What's the point of class-of-service bonuses?

With the 2015 division of US airline loyalty programs into revenue-based (Southwest, Delta, United) and distance-based (American, Alaska) models, deciding on a primary carrier and loyalty program has become a game with multiple moving parts. While loyalty programs have always been confusing, evaluating a loyalty program now requires prospectively considering:

• your average cost per mile flown each year. If it's over the break-even point with Delta and United, you may be better offer continuing to credit your flights to them. If it's less than the break-even point, you'll be better off crediting your flights to a distance-based award program;
• how much of a premium you're willing to pay. How much more expensive are the typical American or Alaska flights out of your home airport? Are you willing to drive to a more distant airport in order to credit miles to a distance-based carrier?
• how much you value elite benefits. Crediting paid American and Delta flights to Alaska, as I do, means foregoing upgrades and same-day travel benefits on those flights. Likewise high-level elite status with either airline – but not Alaska – comes with regional and global upgrade certificates that can move you from economy to business class (or first class in American's case) on paid international flights.

In my case, taking all those factors into consideration, I decided to go with Alaska Airlines Mileage Plan as my primary airline loyalty program. That's principally because my flexible schedule means I'm always paying as little as possible for airline tickets, and redeeming miles for award flights whenever possible. My cost per mile flown would generate a trivial number of redeemable miles each year, while crediting flights to Alaska will continue to produce a noticeable number of miles.

All this was on my mind this week when I called into Delta to add our Alaska Airlines frequent flyer numbers to our first class tickets returning from New Orleans. In Delta's revenue-based model, those tickets would earn 1,715 SkyMiles for a general member or 2,401 SkyMiles for a Silver Medallion.

In Alaska's distance-based Mileage Plan, they'll earn 2,495 miles: 1,426 base miles and a 1,069-mile class-of-service bonus (we'll earn additional bonus miles as Mileage Plan elites, as well).

Thinking about this raised a seemingly-obvious question: what's the point of class-of-service bonuses, anyway?

Premium fares are more expensive because they're premium

In principle, passengers might be willing to pay more for premium fares for a number of reasons: full-fare economy tickets are freely changeable or refundable; business and first class fares include free checked bags, meals, drinks, and more comfortable seats or beds.

Of course at the other end of the spectrum Delta's cheapest "E" fares don't even include the ability to choose your seat.

The point is, why would airlines feel the need to bundle bonus frequent flyer miles into premium fares, when the fares are already higher because of manifest differences in the product being sold?

The way I see it, there were two possible reasons.

People are suckers

No one's ever gone broke underestimating the intelligence of American consumers. Every day I'm sure consumers buy more expensive tickets than they actually want or need in order to earn bonus frequent flyer miles, the value of which doesn't come close to making up for the difference in prices.

I bought our first class tickets using US Bank Flexpoints, so I was going to be paying the same 20,000 Flexpoints per ticket as long as the total price didn't exceed $400. Delta was selling a "G" class fare for around $300 and an "A" class fare for $392. Using Flexpoints, it was a no-brainer to choose the "A" fare, since it will earn 40% more Mileage Plan miles. I wouldn't have done the same if I were paying with cash, but are there consumers who would? Without a doubt.

People take advantage of corporate travel policies

The other explanation is that the individuals who accrue frequent flyer miles for trips paid for by their companies lobby for corporate travel policies that allow them to book premium fare classes. In other words, class-of-service bonuses pit the individuals doing the traveling against the companies that pay for it.

I'm not questioning that there are individuals who really do need fully flexible tickets. A consultant who truly has no idea how long an assignment will last springs to mind as the classic example.

But when refundable flights cost 3 or more times as much as non-refundable flights, simply not knowing if you'll have to return Friday or Monday isn't an excuse; the company would be better off booking two (or three!) non-refundable flights, while the employee doing the flying would much prefer the class-of-service bonus earned on a single changeable/refundable fare.

Enjoy class-of-service bonuses while they last!

While class-of-service bonuses are a scam, that doesn't quite do justice to the situation. Class-of-service bonuses are a scam because frequent flyer programs (and loyalty programs in general) are a scam. They exist in order to cloud consumers' judgment and earn excess profits on top of what airlines or hotels would earn providing commodity travel services.

Travel hacking has been the recognition of exploitable elements of systems designed in their turn to exploit travelers. Revenue-based programs are targeted at one of those exploitable elements (mistake fares and mileage runners), but commodifying frequent flyer programs into a simple rebate scheme will also be clarifying for passengers who mistakenly thought they were the beneficiaries of the airlines' largesse.

In the medium-term, it'll of course be interesting to see if and when American Airlines and Alaska Airlines follow suit. Until then, I'll be happily earning miles based on distance flown and enjoying class-of-service bonuses when – and only when – it makes sense to.