Ethics of Frequent Flier Programs

Am I the only one who gets ethical qualms about frequent flier programs?  If your job was to buy supplies for the company you work for, and a printer company offered to give you and your family a Hawaiian vacation if only you would have your company buy their printers instead of the competition's, could we all agree that would be a kickback or bribe?  And that it would be, if not illegal, certainly unethical?

So why don't the same rules apply to airline travel?  When buying an airline flight for business, you are acting as a purchasing agent for your company.  And the airlines, in the form of frequent flier miles, are offering you [not the company] something of value to steer your corporate purchasing decisions to their product.  Frequent flier miles are a blatant kickback.  Informal poll:  How many of you have purchased flights that are a worse deal for your company but a better deal for your frequent flier account?

A further rant: OK, if you are not turned off by that rant, here is a related one about Visa cards that give out frequent flier miles.  As mentioned earlier, these are hugely profitable for credit card companies, so much so that they create much of the value in modern airlines.  Credit card companies, perhaps the only stable monopoly I have seen in my lifetime, have perfected the art of forcing retailers to subsidize their credit card users. 

Now, a fairly rational person would expect that a cash transaction is cheaper than doing one on credit.  However, due to the very strong position of MC and Visa processors, credit card customers actually get a lower price than cash customers.  Here is why:  Credit card companies have taken to giving their users a rebate on their purchases, either in cash or frequent flier miles or some other compensation.  These rebates are funded by charging higher interchange fees to merchants (basically a percentage of credit card transactions cleared).  The magic occurs because merchants, in their processing agreements, are generally banned from giving discounts to customers for using cash.  As a result, the higher credit card interchange fees are spread among all customers, cash or credit card, equally.   The result is that credit card customers pay lower net prices than cash customers, when the rebates are factored in.

Though our trade association tries to seek government action of some sort, I am neither confident that this will help or philosophically inclined to ask for such help.  Right now, I am working within the association to try to build support for some sort of one day boycott against accepting credit cards as a starting point to trying to build up some group negotiating power vs. the credit card processors.

  • Doug

    My employer solved that problem very easily: he doesn't let us make our own arrangements. His assistant does that for us.

    I have had employers who let us buy our own tickets and they usually understood (in at least one case, explicitly) that frequent flyer deals could figure into our choices. It was considered a perk. That's why the IRS has been interested in them.

    Then there was another boss (a manager, not an owner) who bought everybody's tickets with his personal Discover Card and kept the rebates.

  • http://geistbear.blogware.com Thomas

    I don't think it's an issue and here's why, anyone who travels a lot for work generally has two or three memberships in such programs and with that many miles transfer among enough of the airlines partnerships it really doesn't matter which you fly you still build miles.

    Second when I have traveled for my current employer they had an inhouse website that was like travelocity basicly but for inhouse and it picked the airlines for me.

  • Joe

    Also, business travel is a pain. This is one way to minimize the pain. Think of it as a form of income.

  • Kevin

    Now, a fairly rational person would expect that a cash transaction is cheaper than doing one on credit.

    That depends on how many hands handle the cash between the customers' wallets and the business owner's bank account, and how sticky they are.

  • Mike

    When traveling on my university's nickel, I usually select the lowest cost carrier whose flights meet my schedule whether I have any miles with them or not. I might switch to one of my preferred carriers if the cost differential is less than, say, $10 on a $400 ticket. So I guess I'm a venial sinner, eh?

  • http://politics.lel-hosting.com/ Matt

    Honestly, in my case the cheapest flight and the frequent flier benefit generally work out to the same purchase: Southwest. I'm only a member of two FF programs, and I only added the United one because for almost a year I was flying every other week to Denver, and Southwest didn't go to Denver until 3 days after my last trip there. But they're both the cheapest and have the least-complex (hence easiest to redeem) frequent flier program in the air.

    But then, my day job doesn't pay for travel, so all my business travel is for the company I own...my money either way, and the only difference between business travel and personal travel is that the former becomes a line-item on Schedule C. I don't feel it's remotely unethical that deductable travel gained me enough United miles to upgrade to Business class on the US-London leg of next year's European trip with my fiancee, and enough Southwest credits to regularly visit our families for free.

    Given the way employers tend to screw people on travel expenses, I'm disinclined to call employees keeping the miles "unethical", unless they have the authority to impose economically irrational decisions on a company's travel policy for their own personal benefit (ie, an agency cost problem).

  • JohnDewey

    I think Joe above is correct. Trips gained from frequent flier programs are untaxed income.

    With respect to travel costs, remember that large corporations negotiate discounts with airlines. Airline contracts generally require the corporation to met minimum revenue or trip levels. Travel agencies administer the contracts for those corporations, and help ensure employees use the airlines specified in the contract. Those agencies also provide reports to airlines that are used to monitor contract compliance.

  • JohnDewey

    Although Southwest may be the cheapest for Matt, that's generally not true for large corporations. Certainly Southwest doesn't have the burden of union rules and retiree benefits negotiated decades ago. So they can undercut the legacy airlines on some U.S. routes. But a corporation must consider its total cost for all flights in determining which airline to use.

    An airline will combine a corporation's international, cross-country, and local requirements, and then determine an overall discount for the entire package. If the corporation allowed its employees to cherry-pick carriers, they run the risk of losing big discounts on costly international flights.

    Disclosure: I work in the Passenger Sales division of a large legacy airline. So I may be somewhat biased, but I definitely have non-public knowledge about this issue.

  • http://gregprinceblog.wordpress.com Greg

    My employers have always had us choose our own flights, but through a corporate sponsored travel website that kept things synchronized with travel policies, our corporate credit cards, etc. We had the choice of multiple airlines, but lower fares would be flagged as preferential.

    I do look for certain airlines when I am a frequent flier member, but it's more important to me that the flights meet my schedule and whenever possible are non stop.

  • eddie

    While I'm sympathetic to your plight as a retailer squeezed at the hands of the very powerful credit card industry, there's a reason that they have so much power relative to you: consumers in general like paying with plastic and don't like carrying around cash. It's a convenience, and consumers value convenience very highly (as the prices in a convenience store clearly show). The credit card companies have rightfully earned their powerful position by providing consumers with something they want.

    You said the CC companies are "forcing retailers to subsidize their credit card users", but of course retailers don't subsidize anything; they pass their costs on to their customers, meaning that the cash-payers are subsidizing the credit card users (specifically, they're subsidizing the costs of all the infrastructure necessary to provide the convenience, including the bonus incentives like cash-back and airline miles). The CC companies force the retailers to force the cash customers to subdize the plastic-using customers, but in doing so they are simply acting as a proxy for the consumers themselves; their power to force the retailers comes only as a result of consumers' strong desires for convenience.

    In essence, the plastic users are telling the paper users to pay for the costs of plastic, like it or not. Which seems unfair... but it's very much the same as people who like to shop in brightly-lit stores telling those who would be willing to shop in the dark to pay for the cost of lighting. Those who really don't like it can set up dark stores, save on overhead, lower prices, and cater to the dark-tolerant market segment.

  • eddie

    BTW, you should be commended for your reluctance to ask the government to intervene and for your effort to use voluntary means like boycotts to make your point. Would that more business owners were as thoughtful and ethical as you. Best of luck.

  • Binh

    Dear Sir,

    I am a frequent flyer and I have never ever booked flights or hotels for the purpose of my personal gain nor outside of the firm's policy. The web agency we used to book our flights is ridiculously expensive comparing to booking outside, but we have to use it because the firm will get a "kickback" from them if certain numbers of flights are booked annually. I hopped from one hotel to the next over night to earn points but only if the cost is the same and it is still convenient to get to work. Frequent miles and hotel points or any other benefits from traveling for business are considered perks and they are justly compensated . They are non taxable and I am sure Uncle Sam knows better than to go after those perks. Do you seriously think that 535 members of Congress will allow the IRS to do that?If they allowed so, then who's going to get their travel's perks because after all those perks are not "cash" but only "cash equivalent"? Sitting on the runway for hours, spend an extra night in a room that the airline booked for you due to misconnecting flight, working outside of your comfort zone, eating airport food, etc are reasons that I think the travel perks are just. Ethics is a different issue and should have no basis for this discussion. Airlines compete with each other so they give out frequent miles, plastic providers compete as well so they invented "cash back"

    We, Americans love convienence!!!Credit card is a convienence and one of the reason for this economy to grow at the current pace. It's great for the "smart consumers" and great for the "plastic providers" because not all consumers are created equal. In the end, it's a win win situation, and even for the small business owners. How much sales do you think you will lose if it's not for CC? Do you think the CC fee is greater than the loss sale if all transactions are done by cash? By the way, shouldn't your price already include the cost of the CC fee so in effect that cost is passed to the consumers? It's too bad if the cash consumers have to bear the burden, after all we inhale the same air as the smokers and that's why they are paying a higher price for their cigarrettes just as we are paying higher for our health cost.

    It's not everyday that people walk into Best Buy and pay for plasma tv with cash nor do they furnish their homes with Ethan Allen using cash. I don't carry any credit card balances except the company's AE because I am not always up to date with the expense report but I hate NY city because I have to spend too much "cash" there.

  • Mark

    "The magic occurs because merchants, in their processing agreements, are generally banned from giving discounts to customers for using cash. ...The result is that credit card customers pay lower net prices than cash customers, when the rebates are factored in. ...Though our trade association tries to seek government action of some sort, I am neither confident that this will help."

    These agreements are clearly anti-competitive, but might this situation not have come into being as the result of an unholy alliance between government, the judicial system and the card companies? Why?
    All want rid of cash: the anonymity that cash provides acts as...
    1. a brake on excessive taxation (black market acts as 'escape valve')
    2. an inhibitor of governmental, legal and corporate intrusion in private life (prevents monitoring & control as can choose to have no log of purchases or assets)
    3. an inhibitor/delayer of tyranny (no need for 'approval' to make purchases, difficult for govt to withdraw from its opponents the ability to make purchases)
    4. an enabler of last-resort resistance to tyranny (facilitates buying one's way to safety, buying tools of resistance etc.)

    If they can eliminate anonymous, untraceable payments, then the elimination of liberty will surely soon follow.

  • http://othwarrior.blogspot.com BlueWarrior

    A frequent flyers' program is aimed at, surprise, "frequent flyers". Travel 40+ weeks a year and then write an article about the ethics of frequent flyer programs. Until you do, you have no idea what a business traveler goes through. The sacrifices that are made, for what, maybe one free trip every two years.
    The intent of most frequent flyer programs is to help the business traveler who regularly uses a particular airline, hotel or car rental company, etc. Do you know what it like to have to waste what little time you have with your family in an airport because you can not get on a flight? Why, because most casual travelers book a cheap flight months in advance whereas a business traveler cannot. A little factoid that many of you don’t realize is that many business travelers end up flying ‘standby” due to changes in their schedule. Sit in the worst seat on the plane, while trying to get your luggage on the plane (you don’t want to take a chance on baggage claim or have to wait on baggage claim) over 80 times a year. Do you know what it like traveling on business without “status” on a carrier 80+ times a year? Going on vacation on a trip to Florida is not the same thing.
    Let me ask all of you another question, have you ever had to bet your career on getting a good night’s sleep in a hotel room? I have done it many a times and I will tell that companies will not pay for upgraded rooms for the average business traveler, my employer will not. If I use a hotel chain regularly, my points help me get a quiet room so that I can make sure I can get a night’s sleep (which most people take for granted and is never a “sure thing” on the road).
    I spend around a thousand hours a year traveling or preparing to travel; my company like most companies, does not compensate me for travel, . Think about how many hours that is, the average business traveler gives up hundreds of hours of his or her life traveling. In some industries, traveling is not a choice. At this point, frequent flyer programs help the average business traveler (companies will usually only buy first class tickets for their corporate executives, the rest of us have to fend for ourselves) and make it bearable for us to travel as much as we do. The system right now is that we can make our lives tolerable by using some of the benefits accumulated through frequent flyer programs. Frequent Flyer programs are intended to help frequent flyers, if you are not a frequent flyer, the benefits are not as useful, but many casual travelers are trying to take advantage of these programs and are frustrated when they do not receive major benefits. Please allow us business travelers to keep the few benefits we have from toiling our lives away, on the road. A vacation trip every two years with my wife does not make up for all of the hours we are apart.