United Airlines announced changes to its MileagePlus loyalty program that will reward frequent business travelers but hurt occasional or economy travelers. The move follows similar changes announced by Delta Air Lines earlier this year.
Starting in March 2015, MileagePlus will base rewards on the amount spent to buy a ticket rather than the number of miles flown.
“These changes are designed to more directly recognize the value of our members when they fly United,” said Thomas O’Toole, president of MileagePlus, in a statement.
Under current MileagePlus rules, regular loyalty members flying round trip from Chicago to London for $1,100 would receive 7,900 award miles. But under the new program, which bases rewards on the $900 fare that excludes taxes and fees, passengers only earn 4,500 miles for the flight.
MileagePlus Premier Platinum members would earn 9,900 award miles for the same $1,100 flight. A traveler who springs $4,000 for a business class seat ($3,638 without taxes and fees), would get 40,000 miles.
“This was an easy decision for United, in that Delta announced a similar change months ago,” said Robert Mann, president of Port Washington, N.Y.-based airline analyst firm R. W. Mann & Company Inc. “The motivation is clear: reward and recognize the 20 percent of higher-fare, frequent business travelers who represent 70 percent of air travel spending.”
The change has become increasingly necessary as fares and load factors, the percentage of seats filled by paying passengers, have risen, according to Seth Kaplan, managing partner of Airline Weekly, a Fort Lauderdale, Florida-based industry research firm.
“The opportunity cost of letting somebody fly for free is very high,” Kaplan said. “If you’re giving away a seat to somebody, it’s more likely to be a seat that somebody else might have paid for, or that person might have paid you a very high fare if they didn’t get the free seat.”
But the change doesn’t come without risks, especially as United ranks second to last in customer satisfaction, based on a J.D. Power 2014 North American Airline Satisfaction Study released last month.
Also, much of United’s profits come from consumers who don’t fly often, but use a Chase United MileagePlus Explorer credit card, for which Chase Bank purchases billions of dollars in miles for its customers, according to Kaplan.
“United could push too far and get to the point where people don’t find the program worthwhile anymore, and they say ‘I never use these miles and I don’t even accumulate many miles. I don’t want this credit card anymore,’” Kaplan said. “If that started happening on a large scale, then it could turn out to be a bad deal.”
United also risks losing customers to more popular airlines with better loyalty programs. While low-cost carriers like Southwest, JetBlue and Virgin America already calculate rewards based on fare cost, the concept is a new to big airlines.
American Airlines has yet to announce similar changes, although the company has indicated it will adopt a similar program after completing the 2013 merger with US Airways. If American doesn’t, however, United’s MileagePlus could be in trouble.
“The airline that’s not preferred has to have the more generous frequent flyer program to entice people onto that airline,” Kaplan said. “If American doesn’t make the same changes by 2015 and United appears to have the less generous program than American, that doesn’t put United in a great position.”
The company has struggled since its 2010 merger with United Continental Holdings Inc. In the first quarter ended March 31, the airline lost $609 million, or $1.66 per diluted share, down from a loss of $417 million, or $1.26 per diluted share, in the same quarter the year before.
Shares of the airline fell more than 5 percent Wednesday to $45.17 at midday after Deutsche Lufthansa drastically cut 2014 and 2015 earnings forecasts, bringing down share prices throughout the industry. United shares have risen 47 percent over the past year, however, as the industry’s prospects have brightened.