Frequent Flyer Programs Are Like Ponzi Schemes
 

IMO, this writer is streaching pretty hard to make his point.




http://www.smartertravel.com/travel-...0&u=SL9B6BC633

geeeeezzzzzz, not very encouraging news.......not that i didn't know this already.

Yes it is a stretch. Considering that FF programs are often the airlines #1 business asset, the airlines may want to rethink their business model.

Wow...I used to respect some of the things he wrote. Not anymore.

There are some similarities indeed, yet even then some airlines operate the "loyalty" program more like a Ponzi scheme than other airlines.

I think that he is right in pointing out that the airlines can change their rules at will.

However, to compare this with Ponzi schemes is ridiculous.

Also, whilst technically they could just change the rule and ask for a million miles for a domestic award, or even close the programme, I don't think there is a real risk. Even the airlines that went through Chapter 11 did not do anything like this, because the loss of goodwill is simply too much.

Moreover, at least in Europe, airlines have the outstanding miles balance as a liability on the balance sheet.

The Ponzi analogy is specious because FF accounts are not "investments" whose value is expected to rise. They're not even "accounts" at all in a fiscal sense. You have a bunch of miles you're welcome to try to exchange for flights, etc. at an exchange rate that changes all the time. It's more like currency trading than investing.

The value of any given mile is unpeggable, but everybody knows that over time, inflationary forces dilute, not enhance, miles' redemption power.

He's right about the lack of transparency / "black box" issue, though.

It's not so much that FF programs are unsustainable, it's that the airlines prefer not to sustain them at current values. Rather the airlines find it much more profitable to continually devalue the programs.

This almost always happens when a business sells you a service in the distant future in exchange for an up-front payment. That's why, for example, I will choose to self-insure for long-term care: I don't believe that any insurance company would deliver adequate benefits.

Not only a pointless and ill-conceived article, I can't even determine what the author intended by the following statement:

"Imagine how many more investors Charles Ponzi and Bernie Madoff might have bilked had they reserved the right to operate pyramid schemes".

Actually, I think it's a law of economics. What's happening to FF miles is the same as what's happening to the US dollar and most other currencies. It's irresistible to flood the market with extra currency ("printing money") to sustain interest. The money / miles supply goes up, hence inflation, hence declining value.

Every time someone gets 25,000 miles for signing up for a credit card, the value of the overall, global pool of miles declines. There are trillions of unredeemed miles out there now, but finite (or shrinking) ways to spend them, so naturally the "price of goods" goes up.

I don't think the airlines strategize this, any more than Ben Bernanke and the Fed want to promote inflation. It's just what happens.

Great explanation. Example - My wife and I racked up 100K miles in one program just by getting a couple of credit cards each. When we went to cash in our miles for a couple of domestic 1st class tickets, there were no saver seats available, so we just used the 100K to get the 2 1st class tickets on a standard award. A perfect example of mileage inflation. We still got what we wanted without spending any more than we would have otherwise.

This has nothing to do with investments. FF programs are incentive programs. Buy my product and I'll give you a reward. Buy more and I'll give you some bonus rewards. If you make it easier to rack up the miles, then one will just have to spend more miles to get the reward one wants. That doesn't make it a Ponzi scheme.

That's why they are starting to give 30K miles now with new credit card accounts! @:-)

By the way, I prefer to think of being forced to take an F award because of no coach availability as a lifestyle enhancement. :D

I'm not an economist, so this is potentially all a lot of nonsense - but I've had fun trying to figure it out so what the heck?

Pyramid schemes break down because the value of the benefits exceed the value of the investment. If a FF programme gives miles that are more valuable than the notional price the punter pays for them then they rely on more people earning than burning so the total pile of unspent miles grows and grows. In other words, today's burners are subsidised by today's earners. That would be a pyramid scheme and would eventually become unsustainable or have to be cross subsidised by another part of the business. I have heard an argument that at least one airline with a generous FF programme is effectively doing that right now.

On the other hand, the less generous FF programmes make quite sure that the value of the benefits is less than the notional value of the customer's investment. Those are sustainable and generate profit so long as the liability of unspent miles is included on the balance sheet.

1. Ponzi schemes looked legitimate and so do FF programs. (So does my son’s school fete. I like to consider the possibility that it looks legitimate because it is legitimate)

2. Lack of transparency. Ponzi schemes are asking for money for a unique purpose (that is, something that you might not otherwise do). FF programs are mainly aimed at business people who might go for the cheapest tickets otherwise - they’re aimed at building brand loyalty. If a member doesn’t quite know what they’re getting, at least they know they’ll be getting something - at negligible cost, too, as they are ‘earning’ their rewards for doing something that they would be doing anyway. The real cost is the difference between the cheaper product they might purchase and the ‘loyal’ one that they do. This is not borne by the person who orders the ticket but by their company so it is passed on to us as consumers.

(The real lack of transparency is to do with who pays for these schemes. Take an example - a food company’s executives are members of an FF program, for the sake of which their expenses budget is say 10% higher than it would be if the competition were for the cheapest fares and not the best FF deals. How much of this extra cost is passed on to the consumers will depend upon the same economic forces as drive the rest of their business. But consumers will be paying for the same proportion of the extra cost associated with travel as they will be for extra advertising or machinery that goes into production. The difference is that for this extra cost, they will get nothing (advertising should drive up the company’s market share, so decrease prices, new machinery should reduce costs, so decrease prices...) With FF programs, the benefit goes to members (who are already high-earning executives) and to the airlines they support, but the cost is split and partly (perhaps mostly) borne by people who do not benefit at all.)

3. The airlines, in other words, are effectively issuing a currency they are under no legal obligation to honor. Yes. But this makes them different to Ponzi schemes; Ponzi schemes do have such an obligation. This is why their founders are in jail.

4. Lack of legal oversight. As airline companies are offering these programs essentially free (that is, as the costs are not borne by the people who reap the rewards of them - except in those cases where people fly for private rather than business reasons, in which case it’s highly likely that they would be travelling anyway, which once again reduces the personal cost of being a FF member to virtually zero) it’s hard to see what legal controls there could be.

5. Benign beginnings. Once again, this link is just silly. The Little Sisters of the Poor had benign beginnings too, and also began offering people ‘something for nothing’. This is no reason to start suspecting the ethics of Mother Theresa.

People are crushed by Ponzi schemes but who could seriously be crushed by losing their free travel? FF members have risked nothing and performed nothing to earn these points. Does anyone have their retirement savings tied up in their FF account? If they lose them it would be irritating but hardly more significant than that.

1. I would certainly be crushed if I lost my FF miles. :D However, I plan to continue my "burn, baby, burn" approach to miles 'cause who knows how long they may be around or what they may be worth in the future.

2. I have done lots to get my miles--namely flying and filling out dull credit card apps.

Come to think of it, Kimberly may have a point--we have not invested a lot of money in getting miles. Although the rebate lost by using a FF card instead of a cash back card has a quantifiable value. Call it 1.5% of money charged on credit cards. Still, not that much.

In any event, I suspect FF programs are about to get way devalued as they relate to credit card bonuses since it looks as though the remarkably excess monoply profits US card companies have been using to cross-subsidize benefits to FTers are about to be hit hard by new consumer protective laws and regulations.

Burn, baby, burn!