W16121

UNITED AIRLINES: FREQUENT FLYER PROGRAM1


Wong-Yong Oh wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2016, Richard Ivey School of Business Foundation	Version: 2016-03-14
 


In June 2014, United Airlines, Inc. (United) announced that as of March 1, 2015, it would move from awarding miles based on distance flown to awarding miles for dollars spent for tickets, following in the footsteps of Delta Air Lines, which had recently made similar changes to its SkyMiles program. United’s MileagePlus program president, Thomas O’Toole, said, “These changes are designed to more directly recognize the value of our members when they fly United.”2

In March 2015, many customers complained about United’s new mileage policy and saw this change as a significant devaluation of award miles. According to the new mileage accrual plan, most United MileagePlus members would earn fewer miles unless they were flying on expensive short-haul flights or premium-class tickets (e.g., on business-class, first-class or full-fare economy-class tickets). Duane Myers, a Premier Gold member who flew more than 50,000 miles in 2014, said, “This is very disappointing. United already increased the redemption miles requirement recently. Based on my understanding of the new rule, flight miles earning has been devalued by about 50 per cent. Why do I need to pay more to get the same miles I used to get?”


INDUSTRY OVERVIEW

The U.S. airline industry was highly competitive and provided vital services. Domestically, United was competing with other major U.S. network carriers such as Delta Air Lines and American Airlines. At the same time, it was competing with low-cost carriers such as Southwest Airlines, JetBlue Airways, and Virgin America. Internationally, it was also competing against many other international airline companies such as Lufthansa, Air France–KLM, Japan Airlines, and Korean Air Lines.



1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of United Continental Holdings, Inc. or any of its employees.
2 A. Bender, “United Airlines Changes Its MileagePlus Frequent Flier Program, and Basically You’re Hosed,” Forbes, June 10, 2014, accessed April 20, 2015, www.forbes.com/sites/andrewbender/2014/06/10/united-airlines-changes-its-mileageplus- frequent-flier-program-and-basically-youre-hosed/#.
 

The number of carriers had increased dramatically, and passenger revenue, airline traffic, and passenger- carrying capacity had also increased. Relatively stable industry concentration ratios — except in the early 1980s, when deregulation allowed easy entry into the industry — indicated that the largest airlines dominated the industry, whereas small airlines occupied only the niche markets (see Exhibit 1).

In 1978, the Airline Deregulation Act completely changed the structure of the industry. During the regulated period, airline companies could pass on any increased costs to consumers, using a fixed rate of return-based pricing. Deregulation removed almost all government control regarding entry into the industry, flight routes, and ticket prices. Due to the lowered entry barriers, there was a rush of new entrants into the industry. The number of carriers in the United States increased from 34 in 1978, to 106 in 1985 (see Exhibit 1). As a result, rates became highly competitive, the industry became less concentrated, and price wars became a common form of competition.
The high costs of aircraft and fuel were other challenges with which airlines needed to contend. Further, in order to run complex operations, airline companies had to maintain large labour forces, although they also had the ability to outsource some of their operations. In addition, due to excess capacity,3 no carriers had significant pricing power in the marketplace.

Every one of the major network carriers, including United, had previously filed for Chapter 11 bankruptcy protection (see Exhibit 2), and many of them had undergone mergers with other companies (see Exhibit 3). Delta Air Lines acquired Northwest Airlines in 2008, United merged with Continental Airlines in 2010, Southwest Airlines purchased AirTran Airways in 2011, and American Airlines and US Airways merged in 2013. As a result, these four airlines had come to control nearly 85 per cent of the domestic market.4


Airline Alliance

As a mature Alliance with a comprehensive network and good, close relationships between our member airlines, we are excellently placed to offer continuous enhancements in various ways that together improve the Alliance travel experience.
–Mark Schwab, Star Alliance chief executive officer5

A distinctive element in the airline industry was that most of the largest passenger airlines worldwide were members of one of three major alliances, often called global airline alliances — Star Alliance, Oneworld, and SkyTeam (see Exhibit 4).6 Each alliance was composed of a number of airline companies that covered different geographical areas through larger networks. In 1997, the Star Alliance was founded, and competing airlines responded by forming Oneworld in 1999 and SkyTeam in 2000.

Alliances provided a network of connectivity, marketing branding, and convenience for international passengers and international packages. Airline alliances could extend their networks by code-sharing agreements,7 pricing cooperation, and coordination of schedules. Thus, customers could have improved


3 O. Wojahn, “Explaining Over-Capacity in the Airline Industry,” International Air Transport Association (IATA), January 2012.
4 N. Dihora, “United Continental Holdings Inc,” Morningstar Equity Research, October 23, 2014.
5 The Business Travel News, “New LOT,” accessed February 25, 2016, www.btnews.co.uk/article/9020, June 29, 2015.
6 Alliances were also formed between cargo airlines, such as that between WOW Alliance and SkyTeam Cargo.
7 Two or more alliance companies shared the same flight. Tickets could be purchased from any participating airlines, but the flight was actually operated by only one of these code-sharing airlines, often called an operating carrier or administrating carrier.
 

flexibility in terms of destinations and schedules. Also, these alliances reduced costs through the sharing of sales offices, maintenance facilities, airport lounges, and operating staff.
Customers earned award miles from flying on other alliance carriers and redeemed their miles by using award tickets from a single account. For example, United customers could earn miles by flying with other Star Alliance network carriers, such as Lufthansa and Air Canada. They could also redeem miles by getting free award tickets from these alliance partner carriers.


Frequent Flyer Program8

In addition to large network alliances, the airline industry had another unique characteristic — namely, its frequent flyer programs (FFPs). An FFP was “a loyalty program offered by many airlines to customers allowing them to accumulate (or “earn”) points for flights taken or services bought from the airlines’ commercial partners.”9

On May 1, 1981, following the industry deregulation in the United States, American Airlines launched the first FFP. The initial idea of the FFP was quite simple: rewarding high-frequency customers by giving them free tickets if they reached a certain threshold. FFPs could give customers incentives to use any single carrier repeatedly, thus increasing switching costs.

American Airlines initiated the next step of FFP development by introducing “gold” tiers into its program. Since then, other airlines had followed this model and offered special membership tiers (commonly referred to as elite programs, e.g., Silver, Gold, Platinum and 1K members for United) to recognize high-frequency customers. In addition, American Airlines initiated a joint marketing program with Hertz and Holland America Cruise. Airline companies realized that the miles could be used to generate external revenue by selling miles to their partners, such as hotels, and rental car and cruise companies. In order to determine the value of a mile, airlines used the equivalent commercial value of a reward ticket as a base.
In 1987, American Airlines and Citibank introduced the industry’s first co-branded credit card, which was the most significant development in the history of FFPs. Frequent flyer co-branded credit cards delivered significant ancillary revenue for airline companies. By the early 1990s, most North American and European airlines had launched very similar types of FFPs, not only rewarding frequent flyers but also approaching less frequent flyers with alternative ways to earn miles.

Up until the early 1990s, airlines perceived FFPs as cost centres, especially given that customers’ accrued miles were the liability of the companies. As FFPs matured, airlines realized the limitations of the early FFP models. As the number of alliance partners and program-participating customers increased, airlines had the problem of a limited inventory of award seats, which were originally intended to fill empty seats. Therefore, airlines increasingly put restrictions on reward tickets, used so-called “black-out” periods, and introduced mileage expiration policies. Customers felt that the reward seats were too limited, especially at the lowest reward level (e.g., 25,000 miles for a U.S. domestic flight).

The imbalance between accumulated miles and the availability of award seats created new challenges for FFPs. For example, at the end of 2007, Delta Air Lines’ SkyMiles members had 510 billion unused miles

8 E. de Boer and S. Gudmundsson, “30 Years of Frequent Flyer Programs,” Journal of Air Transport Management 24 (2012): 18–24.
9 Ernst and Young, “Frequent Flyer Program: Ready for Take-Off,” Ernst and Young, 2014, accessed April 15, 2015, www.ey.com/Publication/vwLUAssets/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes/$FILE/etude-ey- sur-les-programmes-de-fidelite-des-compagnies-aeriennes.pdf.
 

in their accounts, United’s MileagePlus had 488 billion unused miles, and American Airlines’ AAdvantage Plan reported 613 billion unused miles. “We’re at a turning point,” said Jeff Robertson, managing director for Delta’s SkyMiles program, explaining that although Delta Air Lines’s members earned 27 per cent more miles in 2007 than in 2004, the capacity allocated for award seats stayed flat. “We at Delta [Air Lines] and as an industry cannot continue to have customers earn a significantly greater number of miles year after year without providing customers some flexibility in ways to use those miles.”10
In order to address this imbalance, airlines began to make tactical changes to their programs. Many airlines adjusted the required miles for an award ticket, increasing capacity by simply devaluing the accumulated miles. For example, some airlines charged 40,000 miles for flights that used to be 30,000 miles. In simple terms, those “free” tickets for customers were about to get a lot more costly. Also, some airlines allowed customers to use their miles to book stays at hotels and resorts.

At the same time, some airlines had started to recognize dollars spent instead of distance flown. For example, members of JetBlue’s FFP (TrueBlue program) earned three points for every dollar spent, and Virgin Australia offered its customers five points per dollar spent. Furthermore, Singapore Airlines had introduced its KrisFlyer top tier only to customers who spent more than S$25,000 (approximately US$19,500)11 on first- or business-class tickets.12

Once perceived as a reward program for frequent customers and a powerful marketing tool, FFPs had started to become businesses of their own. By selling miles to airlines’ partners, an FFP could be a very attractive and cash-generating business, and airlines began to consider FFPs as separate business units. Therefore, even spin-offs of FFPs were considered. For instance, ACE Aviation Holdings (Air Canada’s parent company) had sold 12.5 per cent of Aeroplan (Air Canada’s FFP) through an initial public offering in 2005. From 2005 to 2008, ACE progressively sold its remaining stake, which made the Aeroplan Group into a pure loyalty management company. In May 2012, the company changed its name to Aimia Inc.13

In sum, the airline industry had seen enormous potential in FFPs and changed its perspective on them (see Exhibit 5). Over a 30-year history, FFPs had evolved from simple customer reward programs to independent profit-generation business models.


COMPANY OVERVIEW

United Airlines

United Continental Holdings, Inc. was a holding company, and United Airlines, Inc. was its principal wholly owned subsidiary.14 United, with approximately 84,000 employees, had 373 destinations in 60 countries and served 138 million passengers in 2014. Its main hub cities included Chicago, Denver, Houston, Los Angeles, Newark, San Francisco, Washington, Guam, and Tokyo.15 United was a member of the Star Alliance, and the network carriers served over 1,300 airports in more than 190 countries, as of January 2015.

10 S. Stellin, “Award Plans Earn Cash for Airlines,” The New York Times, April 1, 2008, accessed April 14, 2015, www.nytimes.com/2008/04/01/ business/01frequent.html?_r=2&ref=travel&oref=slogin&.
11 All currencies are in US$ unless otherwise stated; S$=Singapore dollars.
12 De Boer and Gudmundsson, op. cit.
13 “Frequent Flyer Program: Ready for Take-Off,” op. cit.
14 Annual Report 2015, United Continental Holdings Inc.
15 “Corporate Fact Sheet,” United Continental Holdings, Inc., accessed April 20, 2015, http://newsroom.unitedcontinental holdings.com/corporate-fact-sheet.
 

United operated 1,257 aircraft as of December 31, 2014. The company’s financial forecast was promising: in 2015, Jeff Smisek, United’s chief executive officer, announced a first-quarter profit of $508 million, compared with a $609 million loss in the same quarter of the previous year (see Exhibit 6) due to low jet- fuel costs and continued efforts at cost reduction. Industry analyst Jim Corridore rated United a “strong buy.” He expected United to continue to generate revenue and lower debt: “We think the revenue environment remains good, and we remain positive on the company and the industry.”16
While the merger with Continental Airlines in October 2010 had made United one of the largest airlines in the world, the company still struggled to successfully merge two companies into one. At the time of the merger, executives expected the integration process to be wrapped up within 12 to 18 months. However, some of the integration work remained unfinished, including ongoing system integration and resolving relations with employees. For example, United had not yet finalized a unified labour contract with flight attendants, and mechanics were using two separate information technology systems for maintenance. Smisek said, “We’re examining everything, because we have a set of assets that are very good. [But] they have not been producing the level of revenue they should be producing. We are keenly aware of that.”17


United’s MileagePlus Program

United’s FFP was its MileagePlus program aimed at building customer loyalty by offering awards and services to loyal customers. Before March 2015, the basic structure of the MileagePlus program was not significantly different from that of other major FFPs. The program had co-branded credit card marketing with Chase Bank USA, National Association, thus allowing customers to earn miles by using that credit card. Customers could also earn miles on qualifying cruise vacations and car rentals, as well as on shopping and dining at partner businesses. Miles expired after 18 months of member account inactivity.

The MileagePlus program generated a substantial amount of revenue (see Exhibit 7). Approximately 4.8 million, 5.0 million and 4.7 million MileagePlus flight awards miles were used in 2014, 2013, and 2012, respectively. These awards represented 7.1 per cent, 7.7 per cent, and 7.1 per cent of United’s total revenue passenger miles18 in 2014, 2013, and 2012, respectively.


What’s New in FFPs in 2015?

On June 10, 2014, United confirmed that starting in March 2015, it would be moving to a revenue-based FFP. Under the new MileagePlus program, customers would not be awarded miles based on the distance (i.e., miles) flown, but rather, on how much they spent per flight (as explained below).19 The fare for mileage accrual included the base fare of the ticket plus carrier-imposed surcharges, but excluded any government- imposed taxes and surcharges.
•	General MileagePlus members (non-elites): Earn five miles per dollar spent
•	MileagePlus Premier Silver members: Earn seven miles per dollar spent
•	MileagePlus Premier Gold members: Earn eight miles per dollar spent

16 G. Karp, “United Airlines Expects another Record Profit in 2nd Quarter,” Chicago Tribune, April 23, 2015, accessed June 20, 2015, www.chicagotribune.com/business/breaking/ct-united-airlines-earns-0424-biz-20150423-story.html.
17 S. Carey, “United Continental: One Sick Bird,” The Wall Street Journal, June 8, 2014, accessed April 20, 2015, www.wsj.com/articles/united-continental-struggles-to-stabilize-1402263534.
18 Revenue passenger miles (RMP) is a measure of airline traffic, calculated by multiplying the number of paying passengers by the distance travelled.
19 Bender, op. cit.
 

•	MileagePlus Premier Platinum members: Earn nine miles per dollar spent
•	MileagePlus Premier 1K members: Earn 11 miles per dollar spent20
The most common complaint about this change was that a passenger would earn fewer miles for flying the same flight. For instance, in the case of a $450 economy-class flight between Los Angeles and New York/Newark (with a one-way distance of 2,454 miles), customers at all levels would earn fewer miles under the new program, as shown in the following table. This change indicated that awards tickets would become more costly for all levels of passengers.

	Non-elite	Silver	Gold	Platinum	1K
Previous program	4,908	6,135	7,362	8,589	9,816
New program	2,250	3,150	3,600	4,050	4,950
Also, there was frustration for those who were searching for a good bargain price, for example, for a trip to Frankfurt, Germany, from Chicago, United States, in which the customer would be rewarded the same miles as other customers who paid a very high price for a last-minute flight to San Francisco.
The new rules had caused other controversies. First, if passengers travelled on a ticket issued by United’s alliance partners (e.g., Star Alliance carriers, such as Lufthansa and Air Canada), customers would accrue United miles based on distance flown, not how much they paid.

Second, there were no changes for the amount of miles earned by third-party partners, such as credit card companies. Thus, the net effect was to make miles earned from third parties more valuable than flying with airlines. Customers expressed their disappointment and anger on United’s Facebook page. In particular, many customers were not happy about the massive devaluation (i.e., requiring more miles for free award tickets or seat upgrades) in February 2014.


WHAT’S NEXT?

The idea of a revenue-based FFP was quite simple: the more you spent, the more miles you would earn. However, this simple idea had potentially huge consequences for both customers and airlines.
Delta Air Lines and United had adopted revenue-based FFPs. The change was good for passengers who spent a considerable amount on tickets, sat in first- or business-class, and/or flew short distances with last- minute bookings. However, for most general customers, the change most likely meant a reduction in value earned from the program.

Among the largest U.S. carriers, American Airlines, one of the Oneworld carriers, was the only airline still using the conventional miles-based FFP. Should American Airlines also adopt the revenue-based FFP, following its competitors? The company could opt to keep its miles-based FFP, signalling that it valued all its customers, not just those who spent more. Alternatively, American Airlines could follow this trend once it finalized the American Airlines and US Airways post-merger integration.

20 United Airlines’ elite status had four tiers: Premier Silver members (who flew 25,000–49,999 miles per year with the airline), Gold members (50,000–74,999 miles), Platinum members (75,000–99,999 miles), and 1K members (100,000 miles and up). Also, for U.S. residents, Premier Qualifying Dollars refers to dollar spending per year to reach elite status and was as follows:
$3,000 for Silver, $6,000 for Gold, $9,000 for Platinum, and $12,000 for 1K. Source: “Premier Status Qualification Requirements,” United Airlines Inc., accessed March 11, 2016, https://www.united.com/web/en-US/content/mileageplus/ premier/qualify.aspx.
 

EXHIBIT 1: AIRLINE INDUSTRY OVERVIEW (1970–2009)

Year	Number of Carriers	Passenger Revenue	Operating Profits	RPM (a)	ASM (b)	CR4 (c)	CR8 (c)
1970	39	31.3	0.2	131.7	264.9	57	83
1971	36	32.2	1.2	135.7	279.9	56	82
1972	34	34.9	2.2	152.4	287.4	57	83
1973	35	36.5	2.1	162.0	310.6	54	83
1974	33	38.7	2.4	162.9	297.0	53	83
1975	34	36.8	0.3	162.8	303.0	53	82
1976	36	40.2	2.0	179.0	322.8	53	82
1977	34	43.1	2.4	193.2	345.6	52	81
1978	34	46.5	3.4	226.8	358.8	53	81
1979	50	52.0	0.5	262.0	416.0	50	79
1980	61	58.7	-0.5	254.2	431.2	49	80
1981	86	58.5	-0.8	248.8	432.5	47	76
1982	93	55.1	-1.3	259.0	424.9	47	77
1983	95	56.8	0.5	281.3	463.4	48	76
1984	95	61.8	3.6	304.5	514.0	46	74
1985	106	63.7	2.3	335.9	547.0	45	73
1986	98	63.6	2.1	366.3	606.8	48	74
1987	93	69.3	3.8	404.3	648.4	51	84
1988	77	75.4	5.2	423.3	648.7	53	85
1989	71	77.2	2.7	432.7	684.4	57	87
1990	67	80.9	-2.6	457.9	733.4	57	88
1991	66	76.2	-2.4	447.8	715.0	63	90
1992	70	78.0	-3.1	478.1	751.8	69	94
1993	80	81.7	1.8	489.1	770.8	69	93
1994	88	81.1	3.5	518.2	783.8	68	91
1995	95	85.1	7.2	540.4	806.6	67	89
1996	97	88.2	7.5	578.4	834.7	66	89
1997	99	93.9	10.2	605.4	860.6	66	89
1998	98	94.6	10.9	619.5	874.2	65	89
1999	94	96.9	9.1	651.6	917.8	64	89
2000	96	105.5	8.0	692.5	956.5	62	88
2001	100	89.2	-11.1	651.7	930.5	64	89
2002	141	79.5	-9.3	639.6	892.7	62	87
2003	150	81.8	-2.3	655.9	893.9	58	83
2004	140	88.5	-1.4	731.9	969.0	57	81
2005	139	93.4	0.3	779.0	1,003.3	55	83
2006	141	98.0	7.3	797.4	1,006.4	54	82
2007	151	100.7	8.7	829.0	1,037.1	53	81
2008	150	102.8	-3.3	811.4	1,020.1	61	83
2009	130	83.2	2.2	769.5	952.2	60	83

Note: Passenger revenue and operating profits are in US$ billions.
(a)	RMP (revenue passenger miles) is a measure of airline traffic, calculated by multiplying the number of paying passengers by the distance travelled.
(b)	ASM (available seat miles) is a measure of an airline’s passenger carrying capacity, calculated by the number of seats available multiplied by the number of miles flown.
(c)	CR4 and CR8 (concentration ratio) are measured by the sum of market shares by the four largest (and eight largest) firms in the industry.

Source: Adapted by case authors from A. Johnston and J. Ozment, “Concentration in the Airline Industry: Evidence of Economies of Scale?” Journal of Transportation Management 22, no. 2 (2011): 59–74.
 

EXHIBIT 2: AIRLINE INDUSTRY BANKRUPTCY HISTORY SINCE 1990

Date	Bankrupted Company	Date	Bankrupted Company
Nov. 29, 2011	American Airlines	Jan. 10, 2001	Trans World Airlines
Jan. 5. 2010	Mesa Airlines	Feb. 26, 1998	Pan American World Airways
Oct. 6, 2008	Sun Country Airlines	Jun. 30, 1995	Trans World Airlines
Apr. 11, 2008	Frontier Airlines	Sept. 21, 1993	Hawaiian Airlines
Mar. 31, 2008	Aloha Airlines	Jan. 31, 1992	Trans World Airlines
Sept. 14, 2005	Delta Air Lines, Northwest Airlines, Comair	Jun. 27, 1991	America West Airlines
Sept. 12, 2004	US Airways	Jan. 18, 1991	Eastern Air Lines
Dec. 9, 2002	United Airlines	Jan. 8, 1991	Pan Am World Airways
Aug. 11, 2002	US Airways	Dec. 3, 1990	Continental Airlines

Source: The Associated Press, “American Joins Long List of Airline Bankruptcies,” boston.com, November 29, 2011, accessed April 10, 2015, www.boston.com/business/articles/2011/11/29/american_joins_long_list_of_airline_bankruptcies.


EXHIBIT 3: AIRLINE INDUSTRY MERGER & ACQUISITION HISTORY

Year	Merger & Acquisition Activities
1972	Delta Air Lines acquired Northeast Airlines.
1979	Allegheny Airlines became US Airways, after a series of mergers and acquisitions.
1982	Eastern Air Lines purchased Braniff International Airlines’ South American routes.
1985	Southwest Airlines acquired Muse Air.
1986	Northwest Orient Airlines merged with Republic Airlines and became Northwest Airlines.
	Trans World Airlines merged with Ozark Air Lines.
1987	Frontier Airlines, New York Air and People Express Airlines merged into Continental Airlines.
	American Airlines acquired AirCal.
	Delta Air Lines merged with Western Airlines.
	Piedmont Airlines was purchased by US Airways.
1988	US Airways acquired PSA Airlines.
1990	American Airlines purchased Eastern Air Lines’ South American routes.
1991	Delta Air Lines purchased Pan Am’s assets, including Northeast shuttles, 45 jets and European routes.
1993	Southwest Airlines acquired Morris Air.
1997	ValuJet Airlines merged with AirWays Corp., and became AirTran Airways.
1999	American Airlines acquired Reno Air.
2001	American Airlines acquired Trans World Airlines.
2005	US Airways merged with American West Airlines.
2008	Delta Air Lines merged with Northwest Airlines.
2010	United Airlines merged with Continental Airlines.
2011	Southwest Airlines merged with AirTran.

Source: “A Timeline of US Airline Merger History,” PeterGreenberg.com, August 19, 2013, accessed April 20, 2015, http://petergreenberg.com/2013/ 08/19/a-timeline-of-us-airline-merger-history/.
 

EXHIBIT 4: GLOBAL AIRLINE ALLIANCES AND PARTICIPATING AIRLINES

	Star Alliance	Oneworld	SkyTeam
Airlines	United Airlines*: 1997
Lufthansa*: 1997
Air Canada*: 1997
Scandinavian Airlines*: 1997 Thai Airways Int’l* : 1997
Air New Zealand: 1999 All Nippon Airways: 1999 Austrian Airlines: 2000
Singapore Airlines: 2000
Asiana Airlines: 2003 LOT Polish Airlines: 2003 Adria Airways: 2004
Croatia Airlines: 2004
TAP Portugal: 2005
South African Airways: 2006 Swiss Int’l Air Lines: 2006 Air China: 2007
Turkish Airlines: 2008
EgyptAir: 2008
Brussels Airlines: 2009
Aegean Airlines: 2010
Ethiopian Airlines: 2011
Shenzhen Airlines: 2012
Copa Airlines: 2012
Avianca: 2012
EVA Air: 2013
Air India: 2014	American Airlines*: 1999
British Airways*: 1999
Cathay Pacific*: 1999
Qantas*: 1999
Finnair: 1999
Iberia Airlines: 1999
LAN Airlines: 2000
Japan Airlines: 2007
Royal Jordanian: 2007
S7 Airlines: 2010
Air Berlin: 2012
Malaysia Airlines: 2013
Qatar Airways: 2013
SriLankan Airlines: 2014
TAM Airlines: 2014	Delta Air Lines*: 2000 Korean Air*: 2000
Air France*: 2000
Aeroméxico*: 2000
Czech Airlines: 2001
Alitalia 2001–2009 as Alitalia-Linee Aeree Italiane, rejoined 2009
KLM: 2004
Aeroflot: 2006
Air Europa: 2007
China Southern Airlines: 2007
Kenya Airways: 2007
TAROM: 2010
Vietnam Airlines: 2011
China Airlines: 2011 China Eastern Airlines: 2011
Xiamen Airlines: 2012
Saudia: 2012 Aerolíneas Argentinas: 2012
Garuda Indonesia: 2014 Middle East Airlines: 2014
Airlines	27	15	20
Destinations	1,321	1,010	1,052
Revenue	177.42	143.23	186.33
(US$ billion)			
Passengers	653.81 million	512.3 million	588 million
per year			
Countries	193	155	177
served			

Note: * indicates founding members.

Source: Created by author based on data from global airline alliances websites, accessed April 20, 2015, www.staralliance.com/, www.skyteam.com/, www.oneworld.com/.
 

EXHIBIT 5: DEVELOPMENT OF FREQUENT FLYER PROGRAMS

	Legacy FFPs	Advanced FFPs	Autonomous FFPs
Main function	“Cost centre”	“Profit centre”	“Cash cow”
Strategic focus	Frequent flyers	Frequent flyers & high credit card spenders	Frequent flyers & everyday spenders (including infrequent
flyers)
Structure	FFP department (part of marketing division)	Separate strategic business unit	Separate company
Ownership	Owned by airline	Owned by airline	Owned by airline and/or outside investors
Third-party investment	No	No	Yes
Non-air partner
accrual as % of total miles accrual	Small (<20%)	Medium (>20%)	Large (>50%)
Partnership	Mostly travel-related (hotel, car rental, cruises)	Travel-related and financial services (credit cards)	Travel/financial/everyday spending (e.g., groceries, fuel, telecommunications)
Rewards	Award tickets and upgrades for air travel	Rewards travel and limited merchandise	Air, merchandise and other partner products/services

Source: Adapted from E. de Boer and S. Gudmundsson, “30 Years of Frequent Flyer Programs,” Journal of Air Transport Management 24 (2012): 24.


EXHIBIT 6: UNITED’S FINANCIAL DATA

	2010	2011	2012	2013	2014
Income Statement Data					
Operating revenue	23,325	37,110	37,152	38,279	38,901
Operating expenses	22,349	35,288	37,113	37,030	36,528
Operating income	976	1,822	39	1,249	2,373
Net income (loss)	253	840	(723)	571	1,132
Basic earnings (loss) per share	1.22	2.55	(2.18)	1.64	3.05
Diluted earnings (loss) per share	1.08	2.26	(2.18)	1.53	2.93
					
Balance Sheet Data (at December 31)					
Unrestricted cash, cash equivalents & short-term investments	8,680	7,762	6,543	5,121	4,384
Total assets	39,598	37,988	37,628	36,812	37,353
Debt and capital lease obligations	15,133	12,735	13,166	12,409	12,115

Note: Units in millions, except earnings per share data.

Source: UAL Statement of Consolidated Operations Data, Company Annual Report, 2015, 28.
 

EXHIBIT 7: REVENUE FROM UNITED’S MILEAGEPLUS PROGRAM

Year	Cash	Other Revenue Recognized	Increase in Frequent	Increase
	Proceeds from Miles Sold	Upon Award of Miles to Third-party Customers (a)	Flyer Deferred Revenue for Miles	(Decrease) in Advance
			Awarded (b)	Purchase of
				Miles (c)
2012	2,852	816	2,036	
2013	2,903	903	2,174	(174)
2014	2,861	882	2,178	(199)

Note: Units in millions US$.
(a)	This amount represents other revenue recognized during the period from the sale of miles to third parties, representing the marketing-related deliverable services component of the sale.
(b)	This amount represents the increase to frequent flyer deferred revenue during the period.
(c)	This amount represents the net increase (decrease) in the advance purchase of miles obligation due to cash payments for the sale of miles in excess of (less than) miles awarded to customers.

Source: Company Annual Report, 2015, 71.

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