Frequent Flyer failure

Unless you fly often, frequent flyer points won’t get you very far.
 
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01 .Limited consumer payoff

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Frequent flyer programs are confusing and complicated, but what is clear is that they’ve become a big dollar-driver for the airlines.

Unless you're a frequent business traveller, you're faced with a dilemma. If you want to build up your frequent flyer points, you’ll need to fly the same airline every time or only transact with businesses that allow you to earn points through a linked credit card. But what if a dream discount fare with another carrier pops up?

Pointless pursuit

Frequent flyer miles have a limited shelf life; you would have to fly a lot within a limited window of time for there to be any benefit. Like gift cards with too many restrictions, frequent flyer miles can be a gift that rarely, if ever, gives.

Over the years we have received considerable consumer input about the questionable value of frequent flyer points. One consumer told us: “I used to care a lot, but over the past three or four years really cheap fares have become available with the discount carriers and the bigger airlines got stingy and made their points worth less in real terms. Plus they stopped awarding miles on the cheaper tickets. Last year I lost about 6000 points from not flying enough.”

This is how the situation stood when we last investigated the issue in late 2011. Aside from the details, very little has changed: frequent flyer points are still worth more to the airlines than they are to their customers. 

How they add up

  • Qantas , which awards points per mile, gives you at least 1000 points for every one-way flight if you’re a frequent flyer member.
  • It costs $82.50 to join but is free through Woolworths Everyday Rewards program.
  • You could conceivably come out ahead on points with Qantas on flights less than 1000 miles, but only if you fly often enough that sticking to the same airline makes sense.
  • In a Sydney to Melbourne scenario, you’d get 1000 points from Qantas for the 443-mile flight to Melbourne in economy and the same for the flight back.
  • Virgin’s Velocity program  is free, and awards points per dollar spent on domestic flights.
  • This means you’d only get 1000 points all up for a $200 return saver fare from Virgin. 
  • If you bought a more expensive ticket on Virgin, of course, you'd earn more points.

CH1011_FrequentFlyer_plane_E_WEBUpping the ante

Qantas and Virgin Australia – the only two domestic carriers that offer points – are battling it out on the frequent flyer front, with Virgin playing catch-up to Qantas’ long-standing market dominance.

In late August 2011, Virgin released a re-tooled version of its Velocity, including a new platinum level for status credits and the opportunity to upgrade on domestic flights using points (previously unavailable).

The new Virgin plan looks like an effort to make points more user-friendly, especially for those who fly a lot. A promised upcoming feature is that families will be able to pool points and status credits and put their membership on hold for six months for parental leave without losing their credit status, something CEO John Borghetti says “is very important to our customers who spend time away travelling and want to share their benefits with their families”.

Borghetti admits that “reward seats were becoming harder to find and more expensive”, although the revised Velocity Frequent Flyer program still does not appear to be designed to reward casual travellers. Not to be outdone, Qantas has a new, higher-level platinum program in the works, aimed at a very select group of flyers.

 
 

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Clifford Reichlin, whose online forum The Australian Frequent Flyer has been a busy stopover for travellers since 2002, says frequent flyer points are a “promotional and marketing currency” designed to get consumers to fly more, not help them save money.

Profit motive

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“What they really want to do is convert the occasional traveller into a frequent traveller,” Reichlin says.

“It’s not a loyalty program and has nothing to do with loyalty. The airlines aren’t rewarding you for flying with them, they’re trying to get you [to] buy more airline tickets, preferably the pricier ones. If it were a straight-up loyalty program, your points wouldn’t expire and the programs wouldn’t be so difficult to figure out.”

Due to the complexity involved in accumulating points, many casual travellers understandably don’t know what to make of frequent flyer points.

But what is clear is that the major airlines care a lot about them. Last year, Qantas generated more revenue from points than from original ticket sales, or about 60% of its net profit. In 2011 Macquarie Transport analyst Russell Shaw told us Qantas’ frequent flyer program is worth about $2 billion.

Given its success, the frequent flyer business seems to be fuelled by basic maths. So long as Qantas charges its many partners more to buy points – and thus to be able to add them as customer incentives – than it costs the airline to redeem those points, they come out on top.

Reichlin, a former Ansett employee and industry consultant, confirms that the airlines have continually reduced the value of their frequent flyer points over the past decade or so, but not in ways that would be obvious to consumers.

“It’s done quite subtly – the cash component of each point has increased with things such as fuel charges and other added costs. The point per mile or dollar may look the same on paper, but the overall cost of each point for consumers has increased dramatically,” he says.

ToasterElusive value

He also argues convoluted programs are a deliberate strategy. “A simple system would be much easier to understand for everyone, but that wouldn’t really push the right buttons for the airlines. There are never-ending discussions on my forum about how to get value from your points, because there are so many variables, so many ways of doing it.”

Reichlin points out that airlines draw considerable revenue from banks whose payment cards are linked with frequent flyer programs, yet there’s no link between the profits and the availability of seats purchased with points.

“How the seats are allocated is entirely up to the airlines, and there’s no transparency for the consumer at all.”

He estimates frequent flyer points to be worth about one cent a point on average – consistent with our estimate for domestic flights – but can also drop well below that value. “They will be worth a lot less than one cent if you buy a voucher or pay for goods and services. But if you manage to get the timing right and use your points for an upgrade from economy to business, the value can jump to three or four cents per point. The problem is, it’s very hard to pull that off.”

(Reichlin’s forum has also become an advertising and communication outlet for the airlines, but he insists there’s a firm dividing line between posts from consumers and commercial content. “We maintain strict editorial independence.”)

Frequent-flyer-points_WEBCalculated to confuse

How many frequent flyer points you get from flying depends on:

  • Whether you’re flying on the member airline or its discount brand or partner airline.
  • Whether you’re sitting in economy, business or first class.
  • Point accumulation is also determined according to whether you’ve previously spent enough on airline tickets to make it into a silver, gold or platinum program.
  • How many points you earn by using your credit card or numerous other transactions.

But it’s not just points you’re after. You also need status credits. The more you fly, the more status credits you get, and it’s the status credits that pave the way to silver, gold or platinum status.

As you move up, your point-earning power increases, but only if you buy tickets often enough – and fly far enough – to maintain your status. Status credits can only be earned by flying – and they disappear after 12 months.

On the face of it, Virgin Australia pulls slightly ahead of Qantas in its status credit offering. Virgin offers fewer credits for comparable trips (400 compared with Qantas’ 480 for a return Sydney-London trip in business class), but also requires fewer credits to get into a status credit program and start earning more points.

The common thread is confusion. The more you spend, the more you get, but the value of what you get is tricky to determine.

Points on the ground

Of course, there are many ways to collect points other than flying. Qantas, for instance, has more than 400 retail partners. But whether the points are worth the price is another question.

In a 2011 promo, consumers were offered two Qantas Frequent Flyer points per dollar spent on a range of Optus services.

“I would never convert points to purchase – definitely not good value,” says Naomi Stephens. Among the special offers in the Qantas Frequent Flyer store last month was an LG 32’’ LCD TV for 86,500 points and a Coleman 58L Xtreme Cooler for 19,700.

If you flew Qantas Sydney-LA return five times as an entry-level bronze member you’d still be 11,590 points short of the TV, and 4718 points short of the cooler after a single round trip. (We found the products for $439 and $139 respectively at retailers.)

It’s the same story with Virgin. An Akai DAB digital radio was recently going for 15,900 points in the Velocity store, and you could throw in a Breville 34L microwave for another 34,900 points. If you flew Virgin Australia Sydney-LA return twice (discount economy) you’d still be 910 points away from the radio and could only get the microwave if you made the return trip four times. (CHOICE found the same products for $72 and $129.)

Nevertheless, Qantas Head of Airline Loyalty, Stephanie Tully, tells us the flying kangaroo “benchmarks goods sold versus other loyalty programs in the market and we believe we have a competitive offering”.

Virgin Manager of Corporate Communications Emma Copeman argues “our redemption pricing is competitive and represents real value”.

Card tricks

As we highlighted in our report on credit card-based frequent flyer miles last year, you’d have to spend big dollars on your credit card every month and pay the balance in full without fail to make it worthwhile.

Our calculations showed that a $5000-per-month spend on your credit card would earn you a maximum of about $1000 worth of points a year on either Qantas or Virgin in the best-case scenarios.

If you spend less than $1000 a month with your card, in many cases the net value of any frequent flyer points will be eaten up by fees.

CHOICE verdict

Your points won’t buy you much with either the Qantas or Virgin programs unless you fly a lot. And with stiff competition for passengers, you may save more money than what the points are worth simply by buying the cheapest ticket. Unless you fly often, don’t let the pursuit of frequent flyer points dictate your itinerary. Competition is reportedly on the wane and deep discounts may be harder to come by, but for casual travellers, any significant savings on a ticket price likely beats the value of flyer points. Book the cheap seats and use the built-up savings to splurge for premium ones.

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