It was such a simple idea that no one–not even the executives at American Airlines who conceived the special promotion–had any idea it would blast off to such heights.
American`s introduction in May, 1981, of AAdvantage, more commonly known today as the frequent-flyer program, has not only sent vibrations through the entire travel industry, but also has pitted corporations against employees in a new ethics problem.
Frequent-flyer programs–which have been adopted by almost every major airline and some regional carriers to build brand loyalty–reward regular or frequent travelers with travel points that are tallied up and cashed in later for free tickets and other perks. The programs have become the airlines`
hottest marketing tool, but they have caused massive headaches for corporate travel planners, bottom-line budget planners, the Internal Revenue Service and anyone else who can`t tolerate the word ”freebie.”
Most frequent-flyer participants are corporate employees. The controversy is whether the corporations that pay for the tickets or the employees who do the actual traveling should reap the benefits. Lurking in the background is the IRS, which is investigating the possibility of assessing a value and taxing such ”free rides.”
The issue gets more tangled because frequent-flyer programs now offer more than just free airfare.
Points also are awarded for tie-in programs for frequent flyers who patronize certain car rental agencies, hotels, cruise lines and other airlines hooked into a particular` program. When frequent flyers cash in their awards, such additional travel services are complimentary.
And then there`s the even more complicated issue of selling the air tickets. Some frequent flyers have earned so many awards they don`t have the time or inclination to take the trips, so they sell the airline coupons to such companies as the Flyer`s Edge.
The Flyer`s Edge, 626 Green Bay Rd. in Kenilworth (256-8200), is one of a handful of companies nationwide that act exclusively as frequent-flyer ticket clearinghouses. The Flyer`s Edge handles virtually all the major airlines`
tickets, except Pan Am`s WorldPass coupons, which are not transferrable.
The three-year-old company is the brainchild of Bill Watt, the sole owner and a former Leo Burnett advertising executive.
Watt said his company provides the biggest savings–”up to 50 percent for travelers who want to go first class on trips more than 1,000 miles.
”We can offer some savings on business class to Europe and the Orient
–but not really on unrestricted tourist class. And we can`t compete with super-saver fares to Europe.”
Here`s how the system works: An executive has a coupon for a ticket to Hawaii worth $1,400. He`ll sell it to the Flyer`s Edge for $500, which will turn around and sell it to another traveler for $700 or $800.
Everyone, it seems, gets a good deal–except the executive`s corporation and the IRS. It is up to the individual traveler to notify his corporation and/or the tax people of such transactions.
It`s apparent that if the IRS stepped in, the entire frequent-flyer program would, as American Airlines spokesman Joe Stroop said, ”become a whole new ball game.”
But Stroop said it`s unlikely the IRS will tax frequent-flyer benefits.
”It would be an incredible administrative burden that would cost more to enforce than they could collect.”
Stroop and other airlines` spokesmen also argue that frequent-flyer awards are a discount no different from, say, a special deal a consumer works out with a car salesman. ”And how do you tax the difference of a discount?” Stroop asked.
Airlines are evasive about the number of frequent flyers participating in their programs, with spokesmen giving large, general numbers, such as Pan Am`s participation estimate of ”more than 750,000” or American Airlines` ”more than 2 million.”
A large number of travelers belong to more than one airline`s program, but Stroop said, ”There is a tendency to concentrate on one program to collect the most points for the higher awards. Travelers will shop around and find the airline that goes where they want to go most often.”
There is little difference in benefits among the major airlines`
frequent-flyer programs.
Many travelers will choose their favored airlines by geographic consideration. For instance, United, which is based in Chicago, is popular with business travelers here. In Dallas, American Airlines, which has a hub there, is a frequent choice.
Travelers are allowed to roll over points for indefinite periods of time
–up to several years.
Pan Am spokesman Jeff Kriendler said his airline`s attempt to enforce a June, 1984, deadline on its WorldPass awards cost the airline a second-quarter loss of $50 million, as hundreds of frequent flyers filled up planes headed primarily for the Orient and the South Pacific.
Kriendler said the airline doesn`t plan to mandate any more deadlines, but the large loss only served to reinforce Pan Am`s conviction that the
”Worldpass system is a hell of a program, and remains the airline`s most important marketing program to instill brand loyalty.”
At one time frequent-flyer programs were administered through mail-in coupons, but now all but a few of the airlines have computerized the process, automatically registering a traveler`s points at the check-in counter.
A full accounting of the point status is tallied and mailed on a monthly or quarterly basis to the individual traveler, not his or her corporation.
That`s the main reason the IRS has not been able to impose taxes on frequent-flyer freebies and the same reason that has corporate travel planners pulling out hair. Until very recently it has been nearly impossible for anyone besides the airline to keep track of just how many points and awards each frequent flyer has earned.
So far, the airlines have been able to guard jealousy this cozy relationship between themselves and the individual traveler, who pays nothing or a nominal yearly fee to join.
”The frequent-flyer programs were deliberately set up to be confusing to corporations,” said Denis Day, president of the Day Partnership, an Oak Brook corporate travel consultant.
But the advent of new computer software tracking programs that allow companies to more closely monitor which of their employees are traveling on which airlines could change all that.
One such system has been developed by Corporate Services International of Cambridge, Mass., which offers the service to travel agents, who in turn can offer the program to corporations. Company president Steve Trooboff said the system, which is only two years old, currently only has about 100 users nationwide.
”A lot of the corporations don`t know the system exists,” said Trooboff. ”On the average the system can give the company a 3 percent net savings. But air travel alone averages only 40 percent of a company`s travel costs, so many companies feel the saving is not worth the loss of company morale or ill will it would create. They simply choose not to take on their employees in this issue.”
Indeed, most companies have thrown up their hands in trying to deal with the issue. A study by Runszheimer International, a management travel consulting firm, reveals that 18 percent of a cross-section of 1,000 companies surveyed nationwide say frequent-flyer programs are their biggest travel management problem.
Runszheimer spokesman Brad Burris said, ”47 percent of the companies had some sort of written policy concerning frequent-flyer programs, and of those, 30 percent considered it company property. That means 70 percent of the companies surveyed just consider it an employee perk. And very few of those who consider it company property actually try to monitor it.
”The biggest problem companies face is employees who are avoiding the lowest fare in order to book flights with an airline they can earn points with,” said Burris.
For instance, a Chicago-to-New York flight on a major airline costs $800, while a cut-rate fare on another carrier is only $360.
It is precisely for this reason that it is to the airlines` advantage to foster loyalties with the individual employee rather than a corporation run by bottom-line budget planners.
”And then there`s the whole issue of individual employee ethics,” said Burris. ”The frequent-flyer program puts the employee in a compromising position. Most companies have a policy that employees can`t accept gifts over $25. Free air fare to the Orient is obviously worth more than $25. The company, after all, is paying for the tickets. What if a corporate purchasing department got a free typewriter every time the company purchased 100? Should the employee filling out the form in that department be allowed to take that extra typewriter home?”
But the airlines and employees argue that the free flights are a legitimate perk, especially for employees who are forced to travel away from their homes and families on a regular basis.
”Believe me, you earn every one of those coupons you fly for,” said Watt of the Flyer`s Edge. ”You have to remember that a lot of these people are not flying during regular 9-to-5 business hours. There`s a lot of time sitting in airports and on planes at a lot of odd hours.”
For now, the employees remain the primary beneficiaries of the frequent-flyer programs, even in companies that have employed Trooboff`s tracking system.
”Most of the companies still use it simply as a sampling device and not for punitive action,” said Trooboff. ”But you can bet that at the next business downturn this program is going to sell like wildfire.”–
FREQUENT FLYERS AWARDS ON UNITED AIRLINES
10,000 MILES
Airline travel
Upgrade to first class on United; or 1 free round-trip upgrade to first class for any adult coach on Pan Am domestic flight
International airline travel
1 free upgrade business class from unrestricted coach class on Pan Am international flight
Car rental
Upgrade (Hertz, Budget)
Hotel
Upgrade plus 20% discount on 2 nights (Hyatt, Westin, Meridien)
20,000 MILES
Airline travel
25% discount on 1 round trip on United or Pan Am domestic flight
International airline travel
Upgrade on Lufthansa
Car rental
1 weekend day
Hotel
25% discount on 2 nights (Hyatt, Westin); or 1 night when 1 purchased
(Kempinski, in conjunction with Lufthansa award)
30,000 MILES
Airline travel
50% discount on 1 domestic round trip on United or Pan Am
International airline travel
20% discount Alitalia economy or prima business class round trip; or 25%
discount or upgrade on Air France
Car rental
1 weekend day
Hotel
50% discount on 2 consecutive nights (Hyatt, Westin, Meridien)
40,000 MILES
Airline travel
75% discount on one domestic round-trip United or Pan Am
International airline travel
2 for 1 economy class round-trip Alitalia plus 2 for 1 connecting round trip any class United; or upgrade to first class from business class, Lufthansa SAS; or 1 business class round trip with purchase of companion ticket on Air France
Car rental
1 weekend day
Hotel
50% discount on 3 consecutive nights (Hyatt, Westin, Meridien); or 50%
discount on 2 nights (Meridien/Air France); or 2 nights when 2 purchased
(Kempinski/Lufthansa)
50,000 MILES
Airline travel
1 coach or first class round trip, plus upgrade for companion on domestic flights on United or Pan Am
International airline travel
2 for 1 business class round trip on international Pan Am flight; or 2 for 1 prima business class round-trip Alitalia, plus 2 for 1 connecting round trip any class United; or 2 for 1 business class round-trip Air France; 50%
discount on round-trip first class ticket, SAS
Car rental
2 weekend days, minimum 3-day rental (Hertz, Budget)
Hotel
3 consecutive nights (Westin, Meridien); or 3 weekend nights, or 3 nights when 3 purchased (Hyatt); or 50% discount on 3 nights (Meridien/Air France)
60,000 MILES
International airline travel
2 for 1 coach round-trip SAS, Air New Zealand, Lufthansa; or 2 for 1 first class round-trip or 2 upgrades to business class Air France
Hotel
3 nights when 3 purchased (Kempinski/Lufthansa)
75,000 MILES
Airline travel
2 first class or coach round-trip tickets United; 1 coach round-trip ticket to Hong Kong or Tokyo United; or 2 free first class tickets domestic Pan Am
International airline travel
1 free economy class international flight Pan Am; or 1 free economy class round trip and a 50% discount for traveling companion, Alitalia plus 2 connecting coach round trip on United; or 1 coach round-trip ticket or 2 for 1 business class round-trip ticket SAS; or 2 economy round-trip tickets or 2 upgrades to first class Air France
Car rental
4 day rental with minimun 3 paid days (Hertz, Budget)
Hotel
4 consecutive nights (Westin, Meridien); 4 nights which include weekend or 4 nights when 4 purchased (Hyatt); 2 nights (Meridien/Air France)
Cruise
2 for 1 cruise Royal Viking Line
80,000 MILES
International airline travel
1 coach round-trip ticket or 2 for 1 business class round-trip ticket on Air New Zealand
Hotel
4 nights when 4 purchased (Kempinski/Lufthansa)
90,000 MILES
International airline travel
1 first class round-trip ticket Air France
Hotel
3 nights (Meridien/Air France)
100,000 MILES
International airline travel
2 coach round-trip ticket or 1 business class round-trip ticket to Hong Kong or Tokyo on United; or 2 coach round-trip tickets, or 1 business class round- trip ticket or 2 for 1 first class tickets (SAS Lufthansa); or 1 round-trip business class ticket plus 50% discount on companion ticket (SAS); or 2 free economy round-trip tickets international flight Pan Am; or 2 free economy class round trip on Alitalia plus 2 free connecting coach round-trip tickets on United; or 1 free prima business class and 50% discount for traveling companion on Alitalia plus 2 free connecting round-trip tickets any class United; or 2 for 1 top class round trip on Alitalia plus 2 for 1 connecting round-trip ticket on any class United.
Car rental
1 week midsized rental
Hotel
Same as 75,000 miles (Hyatt, Westin, Meridien); or 3 nights, 50% discount on 3 additional nights (Kempinski/Lufthansa)
Cruise
2 for 1 cruise
125,000 MILES
International airline travel
2 business class round-trip ticket or 1 first class round-trip ticket to Hong Kong or Tokyo on United; or 1 business class round-trip ticket, or 2 for 1 first class round-trip ticket Air New Zealand; or 2 business class round-trip tickets, SAS, Lufthansa; or 1 first class round-trip ticket and 50% discount for companion ticket Air France; or 2 free business class round-trip tickets or one free first class round-trip ticket on Pan Am; or 2 free prima business class on Alitalia plus 2 free connecting round-trip flights on United
Car rental
1-week full-sized rental
Hotel
5 consecutive nights (Westin, Meridien); or 5 nights which include weekends, or 5 nights when 5 purchased (Hyatt); or 4 nights (Meridien/Air France): or 3 weeekend nights, 50% discount on 4 additional nights.
Cruise
1 for 2 cruise
150,000 MILES
International airline travel
2 first class round-trip tickets to Hong Kong or Tokyo; or 1 free top class round-trip on Alitalia plus 1 free connecting flight any class United; or 2 free first class round-trip tickets Pan Am; or 2 coach round-trip tickets or 1 round-trip first class ticket plus 50% discount for companion to the South Pacific, Air New Zealand; or 1 first class round-trip Lufthansa; or 2 first class round-trips Air France
Car rental
1-week luxury rental
Hotel
Same as 125,000 miles; or 5 nights (Meridien/Air France)
Cruise
1 cruise for 2
250,000 MILES
Cruise
1 cruise for 2
350,000 MILES
Cruise
To be announced
Frequent flyer awards are subject to change. Car rental awards apply only to United flights.
