies aren’t regulated. There is no equivalent of the Federal Reserve.

During the end of the 1980s and the beginnings of the 1990s, there had been a number of lawsuits which generated some constraints on what airlines could or could not do with their programs. Essentially, though, each remains relatively autonomous in how each airlines configures the point system and the ways in which the currency is allowed to be “spent.”

Among the recent changes, beginning on February 1, 2014, United boosted the number of FFMs needed for a first-class ticket to the Middle East from the U.S. That applied to both its own planes and to those of its partners. For its own, the increase was around 30,000 miles. For partners’ it has been around 85,000 miles. In addition, it specified new spending levels in order to qualify to even participate in the program.

Next year, Delta is introducing another form of game-changer. FFMs will be calculated on the amount of money spent, not miles traveled. This shift could leave the Everyman flyer grounded. Businesspeople and jet-setting hipsters are the ones who have the resources to pay top dollar for the flight they want when they want it. Therefore, they will receive the FFMs, not Everyman who plays every angle to save a few bucks on flying.

Another rant among those using these currencies is that a standard perk is vanishing. That’s the upgrade from coach to business class Delta had given to frequent flyers when the better seats were empty. Last March that was no longer available on a number of its domestic flights. As a competitive advantage, some airlines are retaining this feature – for now. But frequent flyers are wary that overall the currencies are being devalued, on several fronts.

Obviously, with all the modifications, the value of the mile traveled or the amount of money spent is unstable. That makes this asset as volatile as those in banana republics. At one time couples stored their miles, planning for plenty of no-cost travel during their retirement. Now no one can treat any part of these currencies as “bankable.” Perhaps the new attitude will have to be: Use it or lose it.

The airlines claim the modifications are needed because of their own growing operating expenses and investments in improvements such as seats which turn into beds.

Clearly, users of FFM are vulnerable. But, from a business point of view, so are the issuers of the currencies. The institution was begun as a loyalty initiative back in 1981 by American. Ironically, as some airlines play fast and loose with the rules of the game, their particular FFM programs could provide strong disincentives for both individuals and organizations to switch to other carriers. That movement could be accelerated if their competitors create totally different kinds of rewards programs.

FMM could go the way of giving out drinking glasses at gas stations for a fill-up. In addition, lawsuits could be filed and there could be an outcry for increased regulation.