United Airlines: Frequent Flyer Program

In June 2014, United Airlines, Inc. (United) announced that as of March 1, 2015, it would move from awarding miles based on distance flown
to awarding miles for dollars spent for tickets, following in the footsteps of Delta Air Lines, which had recently made similar changes to its
SkyMiles program. United’s MileagePlus program president, Thomas O’Toole, said, “These changes are designed to more directly recognize
the value of our members when they fly United”.

In March 2015, many customer complained about United’s new mileage policy and saw this change as a significant devaluation of award
miles. According to new mileage accrual plan, most United MileagePlus members would earn fewer miles unless they were flying on
expensive short-haul flights or premium-class tickets. Duane Myers, a premium gold member who flew more than 50,000 miles in 2014, said,
“This is very disappointing. United already increased the redemption miles requirement recently. Based on my understanding of the new rule,
flight miles earning has been devalued by about 50%. Why do I need to pay more to get the same miles I used to get?”

Industry Overview

U. S. airline industry was highly competitive. United was facing tough competition from domestic as well as foreign airlines. The number of
carriers in the U.S. increased from 34 in 1978, to 106 in 1985. As a result, rates become highly competitive, the industry become less
concentrated, & price wars became a common form of competition. Due to excess capacity, no carriers had significant pricing power in the
marketplace. Every one of the major network carriers, including United had previously file for Chapter 11 bankruptcy protection, and many
of them had undergone mergers with other companies. Delta airline acquired Northwest airlines in 2008, United merged with Continental
airlines in 2010, Southwest airlines purchased AirTran airways in 2011, and American airlines and US airways merged in 2013. As a result,
these 4 airlines had come to control nearly 85% of the domestic market. In airline industry, there were 3 major alliances namely; Star
Alliance (1997), Oneworld (1999), & SkyTeam (2000). Alliances provided a network of connectivity, branding and convenience for
international passengers. As a result, these alliances reduced costs through sharing of sales offices, maintenance facilities, airport lounges and
operating staff. Customers earned award miles from flying on other alliance carriers and redeemed miles by using award tickets from a single
account.

Frequent Flyer Program (FEP)

FEP is a loyalty program offered by many airlines to customers allowing them to earn points for flights taken from airlines or partners. On
May 1, 1981, American airlines launched the 1 st FEP. In next step, it introduced ‘Gold’ tiers into program. In 1987, American airlines &
Citibank introduced the industry’s 1st co-branded credit card, which was the most significant development in the history of FEPs. By the early
1990s, most North American & European airlines launched very similar types of FEPs. As FEPs matured, airlines realized the limitations of
early FEPs models. Airlines increasingly put restrictions on reward tickets and introduced mileage expiration policies. Customers felt that the
reward seats were too limited, especially at the lowest reward level. The imbalance between earned miles & availability of award seats
created new challenges for FEPs. In order to address this issue, airlines began to make tactical changes to their programs. Many airlines
adjusted the required miles for an award ticket, increasing capacity by simply devaluing the earned miles. At the same time, some airlines had
started recognize dollars spent instead of distance flown & Virgin Australia offered its customer 5 points per dollar spent. Singapore airlines
had introduced its KrisFlyer top tier only to customers who spent more than $ 25000 on 1 st or Business class tickets. Once perceived as a
reward program for frequent customers, FEPs had started to become businesses of their own. By selling miles to airline’s partners, an FEP
could be a very attractive & cash-generating business, & airlines began to consider FEPs as separate business units. Hence, even spin-offs of
FEPs were considered. In sum, airline industry had seen enormous potential in FEPs & changed its perspective on them. Over a 30-year
history, FEPs had evolved from simple customer reward programs to independent profit-generation business models.

United Airlines (United)

United was a member of Star Alliance, & the network carriers served over 1300 airports in more than 190 countries as of 2015. Its main hub
cities included; Chicago, Denver, Houston, LA, New York, San Francisco, Washington, Guam, & Tokyo. In 2015, United announced 1st
quarter profit of $508 million compared with a $609 million loss in same quarter of last year due to low fuel costs and cost reduction efforts.
While the merger with Continental Airlines in October 2010 had made United one of the largest airlines in the world, the company still
struggled to merge 2 companies into 1. Some of the integrated work remained unfinished like; United had not yet finalized a unified labor
contract with flight attendants, & mechanics were using 2 separate IT systems for maintenance. United accepted that they have not been
producing the level of revenue they should be producing they should be producing.

United’s MileagePlus Program (FEP)

This program aimed at building customer loyalty by offering awards & services to loyal customers. Before March 2015, the basic structure of
this program was not different from that of other major FEPs. The program had co-branded credit card marketing with Chase bank USA,
National Association, thus allowing customers to earn miles by using that credit card. Customers could also earn miles by qualifying cruise

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vacations and car rentals, as well as on shopping & dining at partner businesses. Miles expired after 18 months of member account inactivity.
This program generated a substantial amount of revenue. Approx. 4.8 million, 5.0 million, and 4.7 million MileagePlus flights awards miles
were used in 2014, 2013, & 2012 respectively. These awards represented 7.1 %, 7.7%, & 7.1% of United’s total revenue passenger miles in
2014, 2013, & 2012 respectively.

What’s New in FEPs in 2015?

On June 14, 2014 United confirmed that starting March 2015, it would be moving to a revenue-based FEP. Under the new MileagePlus
program, customers would not awarded miles based on the miles flown, but rather, on how much they spent per flight. The fare for mileage
earned included the base fare of the ticket plus carrier-imposed surcharges, but excluded government imposed taxes.

 General MileagePlus members (non-elites): Earn 5 miles per dollar spent.

 MileagePlus Premier Silver Member: Earn 7 miles per dollar spent.
 MileagePlus Premier Gold Member: Earn 8 miles per dollar spent.
 MileagePlus Premier Platinum Member: Earn 9 miles per dollar spent.
 MileagePlus Premier 1K Member: Earn 11 miles per dollar spent.

The most common complaint about this change was that a passenger would earn fewer miles for flying the same flight. For instance, in the
case of a $450 economy-class flight, customers at all levels would earn fewer miles under the new program:-

non-elites Silver Gold Platinum 1K

Previous Program 4908 6135 7362 8589 9816
New Program 2250 3150 3600 4050 4950
Also, there was frustration for those who were searching for a good bargain price, for example, for a trip to Germany from USA, in which
customer would be rewarded the same miles as other customers who paid a very high price for a last-minute flight to San-Francisco. The new
rules had caused other controversies, 1st if passengers travelled on a ticket issued by United’s alliance partners, customers would earn United
miles based on distance flown not how much they paid. Second, there were no changes for the amount of the miles earned by 3 rd party
partners such as credit card companies. So, the net effect was to make miles earned from 3 rd parties more valuable than flying with airlines.
Customer expressed their disappointment and anger of United’s Facebook page. In particular, many customers were not happy about the
massive devaluation (i.e. requiring more miles for free award tickets or upgrades) in Feb 2014.

What’s Next?

The idea of a revenue-based FEP was quite simple: the more you spent, the more miles you would earn. However, this simple idea had
potentially huge consequences for both customers and airlines. Delta airlines & United had adopted Revenue-based FEPs. The change was
good for passengers who spent a considerable amount on tickets, sat in 1st or business class, and/or flew short distances with last-minute
bookings. However, for most general customers, the change most likely meant a reduction in value earned from the program. Among the
largest U. S. carriers, American Airlines, one of the Oneworld carriers, was the only airline still using the conventional miles-based FEP.
Should American airlines also adopt the revenue-based FEP, following the competitors? The company could opt to keep its miles-based FEP,
signaling that it valued all its customers, not just those who spent more. Alternatively, American Airlines could follow this trend once it
finalized the American Airlines and US Airways post-merger integration.