The Department of Transportation has been making moves to provide consumers with better protections against airlines. However, their recent initiative isn’t one I was expecting at all – the DOT is investigating the Big 4 frequent flier programs.
Our little game is filled with rewards and pitfalls. The latter is primarily due to loyalty program owners constantly trying to optimize their points ecosystems to be minimally rewarding to us while extracting maximum profit for them. Well, it seems that government officials now recognize how much the scales have been tipping in the owners’ favor and have begun a review process to do something about it. In the world of transportation, this resulted in the fact that the DOT is investigating the Big 4 frequent flier programs to review several specific concerns.
DOT is Investigating the Big 4 Frequent Flier Programs
For quite some time now, airlines (and hotels) have been famous for constantly devaluing their programs. However, in recent years, they’ve seemingly upped the ante by eliminating award charts altogether, allowing themselves to conceal the true costs of awards and making it easier for them to make unannounced devaluations. Well, it seems as if the U.S. government is growing weary of these shenanigans.
Back in May, the Consumer Financial Protection Bureau and the DOT held a public hearing on airline frequent flier programs and their associated credit cards. During the meeting, smaller U.S.-based airlines touted their more customer-friendly policies and better value. This is something we all already know, as Alaska Airlines provides better value than its Oneworld partner, American Airlines. They also took the opportunity to take a jab at their larger peers, with testimony about how these bigger airlines leverage their reward programs against smaller airlines.
This CFPB-DOT public hearing is what, apparently, triggered the current path we now find ourselves on. You know, the one in which the DOT is investigating the Big 4 frequent flier programs – AAdvantage, Mileage Plus, Rapid Rewards, and SkyMiles.
Specific Concerns
In its announcement about how the DOT is investigating the Big 4 frequent flier programs, it also covered the concerns they’re seeking to address. All of these revolve around the fact that in the DOT (and, I guess, the CFPB’s opinion) opinion, “points systems like frequent flyer miles and credit card rewards have become such a meaningful part of our economy that many Americans view their rewards points balances as part of their savings.”
As such, the DOT wants to, “examine the fairness, transparency, predictability, and competitiveness of airlines’ rewards programs. DOT has the authority to investigate and take action against airlines for unfair or deceptive practices and unfair methods of competition in air transportation or the sale of air transportation.”
The specific points the DOT is currently investigating include:
- Devaluation of earned rewards. The obvious circumstance under review here is airlines increasing award prices, which effectively reduces the value of points already earned. However, this section also includes other devaluations, including things like changes to expiration policies, blackout dates, limits on who you can book award flights for, removal of complimentary benefits, changes in elite status benefits, and the refusal to honor promotions, among others.
- Hidden and dynamic pricing. This one takes aim at the growing trend of airlines doing away with award charts. Here, the DOT rightfully states that hiding the value of points makes it harder to compare award pricing against cash rates while simultaneously making it easier for airlines to devalue without detection. They also say that this practice “masks the disparity between the purchase price of points” and their redemption value, while dynamic pricing compounds their concerns due to its frequent and unpredictable changes.
- Extra fees. Here, the DOT is concerned about how fees that airlines may assess to maintain, redeem, or transfer points may lower the value of the points, especially since most fees don’t provide passengers with any value.
- Reduction in choice and competition. Well, now… this one is interesting, especially given Alaska’s & Hawaiian’s proposed tie-up. Beyond the loss of a competing program in this space, the DOT is also concerned with what happens during the combination, stating “integration of two rewards programs can present problems if customers in one or both programs lose value, rewards, or status in the transition.” Further, they want to look at ways programs can collude to fix pricing.
As the DOT is investigating the Big 4 frequent flyer programs, identified airlines must provide the DOT with an enormous amount of information pertaining to each of the four main focuses above. Information ranges from award pricing changes and their impacts on consumers to the average dollar value of their points for award flight redemptions and other redemption options.
Impacts on the Alaska-Hawaiian Merger
The timing of the announcement that the DOT is investigating the Big 4 frequent flyer programs is interesting. The agency is currently reviewing Alaska’s and Hawaiian’s exemption request, which is the final approval they need before they can close on their merger. However, the fact that the DOT didn’t target either airline means that they likely aren’t concerned with their programs – yet. As it stands today, both have award charts and, especially in the case of Alaska, provide consumers with more value than most of the Big 4. That said, the last point above remains a concern.
I’m sure that even though the DOT isn’t asking Alaska and Hawaiian for information as part of its larger investigation, their merger review likely includes questions around what they plan on doing with Mileage Plan and HawaiianMiles. We all know they’re going to merge HawaiianMiles members into Mileage Plan and rebrand the program. But the thing that concerned me is whether or not they’d devalue award charts as part of this or adopt the worst prices from both.
With this review, I think the likelihood of a devaluation occurring is significantly less than it once was. Moreover, I largely expect Alaska to retain its current pricing overall rather than try to mash in some of Hawaiian’s. After all, Alaska has a distance-based scheme, whereas Hawaiian has some quasi-distance-based system in place now.
This is all to say that I don’t think this review will put a damper on the merger, though I do think Alaska Air will tread more carefully as they consider how they’ll combine their two loyalty programs.
DOT is Investigating the Big 4 Frequent Flier Programs, Final Thoughts
Broadly speaking, and based off the information we have today, I do think the fact that the DOT is investigating the Big 4 frequent flier programs is a good thing. I’d like to see regulations requiring that we be given ample prior notice before changes go into effect. This would at least give consumers time to make redemptions before the new pricing models become effective and is something airlines used to be good about doing as a courtesy.
That all said, I do worry about unintended consequences. For one, with government agencies confirming the value of points and stating that they’re a “meaningful part of our economy” makes me worried that the Internal Revenue Service will have more evidence (and data) to support taxing points balances or redemptions. That would be absolutely devastating to us all if that were to come to pass, though I also still think the argument that these points and their ecosystems represents rebates and not taxable income should continue to prevail.
Another concern to consider as the DOT is investigating the Big 4 frequent flier programs is unintended consequences. The potential IRS issue aside, the DOT could create well-meaning regulations that actually make things worse or more complicated. We’ve seen this debated to great lengths regarding their recent reimbursement rules. Whether or not something like this will happen is anyone’s best guess, though.
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