It Was 20 Years Ago Today
||:: History of Frequent Flyer Programs
They may not have begun as a drawing on a napkin and they may not be dot-com wonders, however, frequent flyer programs have come a long way and carved their own niche these last two decades.
By Randy Petersen (May, 2001)
Unlike modern myths of popular pastimes, frequent flyer programs did not begin in a garage, they weren't scribbled out on a napkin in Bob Crandall's kitchen, nor are they a dot-com wonder. The fact is that frequent flyer programs, while celebrating their 20th Anniversary on May 1, aren't anything they started out to be except one thing - successful. The roots of these programs can be traced back to 1979 when Bill Bernbach, CEO of Doyle Dane Bernbach -- the advertising agency for American Airlines proposed that American do something special for its best customers. At that time, Bernbach was watching with wonder as banks were offering toasters and electric blankets to their best customers and to new customers for opening up accounts. They were having great success with the idea. The agency's idea was to offer American's best customers a special "loyalty fare." Following deregulation in 1978, the airline industry was afloat with ideas that all evolved around airfares. Bernbach's idea was passed around until Nick Babounakis, then director of Marketing Plans for American Airlines, discussed the idea in mid-1980 with Rolfe Shellenberger, who was manager of Marketing Plans at that time. They both came to the conclusion that frequent travelers would not likely feel rewarded by a special fare. The two were supported in their conclusion by the Pricing Department at American Airlines, which offered up a conclusion that a loyalty fare would likely be matched by any other airline and American would likely lose some revenue from decreased yield. Pricing then handed the file off to the then Senior Vice President of Sales and Marketing, Tom Plaskett, who passed it along to Nick Babounakis and Rolfe Shellenberger asking them to try and salvage something from the variety of opinions and research that had been done.
About the same time, Western Airlines ("The Only Way To Fly") introduced its Travel Pass program, which might well be called the first real frequent flyer program. The Travel Pass program awarded $50 in travel certificates to passengers that flew five trips with Western. While not mileage based, it did pass the reward test and moved beyond the "earning copper" programs that were already in existence. These earlier programs were designed for the business traveler, and were literally the only marketing efforts by the airlines to this important group. At that time, the airline industry had abandoned the business traveler and was comfortable in turning this customer over to the travel agency.
After some ideas were kicked around at American, the Marketing Plans group agreed that a free trip would mean a lot to a frequent traveler if it included a deal for a companion and a first class upgrade. At the time, first class was a relative unknown for the frequent traveler, the space was usually occupied solely by movie stars and VIPs. The idea was then defined in a short paragraph for Tom Plaskett, asking to pursue a concept that offered a frequent traveler the equivalent of a free first class trip to Hawaii from any domestic point, with a free upgrade for any companion for whom a ticket at even the lowest fare was purchased. Of course, Hawaii was kind of a symbolic destination because most business travelers would not have traveled there on business and would find it an attractive incentive for them to fly American Airlines.
The group went on to define the rules and the rewards, the lowest award being a free upgrade from any fare. Its "cost" was pegged at 11,000 miles because American's longest city pair at that time was Boston to Los Angeles and they didn't want travelers to be able to get a free upgrade after only two transcontinental roundtrips (10,444 miles). They also offered discounts from any fare at levels of 25,000, 30,000, and 40,000 -- 25 percent, 50 percent and 75 percent respectively. The grand prize was 50,000 miles for the first class roundtrip plus the companion upgrade. When these programs began, there was no such thing as free coach tickets, the closest thing being discounts off a paid ticket in coach. Also, the emphasis was on first class as an award, not a benefit. Times have changed, as today most awards are redeemed in coach and the reward of first class is usually defined as a perk of the program's elite level program.
The early rules of the program included such caveats as: Awards would not be transferable to anyone. Accumulation must occur in the 12-month period beginning with the first trip. First class would give you a 25 percent bonus in mileage accumulation. Actual flown miles or nonstop distance between origin and destination on through flights would be credited. One free layover in addition to point of turnaround would be permitted.
Interestingly, it doesn't seem as if Bob Crandall, then president of American Airlines, was directly involved in the creation of AAdvantage, except insofar as he and Tom Plaskett discussed what was being done.
Plaskett hired Hal Brierley, a successful direct marketing consultant whom he had met at Harvard. Brierley helped to define the rules and to add professionalism to the direct mail program. Brierley went on to found his own company and has successfully directed the frequent traveler efforts of many programs including United Mileage Plus, Hyatt Gold Passport and others.
But while it seems that American orchestrated a smooth and successful launch, there were times when the program almost didn't get launched. Early on, some vice presidents and sales managers tried to derail it, mostly because of the turf war it was starting. The argument was that this isn't the right time, we've got too much on our plate right now. Finally, Bob Phillips, vice president of Passenger Services, sprang to defense of the concept and gave his complete commitment to its success, citing that his boss (Tom Plaskett) thought highly of the concept. In a meeting with sales and marketing guys, Phillips said "I think we can do a good job of it, I think it's a great thing for American Airlines. And we're finally doing something for the customer." It was a courageous move and really made a difference.
And then there is that name -- 'AAdvantage.' The decision to name the program fell to the advertising agency, they called all the marketing people from American together and, from a list of names on a blackboard, voted unanimously for AAdvantage. They discovered that, by using a typewriter, they could type the two A's and half way up between the two AAs put a little 'x' and it looked like a bird. But there was a slight problem. While American called the program 'AAdvantage,' many early customers called it 'A' 'Advantage.' Over time, the name became a brand and the double A became silent. Clearly, the launch of this program wasn't a completely smooth ride. In fact, some of the public, and CEO's and CFO's of companies who used American for much of their business travel, soon began to contact American complaining of 'this immoral' thing that American was doing. Today, some of that sentiment stills exists.
Financial justification for the program was based on incremental tickets purchased by award redeemers for their companions, plus "stretch," a word that was used to define extra trips generated by the program. All the research done by American in this period indicated that all costs of the initial program would be covered if each traveler in the program took a quarter of an extra trip per year. Later on, it was discovered that the induced "stretch" actually was more like six extra trips on American Airlines per traveler, per year.
In The Beginning...
The first news covering frequent flyer programs was published on May 7, 1981 when The Wall Street Journal reported that United Airlines, which had launched a half-fare coupon promotion some two years earlier, was beginning a new program to lure frequent travelers. The story went on to recap the award schedule and even cite the fact that United was offering a sign-up bonus of 5,000 miles without having to fly. Mysteriously missing in this first article was the name of this new United program and any mention of American's similar program, which was launched days prior. In fact, United responded so rapidly to the American program that United has often been credited for launching the first program. In truth, though, the United Mileage Plus program celebrates 20 years of operation on May 6, just six short days, and many late nights, after the launch of American's AAdvantage program on May 1.
On May 12, 1981, The Wall Street Journal printed yet another story on this emerging trend, announcing that TWA was launching its own program. In the article, TWA boasted that its program offered the "greatest potential benefits because the airline has a more extensive international system than carriers with similar programs." Even early on, no single program dominated the headlines, or the member's choice. Our favorite early news coverage occurred on Sept. 9, 1981, when The Wall Street Journal reported the following news: "Airline bonus games, which reward frequent fliers with free air travel or discounts, were early causalities last month when the air-traffic controllers went on strike. As a result of the strike and the accompanying confusion, passengers scrambled to get any flight they could, and the 'Brand Loyalty' that the games were supposed to inspire was diffused." It seems that the early media coverage was suspect of these "games."
This same article goes on to quote Mark Lambrecht, United's Direct Marketing and Promotions Manager as having said that United, "...may have opened a Pandora's Box" and that the airline may have to increase its awards to stay competitive with the smaller airlines. Now that's an interesting twist, given that today, many are trying to convince Congress that these programs are driven by the bigger airlines. And, finally, the article states that "Airline-industry observers doubt whether the bonus-flight programs will generate any new traffic for the airline system, which has been losing passengers for nearly two years."
And so the program was launched. At the time, American had about 60,000 members in its Admiral's Clubs and another 130,000 members in the American Traveler program. So on launch day, they simply mailed letters to these people, pre-enrolling them in the program and giving them their new AAdvantage number. In a second wave of membership growth, American bought the American Express list, which brought many new members to the program. The thing that surprised American at this point was that it was only witnessing the tip of the iceberg. Its good customers from the Admiral's and Traveler programs were not nearly as numerous as the people that eventually became new members of the program. That was a surprise, as American realized it had under-defined the market.
It wasn't until United and TWA got involved, that the program became liberalized. In the fall of 1981, United offered a deal where six trips would qualify any traveler in its program to receive a free trip. However, the rules did not restrict it to members only, so American matched United, worrying about what might happen as people earned, then sold free trips to friends and strangers. That behavior, of course, would cut deeply into the risk factor because now any free trip might deprive American of full-fare revenue from somebody who used a scalper.
After a few months of success, an element of the program emerged: nobody really jumped at the discounts for coach class tickets and everybody was after the free trip, which was only available in first class. American had calculated something like three to five percent of the regular travelers would qualify for free tickets. It turned out to be more like seven to 10 percent. American ran out of first-class seats to Hawaii and could not fulfill the demand of first-class seats at the end of the first year. The big question was what was the program going to do? The demand was larger than the supply.
The First Five Years
Launched on May 1, 1981, it wasn't until October 1981 that AAdvantage started to issue a monthly mileage summary. Special award statements were generated separately whenever a mileage award level was achieved. Also in October 1981, AAdvantage introduced Hyatt and Hertz as "award" partners and its newest innovation: two first class roundtrip tickets to any American Airlines destination for 75,000 miles. Fifty thousand miles was one first class ticket plus a free first class upgrade for a companion. The original award structure allowed you 12 full months to accumulate mileage toward an award and when you claimed that award, you automatically began a new AAdvantage year. The original newsletter contained messages from Tom Plaskett, then senior vice president of Marketing, now past chairman of Legend Airlines with stops at Pan Am. From Nov. 15, 1981 through Jan. 31, 1982, AAdvantage held its first "AA Holiday Special," a promotion much like today's offers. If you flew 7,000 miles with a minimum of five flight segments, you received a free first class ticket to any American Airlines destination. In those days, the airline didn't fly globally like it does today, and the free award certificates were redeemable at travel agencies.
One of the more unusual promotions involving AAdvantage was in February and March of 1982. The program offered "AAdvantage Happy Hour" on all Dallas/Fort Worth flight departures. Show your AAdvantage card on board, and you received the second cocktail, wine or beer free. In 1982, the program also had several "day-of-the-week" bonuses. You received extra bonus miles for Tuesday or Saturday flights. In April of 1982, another promotion involving miles and flight segments was launched. Fly 5,000 miles with at least five segments and you earned a free first-class ticket plus first-class upgrade on American to Mexico, the Caribbean, Bermuda or the Bahamas. On May 1,1982, AAdvantage ushered in a new twist to its program -- mileage-earning partners. British Airways joined the program allowing members to earn mileage when flying British Airways, but more importantly for many members, the ability to use an award to Europe on British Airways. There was one caveat with British Airways -- only 50 percent of mileage flown in Tourist Class was awarded.
The original 1981/1982 award chart looked something like this:
1981/1982 American AAdvantage Chart
- 12,000 miles - one first class upgrade from a coach ticket
- 20,000 miles - 25 percent off a roundtrip ticket
- 30,000 miles - 50 percent off a roundtrip ticket
- 40,000 miles - 75 percent off a roundtrip ticket
- 50,000 miles - one free first class roundtrip ticket plus first class upgrade on a companion ticket
- 75,000 miles - Two free first class tickets on American
August 1982 began with an award travel option to London, 20,000 miles earned a free upgrade from first class to Concorde on British Airways while 40,000 miles was good for a free companion roundtrip economy ticket plus one free roundtrip coach ticket to an American gateway city or a roundtrip upgrade from economy to business class on American. And July of 1982 turned the world of privileges upside down -- AAdvantage Gold was introduced.
One of the great offers for AAdvantage members was in September or October of 1982 when members were eligible for special discounts from Hyatt Hotels in Mexico. Imagine a double room at the Hyatt Cancun Caribe for only $37.50 or a double room at the Hyatt Regency Acapulco for only $30.50. Ah! The good old days. In September of 1982, AAdvantage introduced Hertz awards as part of its program, followed by the addition of Holland America Cruises on Oct. 30. You could earn miles for each day you were on board ship and it included the ability to earn mileage based on total cruise mileage. From Oct. 21 through Dec. 15, 1982, the highly successful "AA Double 7 Special" promotion took place. Fly 7,000 miles with seven segments during this time period to earn two free coach tickets.
In April 1983, the AAdvantage program was extended indefinitely. During the "Winter Special" from Jan. 31 through March 15, 1983, members could earn one free coach ticket for flying 8,000 miles with six segments for $150 per segment, if you had enough mileage to qualify for the free ticket(s) but not enough flight segments. The purchased segments counted only toward eligibility and no mileage credit was issued. On the other hand, if you had enough segments, but not enough miles to qualify, then you could exchange some of your current AAdvantage miles to qualify. You could exchange 5,000 AAdvantage miles for 500 "Winter Special" miles, or 10,000 AAdvantage miles for 1,000 "Winter Special" miles. Also in 1983, the AAdvantage program boasted that it had the only frequent flyer program that was fully automated and required no tickets or coupons. In June of 1983, Frontier Airlines joined the program, offering mileage accumulation and award redemption.
The next year turned out to be a very busy year for AAdvantage. Inter-Continental hotels and Sheraton hotels joined the program in January and February of 1984, and Avis signed on as a car rental partner. Hertz and Hyatt dropped out of the program during the early months of 1984 as AAdvantage began to develop a full complement of partners. In 1984, Frontier Airlines ran the first of the "Fly Twice, Fly Free" bonus promotions which are still around today. KLM joined the program in June, and from July 1 through Oct. 31, 1984, members could earn 20,000 miles for purchasing a used car from Avis. Also in July, Holland America Cruises left the program and in October 1984, Singapore Airlines joined the program. In the fall of 1984, the AAdvantage program introduced its "Something Special" bonus promotion, which gave a 50 percent mileage bonus on all American and Frontier flights. The first free transatlantic first class travel awards were introduced in November of 1984.
Ante Frequent Flyer Programs
Before mileage programs, prior to reward programs, there were traveler recognition programs offered up by Alaska Aeronaut, American Traveler, and United Executive Air Travel Program. United's Executive Air Travel Program was designed to recognize city strips -- the cities members flew to the most. Imagine if you will, a walnut plaque resplendent with your name; a bronze, silver and gold metal strip and the words "for continued use of our airline on flights to the cities listed below." The first flight from a United departure city to a United destination city earned the traveler a bronze destination city strip when they sent United a completed Flight Verification Card (FVC). The member received a silver destination strip for the second flight into the same destination city. When United verified a member's fifth flight into that same United destination city, the member was sent a gold destination city strip. United's computers tracked flights between their city pairs and, when the recorded mileage added up to a standard running total, the member became qualified for an appropriate Mileage Medallion. Mileage Medallions were automatically awarded at 100,000 mile, 500,000 mile and 1,000,000 mile levels. City Frequency Awards were earned by recording additional flights (beyond five) to a particular city. They were awarded for a minimum of 15, 25, 50 and 100 trips respectively, to the same destination city. Each plaque contained 18 strips and members applied city strips in layers as each city built up over their travelers.
In 1985, the AAdvantage program became involved in the first of many social causes that it has become known for. It was the introduction of the "AA Liberty Club." If you made a tax-deductible contribution of $100 or more to the Liberty Centennial Campaign, you were given a 10 percent bonus on all actual mileage flown in 1985. The program ran again in 1986, allowing members to earn a yearlong bonus of 10 percent for a $100 contribution. This was also the year that coupon brokers became a nuisance for frequent flyer programs, and in April of 1985, AAdvantage published its first notice of rules governing the barter or sale of awards. Frontier left the AAdvantage program in mid-March, 1985 and at about the same time, AAdvantage introduced a "minimum mileage balance" program which ensured at least 5,000 miles remained in an account.
AAdvantage had another banner year in 1986. It introduced Qantas as an international partner and on June 1, Pan Am joined the program. Although Pan Am would leave the program after just a few years, it was keeping an open mind on the growth of services and benefits for its members. Also in 1986, AAdvantage introduced its award expedite service as a way for the growing number of members to claim awards at the last minute. In 1986, AAdvantage celebrated its 5th birthday with an "Anniversary Special." If you flew 10,000 miles with eight segments, you earned a free coach ticket. Eighteen thousand miles with 14 segments qualified you for two free coach tickets. From 1987 on, we trust you've been paying attention to InsideFlyer and can remember for yourself.
But what of United Mileage Plus?
Launched just six days after the AAdvantage program, this program deserves equal attention as it forced AAdvantage to change direction early on. United had the Mileage Plus program all mapped out and sitting on a dusty shelf while it used script discounts to calm an unsettled passenger list because of a prior strike that had disrupted its route system. United had it's own "godfather" in the form of Steve Grosvald, United's manager of Merchandising and Promotion at the time, who remains today a foremost expert on the topic. Although admitting that the AAdvantage program announcement caught United by surprise, it wasn't unexpected. With deregulation in full force, the United team believed it would only be a matter of time before some sort of "rewards" program would become a reality. At the time, United executives had been using Western Airlines Travel Pass as a compass. United's recognition program at the time was the Executive Air Travel Program (EATP) which had some 300,000 members. While the nugget of an idea for rewarding customers at American Airlines came from its agency at the time, so did a similar idea come from the direct marketing firm that handled the EATP program for United. This "Air Script" idea used currency-like script to reward frequent flyers with free transportation. But Dick Ferris thought it was a bit premature and would be a costly foray. In the meantime, the EATP as a recognition device was going just fine and people were collecting their little city strips and the 500,000-mile medallions to add to their plaque. So that program really gave United the mechanism and it was able to turn on Mileage Plus instantly.
Dan Moonjian, then vice president of Market Management recalls, "I will tell you that we thought we followed up very quickly, the program was sitting on the shelf. We had gone out some time before that and developed a whole bunch of programs that we basically felt we could use to come back from strike on. And basically at that time we elected to go with the half fare coupon because we were looking for something with an immediate response. As the frequent flyer program was something that would build over time, we said okay we're going to go with the half-fare coupon and let's put this frequent flyer thing on the side in case we need something else further down the line and we did. Then lo and behold not long after that American came out with AAdvantage and we basically pulled that thing off the shelf, dusted it off, called it Mileage Plus and put it to work." The Mileage Plus name came about because United was looking into many things that were a 'plus.' "Not only mileage but there were a lot of other things that we were using the terminology 'plus' with. I think even outside the airline industry the word 'plus' was being used in the same way you would use, and I hate to use this analogy, a new and improved detergent. People were using the word as something that would be descriptive, something new and bright, and something to be called attention to. And that's one of the reasons we would use it. At that time we were even planning on naming what became United Express the name of United Plus. We had a whole series of things that we were looking at labeling with that 'plus.' Most of them didn't come to fruition but Mileage Plus did," says Moonjian.
In those days Finance and Marketing were always at each other's throats. But fortunately United had some senior level executives in the company like John Zeeman and Dick Ferris who were basically making decisions. And it went all the way to the top before it got done. It was a little bit easier for United because American had already been there. Dan recalls, "If we had been trying to do it ourselves, I don't know if we would have it out today."
The advantage that United had over American was in the area of technology. United felt that it could use the same technology as its EATP and use it to keep track of the account activity of the program. That proved to be right and days later United Mileage Plus was launched. Grosvald says that he asked for thirty days to launch the program but Zeeman, then senior vice president of Marketing and John Blackman, then vice president and general sales manager nixed the idea and decided that United had a window of a week to ten days to get it launched. The solution to neutralize some of American's early advantage was a 5,000-mile enrollment bonus.
Grosvald recalls: "We responded so quickly that The Wall Street Journal gave us the credit for launching the program. I found out about that after the newspaper article came out. I got a call from a fellow employee, Chuck Novack. Chuck said he got a call from a reporter from The Wall Street Journal asking about the new frequent flyer program. So he chatted on and on about all the wonders of Mileage Plus, what we were doing, when we were launching, this and that. So the reporter writes the story that United was the first out with it. And American Airlines raises hell about it. The reporter called Chuck back and said "Why didn't you tell me you were responding to American?" He replied, "you didn't ask!" And so the stage was set for one of the longest running topics in publishing.
The first elite programs were released by both American AAdvantage and United Mileage Plus. The AAdvantage Gold program was launched to the approximately top 2 percent of flyers on American Airlines and launched with a budget of only $100,000. United on the other hand, not willing to simply play follow the leader with American, went after a specific threshold level which has become the standard in the industry today.
And so, after 20 years what have we learned? To some extent, these programs have become a victim of their own success with members in almost every household in America, not to mention the world. You can always read something relating to frequent flyer programs in almost every newspaper, magazine or news show you can mention. The earning power and liability is measured in the billions and trillions these days, and while there are pockets of award destination drought and member resistance to change, there's no doubt that awarding over 15 million free airline tickets a year is something that even the most optimistic founder of any of these programs could not have predicted. Do these programs make the world a better place, or are they a backhanded slap measuring our capacity for greed? We vote that we will never answer this question, so enjoy the party. AAdvantage, please blow out the candles and may everything you wish for come true.