Will success doom frequent-flier miles?

Will success doom frequent-flier miles?

By David Leonhardt, Copyright by The New York Times

WEDNESDAY, APRIL 26, 2006

NEW YORK: Tom Plaskett was sitting on a flight from Boston to Dallas one day in 1980 with a problem that needed solving.
At 36 years old, Plaskett had just inherited the top marketing job at American Airlines from the famously intense Robert Crandall, who had become the company president. Crandall, like hundreds of other executives before and since, was looking for ways to keep customers loyal.

The problem was that the U.S. government had recently deregulated the industry, freeing up airlines to compete on price. And if the only way to ensure loyalty was to buy it with cheap fares, Crandall knew that American was in trouble. It fell to Plaskett and his team to get travelers to buy tickets on American even when it was not offering the lowest fare.

As he thought about what kept people coming back to the same company, his mind wandered to the kitchen of his childhood home in Raytown, Missouri, where he would sit with his mother and lick S&H Green Stamps. The stamps had come from the local grocery store as a reward for shopping there, and when the Plasketts had pasted enough of them in a book, they brought it to an S&H redemption center to claim a prize.

Once it was a toaster. Another time it was a vacuum cleaner. Nothing as alluring as, say, a Hawaiian vacation, but they were enough to tether the Plaskett family to that grocery store.

"It was the idea of getting something for nothing, really," he said. "So I began thinking,'Why wouldn't that work for the airlines?'"

Over the next year, Crandall, Plaskett and their colleagues developed a secret plan modeled on green stamps, a surprise designed to catch their rivals off guard. On May 1, 1981 - 25 years ago next Monday - they unveiled a program called AAdvantage. Frequent-flier miles were born.

Miles have become one of the most successful business ideas not just of the last quarter-century but in the modern history of capitalism. They have been a diabolically brilliant way to separate people from their money while making them feel as if they were instead getting a gift. Sure, you just spent $800 fixing your car, but you charged it to a miles-bearing credit card, putting you that much closer to a free vacation.

If you believe the popular idea that a mile is worth about a cent, the 14 trillion unredeemed miles that travelers hold are more valuable than all of the United States currency in circulation, as The Economist has noted.

"We figured if we were successful," Crandall said this week, "we could replace S&H Green Stamps."

They have obviously done that, and then some. But the comparison also raises a couple of disturbing questions for the airlines. What ever happened to green stamps, anyway? And are frequent-flier miles on their way to becoming yet another great business idea doomed by overkill?

To understand the appeal of miles, it's worth considering an experiment that some researchers did on a Midwestern college campus a few years ago, in which students were given a choice between two simple tasks. One task would take six minutes and they would get a gallon of Haagen- Dazs vanilla ice cream, while the other would require seven minutes of work and the payment would be a gallon of Haagen-Dazs pistachio.

Not surprisingly, since the second option involved more work and a less popular flavor, only about 25 percent of the students chose it.

But the researchers also repeated the experiment with a couple of tweaks. In the new version, the six-minute task led to a payoff of 60 "points," and the seven- minute task brought 100 points. The students were told that anyone who finished with between 50 and 99 points would be given a gallon of vanilla. Anyone with 100 points would get pistachio.

Practically, there was no difference between the two experiments. But the outcomes ended up being very different. With the lure of points added to the mix, more than 50 percent of students chose the longer task and the pistachio prize that went with it. Independent of their actual value, "points" apparently give people some satisfaction, noted Christopher Hsee, one of the researchers.

Plaskett said he had felt the same thrill when collecting green stamps. It seemed like an accomplishment unto itself, and it allowed him to fantasize about all the things he could get in return.

Frequent-flier miles would be even more alluring than stamps, Plaskett realized, because the airline would give away thousands of them at once.

More than one million people signed up for AAdvantage in the first three months, and every other big airline soon copied it. The programs did exactly what American had hoped. They delayed the march of low-fare carriers, since travelers were willing to pay more for a flight on their regular airline.

In fact, the only real problem with loyalty programs is they tend to sow the seeds of their own demise. They are so addictive, and do such a good job exploiting human nature, that companies cannot help overdoing it.

Frequent-flier miles are now suffering through their own inflationary spiral. With all the miles now floating around and with planes almost full, it's become impossible to claim rewards on a lot of routes.

United Airlines, recognizing the problem, recently announced that it was celebrating the 25th anniversary of its program by letting people use their miles to buy golf clubs and gadgets. That sort of defeats the purpose, since cameras cost United a lot more than empty seats do.

In other words, Crandall's great fear has come to pass despite American's brilliant invention. Airline seats really are a commodity. And frequent-flier programs are just another discount now, not the guarantee of loyalty that they were designed to be.