The Department of Transportation has launched a probe into the rewards programs at the nation's four biggest airlines, seeking to pull back the curtain on business practices that generate major revenue for the airlines through partnerships with credit card issuers.
The Transportation Department said Thursday that it's asking American Airlines, Delta Air Lines, Southwest Airlines and United Airlines to provide detailed information about their rewards programs within 90 days. Under the microscope: the airlines' use of dynamic pricing, their use of hidden pricing, the steps they have taken to devalue customer rewards and the fees they charge to customers who are seeking to redeem or transfer points.
The agency said it's aiming to protect consumers from potentially unfair, deceptive and anticompetitive practices.
"Our goal is to ensure consumers are getting the value that was promised to them, which means validating that these programs are transparent and fair," Transportation Secretary Pete Buttigieg said in a press release.
The department is launching its inquiry roughly 10 months after Sen. Richard Durbin, D-Ill., and Sen. Roger Marshall, R-Kan.,
In May,
On Thursday, CFPB Director Rohit Chopra described the DOT inquiry as "a key step to prevent deceptive devaluation tactics that can plague these alternative currencies held by tens of millions of families."
"Airline valuations are increasingly driven by their points programs and lucrative partnerships with credit card companies, and Americans are paying high interest rates and fees to participate in these programs — yet these tempting points and rewards programs are often depreciated or changed with little notice," Chopra said in a written statement. "The CFPB will continue to scrutinize the relationship between big credit card companies and big airlines."
Airlines for America, a trade group whose members include American, Delta, Southwest and United, said in its own statement Thursday that consumers have choices when selecting airlines, and that the air carriers use loyalty programs as a way to thank their customers. It also said that millions of people enjoy participating in the programs.
"U.S. carriers are transparent about these programs, and policymakers should ensure that consumers can continue to be offered these important benefits," the group said.
Erin Witte, director of consumer protection at the Consumer Federation of America, said she hopes the Department of Transportation will make the findings of its inquiry public. She said the breadth of the DOT's information request shows that the agency plans to evaluate the myriad ways in which consumers are impacted by rewards programs and how airlines handle them.
One example of the information the DOT is requiring the big four airlines to provide is the average dollar value of one reward point. Another example: a description of each change the airlines have made to their rewards programs over the past six years, and how it has impacted existing points.
"Airlines are acting like banks, treating their rewards like currency, and people treat them like currency," said Witte. "That's how they pay for their family vacation."
Rewards programs that offer points to consumers are a central feature of the credit card business and dominate many issuers' marketing efforts. The programs have grown substantially and have increasingly become expensive for issuers and important to consumers, according to
After that report came out, the American Bankers Association said the CFPB was drawing a
Still, the CFPB report cited recurring issues consumers have with rewards including redemption problems, revocation and expiration of rewards each year, devaluation of points and promotions that differ from marketing materials. Banks benefit from marketing promotional bonuses and rates, but they often don't end up paying the full cost of the offers, the CFPB said.
"There are a lot of questions about what is the value of a point or a reward? Who sets that? How does it change?" said Witte. "Is it easy to compare the value of one point to another, or are airlines doing things to actively make that more difficult?"
Consumers can be harmed by "bait-and-switch" tactics in which airlines and credit card issuers advertise the value of points but then change the terms, she said. She added that the largest airlines have grown dramatically through mergers, raising questions about whether the value of rewards have been affected.
"People make conscious choices to go with a particular airline or to use a particular credit card, and these programs have become about credit card spending," said Witte. "They make conscious choices and conduct their business and spending in a certain way so they can redeem those promises that the airline made to get their business."
Aaron Klein, a senior fellow in economic studies at the Brookings Institution, predicted that the DOT's inquiry will make it harder in the short term for the airlines to devalue their rewards points.
"The economics of consumer aviation has become so intertwined with credit card points and rewards, and interchange, that the Department of Transportation is taking note," he said. "There's a real debate as to whether or not airlines are in the business of moving people, or whether they're loss leaders for credit cards."
Banks that partner with airlines on credit cards also have a stake in the DOT's inquiry, Klein said. The banks benefit from the swipe fees that are generated when consumers spend on their airline cards.
Perennial air travelers are some of the banks' most valued customers, Klein said, because they tend to spend a lot of money, which generates swipe fees for the card issuers. "So frequent flying is an efficient mechanism for elite credit cards to target their audience of high-spend individuals," Klein said.
