Is Airline Elite Status Only for Elites?

(Originally published here.)

Starting in 2015, Delta Air Lines Inc. will award frequent-flier miles to customers based on how much they pay, rather than how far they fly. The idea is to redistribute scarce resources toward those with the most money. In this case, that’s probably for the best.

Southwest Airlines Co. already distributes Rapid Rewards pointsaccording to ticket prices rather than distance traveled, and Bloomberg Businessweek reports that other major airlines are likely to move in a similar direction. Delta and United Continental Holdings Inc. also recently established minimum spending requirements to qualify for various levels of rewards status, in addition to the existing mileage requirements.

These changes favor price-insensitive business travelers over regular people who carefully accumulate miles by purchasing their tickets at discounts — a move that will “cull the ranks of those considered elite,” as Businessweek put it. Apparently it just isn’t as appealing to be in one of the first groups to get on a plane when half the people at your gate also qualified for early boarding.

While it’s no fun to be on the losing side of this deal — even the language of lost status and elite privilege sounds somewhat offensive to American sensibilities — it makes economic sense for the airlines, which operate rewards programs to attract repeat customers in a business that essentially sells a commodity. (The experience and the cost of flying between any two points is basically the same across most airlines.)

Not all customers are equal, of course. Like casinos, airlines make the bulk of their money from a few whales — generally lawyers and consultants who fly business class on corporate expense accounts. (The genuinely rich fly private, don’t you know.) Offering frequent-flier perks to these valuable customers is helpful in preventing them from defecting to competitors, which could really impair an airline’s bottom line. Unfortunately, those perks become less valuable as more plebeians get a chance to accrue miles and use them for upgrades.

The situation reminds me a bit of the scramble for housing in San Francisco. When more people want to live in a city with a wide range of amenities but a limited stock of housing, there are only two options: Either prices can rise, rationing scarce resources among those who can afford to pay ever-increasing rents, or the quality of amenities such as public spaces and views can become degraded by overcrowding. There is no easy solution that benefits everyone.

In this case, the airlines may use the extra money they get from these changes to pay pilots more to fly regional routes, invest in improved service, or lower ticket prices for infrequent flyers. Or they may just pocket it as profits that get distributed to shareholders. It may look mean, but that doesn’t mean it’s a bad idea.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article:
Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article:
Christopher Flavelle at cflavelle@bloomberg.net.

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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