The Extra Mile

Airlines Hope that Merchandise Is Just the Ticket for Frequent Flyers

Will non-travel rewards take pressure off scarce award seats?

March 27, 2006 - Airline frequent flyer programs have traditionally been based on a simple premise: be a loyal customer and we'll reward you with a free trip.

While the airlines still covet travelers' loyalty, the reward component of the proposition has become problematic. With profits still elusive and flights running full, airlines have been both less willing and less able to make adequate numbers of seats available as mileage program awards. So they're supplementing the programs' award catalogs with such non-flight items as Apple iPods and Movado Museum watches.

In the most recent example, United announced earlier this month that, through Dec. 31, elite-level Mileage Plus members can redeem their miles for a range of merchandise which includes consumer electronics, jewelry, sports gear and cookware, through Mileage Plus Merchandise Rewards.

Also beginning in March, Delta began allowing members of its top elite tier to redeem their miles for items in the Medallion Marketplace, a collection of 300 new travel and non-travel related awards, including electronics, home and garden items, outdoor equipment, and hotel stays.

The developments at United and Delta follow a similar move by Frontier Airlines. In June 2005, the Denver-based discount airline introduced the More Store, an online catalog of "lifestyle oriented merchandise" from jewelry to restaurant meals to golf outings which elite members of Frontier's EarlyReturns program can obtain with their miles.

Although the non-flight awards mentioned thus far are offered only to the airlines' best customers -- elite members of their mileage programs -- it's likely they will be extended to the programs' general members if they prove popular. Indeed, merchandise awards are already available to non-elite members of the programs of American and Continental.

American's redeemAAmiles program allows AAdvantage members to cash in their miles for hotel stays and car rentals, as well as for points in the Diners Club program. Those Diners Club points in turn can be exchanged for a wide variety of merchandise in the Diners catalog. American also allows its members to redeem as many as 50,000 miles per year to save up to $250 annually in a 529 college savings plan.

Members of Continental's OnePass program can combine miles and cash to obtain jewelry, electronic merchandise and cookware through the program's Miles for Merchandise feature. Or they can bid their miles for merchandise or event tickets on the OnePass Online Auction.

Is the iPod the solution to the award seat crunch?

With various permutations now featured in several programs, and more in the pipeline, non-flight awards are becoming a standard fixture of the airline programs landscape.

Certainly some frequent flyer program participants will welcome the chance to use their miles for a toaster or a restaurant voucher. But will the new awards siphon away enough of the demand for free seats to quell the widespread frustration with the programs' award offerings? That's unlikely, for at least two reasons.

First, frequent flyer program participants have become accustomed to receiving a particular value when they redeem their miles. A free coach ticket within the continental U.S. costs 25,000 in most programs. And a similar ticket can be purchased for, say, $350. So frequent flyers are getting, on average, 1.4 cents in value for every mile redeemed. Whether they do the math or not, that establishes a base value expectation in the minds of program members.

And most merchandise awards fall far short of that value.

A report issued in January 2006 by industry analyst Jay Sorensen estimated the value of miles redeemed for non-flight awards in the programs of American, Delta and United at between .5 and .8 cents each. That's just half the 1.4 cent average value of miles cashed in for free tickets.

There is one non-travel award option which proves to be the exception to the rule, offering better value than either free tickets or merchandise. Redeeming miles for magazines (now a feature of the programs of most full-service carriers) provides members with an average per-mile value of around two cents.

But that's an isolated case, made possible by the fact that magazine publishers can afford to give away subscriptions at little or no cost to the airlines, because the increased circulation generates more ad revenue even if subscription revenues remain flat.

Second, in addition to the dollar-value disparity relative to free tickets, alternative awards suffer from a more fundamental value shortfall. Even if the financial equation favored merchandise awards, the profound lure of travel would still give free trips an edge over anything so prosaic as an electronic device or a discount coupon.

Marketing executives explain travel's unmatched incentive power by characterizing it as aspirational. Others counter that it's more primal than discretionary, theorizing that, for some evolutionary reason, the travel urge is etched indelibly onto the reptilian part of the Homo sapiens brain. Perhaps, they suggest, to "fight or flight" we should add "or take a trip."

Whatever the source of travel's hold on the human psyche, it's the primary reason more than 100 million Americans participate in airline mileage programs; and it's why non-travel wards will never be more than distant-second choices for the majority of mileage program participants.