Frequent Flyer Programs: Empirically Assessing Consumers' Reasonable Expectations

Abstract

Never in the history of commercial flight have airline passengers been so disgruntled. Instances of significant delay, frequent flight cancellation, and lost or delayed baggage have reached such a crescendo that passengers are being described as “mutinous.”1 Indeed, amendments to the airline Passenger Bill of Rights that became effective in August 20112 were not enough to quell customer dissatisfaction with perceived mistreatment by the airlines. In February 2012, as part of the FAA Modernization and Reform Act,3 Congress amplified passenger rights further4 and expressly established the Secretary of Transportation's authority to investigate consumer complaints in a laundry list of other areas in which the airlines chronically fall short, including “the rights of passengers who hold frequent flyer miles or equivalent redeemable awards earned through customer loyalty programs.”5 It is this latter matter—that of flyers' discontent with their inability to redeem accumulated frequent flyer miles or points for free travel as and when they wish to fly—on which this article focuses.6 Indeed, a common complaint against frequent flyer programs is that they “promise the incentive of free travel in exchange for loyalty, and yet they make it very difficult to actually get the free seats.”7 At the heart of this widespread contract enforcement issue is the language of the agreements that establish the passenger's and airline's respective rights in connection with the relevant frequent flyer program. While the lengthy constitutive terms and conditions of these programs vary, nearly all of them use language limiting the availability of award travel, stating simply that redemption of mileage for award tickets is “subject to limitations” or “may not be available on all flights.”8 That free seats are limited is most certainly an obvious proposition. Even a passenger seeking to purchase a ticket will not find seats available on every flight. But what, exactly, does this limitation on reward tickets mean for the average consumer trying to redeem his accrued mileage or points? Put otherwise, to what—if anything—has a given airline bound itself contractually when holding out the promise of free travel? The larger context of the question we pose is twofold. First is extensive case law in the area of federal preemption under the Airline Deregulation Act of 1978 (“Deregulation Act,” or § 1305(a)(1)), which protects the airlines from consumer protection legislation and lawsuits. So substantial is the precedent in this area that the U.S. Supreme Court has spoken about frequent flyer programs not once, but twice9 —both times leaving room for proconsumer arguments based on contract enforcement. The other legal area that is implicated is consumer contracts of adhesion and their enforceability. The vast majority of the rich literature in this area is focused on contract theory, economic arguments, or public policy questions associated with enforcing a standardized agreement against the consumer, who may not have read and therefore actually assented to each of its provisions. The debate over objective and subjective views of consent, the economic efficiency arguments maintaining, inter alia, that enforcement of standardized contracts by their express terms inures ultimately to the consumer's financial benefit, and a variety of proposals for addressing this troubled area of the law have been widely considered by scholars.10 In this article, we study both of these areas and make a number of contributions to the literature. First, we tackle the ample body of law surrounding federal preemption under the Deregulation Act, which is comprised of hundreds of cases decided in state and federal courts in the last few decades. From these we tease out the current status of preemption law, articulating the primary lessons relative to consumer litigation against the airlines based on breach of contract. We also address the question of enforceability of the contract of adhesion from a different perspective, in a somewhat unique but ubiquitous setting11 : to what extent is or should the frequent flyer program contract be enforced against its drafter, the airline? One conclusion of this article is that notwithstanding their suitably vague limiting language, the airlines have made marketing statements in connection with their frequent flyer programs that create specific and measurable consumer expectations about free award travel. We further contribute to the literature by demonstrating how empirical evidence might productively be used to determine the expectations of a reasonable consumer, thereby establishing parameters for performance of the frequent flyer agreement—using sample survey evidence and demonstrating well-accepted methods for its analysis.12 The argument proceeds as follows. First, in Part I, we describe the typical frequent flyer program in some detail, demonstrating that the traditional carriers' programs are all substantially similar—they provide that redemption of earned mileage for free air travel tickets is “subject to availability” at a rate that is not defined. This is followed, in Part II, by descriptions of domestic airlines' award travel redemption rates for a travel ticket at the minimum redemption level. These data show not only that the airlines vary among themselves in terms of their redemption rates, but also that their individual rates of redemption vary over time. Presumably these variations have fueled customer frustration with reward availability. In an effort to put some structure on the airlines' limited duty to perform their promise to award free travel to program participants, we then explore the applicable law. In Part III, we note initially that the Deregulation Act preempts most litigation against the airlines. Our exploration of applicable U.S. Supreme Court precedent and ensuing interpretive decisions in the state and especially federal appellate courts, however, leads to the conclusion that even the Deregulation Act's broad preemptive language will not preempt a suit to assess the parameters of the obligations engendered by the frequent flyer program contract's own provisions. Interpretation of the airlines' unambiguous yet undefined language of limitation, under existing frequent flyer precedent, is likely to revolve around not the airlines' intentions or actual performance but instead around consumers' objective expectations. We then examine the relevant law of contracts of adhesion to demonstrate that frequent flyer programs' limiting language—“subject to limitations” or “not available on all flights”—should be interpreted in a manner consistent with consumers' reasonable expectations. While these caveats perhaps imply that a wide range of possible levels of performance by an airline are possible, they cannot possibly mean that no performance at all is due. But is any redemption level above zero permissible? Or do some rates of reward redemption constitute breach of the parties' agreement? To answer this question, we first establish that all frequent flyer programs are contracts of adhesion. Building on the considerable intellectual work that has been done by others in that unique area of contract law, we are able then to establish that the adhesive terms of the frequent flyer program contract should be interpreted in the adherent's favor, requiring at least a “reasonable” level of award travel availability. Following this legal conclusion, we consider the feasibility of several data-driven means of demonstrating what is a reasonable range of performance. Part IV considers an industry average approach using trade usage as its foundation, before delving into two survey-based approaches for establishing reasonable consumers' expectations regarding the airlines' award redemption obligations. We illustrate exactly how specific survey data could be used to establish the consumers' expectations with regard to obtaining a free award seat. An alternate approach, the threshold method, parallels the use of survey evidence in consumer confusion and deceptive advertising cases. This approach provides an estimate of the redemption levels that would be required to avoid deceiving a sizable number of consumers. These types of empirics are well accepted by courts that consider what effect a marketing message has on consumers. They are equally useful in determining what an airline's limiting language means to frequent flyers. This part addresses how the major domestic frequent flyer programs operate in terms of the rules governing their members' accumulation and redemption of miles. The description is divided into the features offered by the traditional carriers' programs, which are relatively similar to one another, and the features of the programs operated by the so-called low-cost carriers such as Southwest Airlines and JetBlue. Nearly every airline offers a customer loyalty program that encourages passengers to travel or to make purchases using an affiliated credit card in exchange for an opportunity to accumulate miles for later redemption.13 These programs—always branded, but for our purposes generically called “frequent flyer programs”—also grant frequent flyer miles based on the dollar value of members' dealings with the airline's partners: for example, other airlines and cruise lines, hotels and vacation packages,14 car rental companies,15 online retailers, financial planners, realty services, utility companies, and even donations to enumerated charities.16 Members accumulate these miles with the goal of ultimately redeeming them for various rewards, including round-trip airline tickets, upgrades to a higher class of service on a flight, vacation packages, magazine subscriptions, gift cards, and other awards.17 Frequent flyer programs also routinely provide incentive bonuses for the establishment of new credit card accounts and balance transfers. In the typical case, the airline promises a consumer who establishes the credit relationship and charges a specified amount on the card an initial bonus that is, in principle, good for a free domestic travel ticket.18 These frequent flyer programs are huge revenue generators for the airlines.19 Unsurprisingly, the programs offered by the major traditional U.S.-based carriers—the “legacy” carriers—tend to operate alike.20 Program members generally earn miles based on the actual number of miles flown.21 Some programs offer mileage award minimums for flights of less than 500 miles.22 Several also award mileage premiums to passengers flying business and first class, calculating miles earned when flying in those classes of service using multiplier rates depending on the class of service or elite status level.23 Once a frequent flyer has accumulated miles, he or she can then redeem them for rewards from the airline's retail partners or for one-way and round-trip airline tickets. The legacy carriers divide their redemption rates into two- or three-tiered systems. The lowest redemption levels—such as Low Awards, Saver Pass, SuperSaver, or MilesAAver—naturally are seats in coach class, and they are typically available on the fewest dates or the least desirable travel periods or days of the week. These allow members to redeem their accumulated miles at the most discounted rate. For example, with US Airways's Dividend Miles program, a member can choose dates on which “Low” mileage awards are available and redeem as few as 12,500 miles one-way (25,000 miles round trip) for a free travel award.24 It is these lowest reward level travel awards that are held out as entitling a putative credit card applicant to free travel. Because this level of award is the most requested and the available data on these award redemption rates is most comprehensive, our research is focused here. Critical to our research question, the legacy carriers' programs limit the availability of the lowest level reward seats using blanket language. Delta's SkyMiles program is typical: “Seats available for Award Travel are limited and may not be available on all flights or in all markets.”25 Elsewhere in its SkyMiles program description, Delta provides more detail regarding the reservation of rights this affords the airline: “Delta may also limit the seats available for Award Travel . . . redemptions to any or all destinations (including, but not limited to, allocating no Award seats on certain flights).”26 Other domestic airlines' programs, including those of Alaska Airlines, Continental, United, AirTran, American, and US Airways, follow suit. Similarly, these programs' terms and conditions contain disclaimers that permit the relevant airline to modify any aspect of its program with or without notice. Delta, United, and US Airways reserve the right to change their frequent flyer programs at any time without notice, and typically to terminate their programs with six months' notice, jeopardizing the value of miles already accumulated by their members.27 Of the major traditional domestic carriers, only US Airways lists specific dates that reward travel is restricted, usually occurring around holidays and holiday weekends. The other airlines do not specify restricted dates. But United's terms and conditions provide that the airline may “add an unlimited number of blackout dates.”28 Similarly, American's AAdvantage program terms and conditions allow it to “add travel embargo dates, limit[ing] the number of seats available for award travel (including, but not limited to, allocating no seats on certain flights) or otherwise restrict the continued availability of travel awards or special offers.”29 Other airlines contractual language is comparable, noting for example that “[s]eats available for Award Travel are limited and may not be available on all flights or in all markets.”30 Thus, regardless of teaser advertising to the contrary, a consumer who establishes the credit card and makes his purchases accordingly, with the expectation he will be able to book his next flight using a free ticket automatically obtained at the lowest level of redemption allowed, is bound to encounter limited seat availability.31 The same limitation applies to any frequent flyer member who simply joins the program and eventually accrues his or her 25,000 to 30,000 miles, with the expectation that a free ticket will be available the next time he or she seeks to travel. As we shall see, in practice, that limitation will be far more restrictive on some airlines than it is on others. Similar but not entirely parallel are the frequent flyer programs operated by the discount or so-called low-fare airlines, like Southwest Airlines' Rapid Rewards,32 AirTran's A+ Rewards, and JetBlue's TrueBlue program. AirTrans members earn credits based on “flights” flown,33 and the airline allows redemption based on the total number of such flights. More specifically, A+ members earn a single credit for a one-way flight and two credits for each round-trip flown. A+ members can request a round-trip coach ticket after accumulating 16 credits and a business class ticket for double that, or 32 credits. Until March of 2011, Southwest Airlines' Rapid Rewards program operated similarly, based on flights or segments flown. It formerly allowed members to choose between a Standard Award, for which the member had to earn and redeem 16 points, and the Freedom Award, which “cost” 32 points, but which opened up greater seat availability, subject to blackout dates. In early 2011, the Rapid Rewards program was restructured. Now, the points Southwest flyers earn for travel are based on the actual dollar amount paid for the ticket. Concomitantly, Rapid Rewards members can now redeem points for any ticket on any flight with no blackouts,34 but the number of points required to obtain a reward ticket is based on the advertised price of the ticket desired: Business Select seats require 120 points per dollar, while Anytime and Wanna Get Away Fares require 100 and 60 points per dollar, respectively.35 JetBlue's TrueBlue program operates in a manner very similar to Rapid Rewards' new program.36 In this part, we consider and compare the redemption rates of the domestic airlines. In 2010, a team of researchers at IdeaWorks, a Wisconsin consulting firm, began to annually study and rank the airlines in terms of percentage of positive award queries. As can be seen (see Table 1), not all airlines deliver on their award ticket promises at the same rate. Several programs—including those of Southwest Airlines (and international carrier, Air Berlin)—are magnanimous, redeeming reward requests nearly 100% of the time.38 Others, like Delta Airlines' SkyMiles and US Airways' Dividend Miles, have historically been “stingier.”39 In 2010, these programs granted merely 12.9% and 10.7% of their domestic reward requests, respectively, ranking last and second-to-last of the twenty-two domestic and international airlines studied.40 After publication of IdeaWorks's first ranking, these Delta and US Airways numbers were higher in 2011, reflecting increases of about fifteen percentage points for each program from the prior year: Delta to 27.1% and US Airways to 25.7%.41 Nonetheless, in 2011, SkyMiles and Dividend Miles still ranked twenty-third and twenty-fourth, respectively, of the twenty-four frequent flyer programs in the IdeaWorks study.42 Redemption rates for 2012 reflected stagnation at Delta, which still only redeemed rewards 27.1% of the time and then ranked last of the twenty-three airlines studied in 2012.43 Its 2013 number increased by 2.8% to 36.4%.44 US Airways moved up to 33.6% in 2012, but even with a 6.3% increase in redemption rate, it still ranked twenty-first of the twenty-three airlines studied and second-to-last of the domestic carriers.45 As of 2013, Delta's and US Airways' programs still tied for last place among all airlines studied, despite modest increases of 2.8% at US Airways and 9.3% at Delta.46 The other traditional domestic carriers—American, Continental, and United—have historically been more middle-of-the-road. IdeaWorks's initial 2010 study revealed positive redemption rates for these three airlines of 57.9%, 71.4%, and 68.6%, respectively, while the comparable numbers for 2011 were flat or reflected modest increases: 62.9%, 71.4%, and 71.4%.47 Continental and United merged in 2011,48 and the combined programs' redemption rate for 2012 shot up to 87.1%—putting it in a tie for seventh place overall.49 Struggling in bankruptcy, in 2012 American's program to a rate, which put it in place of the twenty-three programs In 2013, these two legacy carriers' redemption rates as to the prior year: American's increased by to and United's to The discount airlines, in the have their frequent flyers Southwest Airlines has the all with a redemption rate between and 100% each AirTran's program has been more a rate in in 2011, in 2012, and in JetBlue's TrueBlue program was in the 2011 ranking of all airlines that with a redemption rate of The TrueBlue program one to in 2012, with a rate of but to a place tie with Airlines by of only a increase to in In to the that the low-cost airlines' programs are which might for their to to program members' redemption requests, one that their redemption rates are higher the low-fare airlines have miles out to be In some cases they are they to have and they not to be as tied to credit and the mileage bonuses associated with those the legacy carriers' programs are more similar than they are they a minimum level of miles that the consumer to a free travel These however, are more difficult to obtain on some airlines than others. The range of positive redemption for these airlines in the studied was from about to The mean and for 2010 were and 57.9%, the mean and for 2011 were and 62.9%, of to for 2012, these were and respectively, with the likely to the of United's and the total number of traditional domestic airlines from to Airlines' somewhat in redemption rates in The 2013 wer

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