Rewards programs at four major U.S. airlines under DOT investigation

The rewards programs of the four largest U.S. airlines — Delta Air Lines Inc., American Airlines Group Inc., United Airlines Holdings Inc. and Southwest Airlines Co. — are under investigation by the U.S. Department of Transportation, the agency said Thursday.

The department asked airlines to submit reports on their programs within 90 days to give the government a better understanding of how consumers “are affected by the devaluation of earned rewards, hidden or dynamic pricing, additional fees and reduced competition and choice,” it said in a statement.

The investigation would be the government’s first comprehensive look at the programs that have generated billions of dollars a year for airlines, in some cases generating more revenue than flight operations. While the potential consequences are unclear, federal regulators could require changes that could disrupt these profit centers for carriers and credit card issuers and eliminate a travel option that many consumers value.

As part of the investigation, carriers will be required to provide detailed information about their rewards programs – which include credit card, consumer incentive, loyalty and frequent flyer programs – including any changes made in the past six years, customer complaints received and the impact of mergers on the programs.

“Many Americans consider their rewards points to be part of their savings,” Transportation Secretary Pete Buttigieg said in the statement. “But unlike a traditional savings account, these rewards points are controlled by a company that can unilaterally change their value.”

Airlines for America, a trade group that represents major U.S. carriers, said in a statement that millions of people benefit from the perks they get through their loyalty programs.

“U.S. carriers are transparent about these programs, and policymakers should ensure that consumers can continue to benefit from these important benefits,” the group said.

Billions of loyalty

Delta said it earned $6.8 billion in 2023 from its credit card partnership with American Express Co., a figure that is expected to grow 10% this year and reach $10 billion over the long term. American Airlines said it received $5.2 billion in cash payments in 2023 from its co-branded credit card and other partners.

Loyalty programs have come under intense fire in recent months, with the Biden administration and lawmakers from both parties concerned that carriers are luring customers with promises of rewards, only to take away those benefits without notice by suddenly changing how points and miles are earned. They also worry that the programs give big airlines an unfair advantage over smaller competitors.

Delta said in a statement that “providing a meaningful rewards experience is the top priority of Delta’s SkyMiles program,” adding that it would respond to the Department of Transportation’s investigation. It has previously cited strong growth in loyalty program memberships, co-branded credit card acquisition and increased card spending since the pandemic.

Southwest said its rewards program includes flexible travel policies and “unmatched availability of award seats.”

“Our commitment to providing our customers with Rapid Rewards points that never expire, no matter how they are earned, has allowed us to double the industry average for seats booked with points,” the Dallas-based carrier said in a statement. As with other carriers, loyalty points can be used for purchases such as flights, hotels, car rentals and gift cards.

United Chief Executive Scott Kirby said its loyalty program was “an important part of what we do” and was beneficial to both customers and the airline.

The hard line of the United States

The Department of Transportation has taken a hard line against airlines over practices or policies it believes could harm consumers. This new investigation is the latest in a series of government actions on that front.

Buttigieg outlined his concerns about loyalty programs and co-branded cards, which help passengers boost their rewards through spending, at a joint hearing with the Consumer Financial Protection Bureau in May.

At the time, he raised two main concerns: that airlines were changing their programs to make it harder for customers to get perks — a move that recently backfired, forcing Delta to rethink a 2023 overhaul following a deluge of complaints — and that the programs were potentially being leveraged in ways that “blocked the entry or growth of smaller, competing airlines.”

Airline loyalty programs are not a new concept. American Airlines was the first major airline to create such a program with AAdvantage in 1981, followed shortly by United and Delta. They started as a way for airlines to differentiate themselves after the industry was deregulated in 1978, but have since become huge revenue generators.

The public got a glimpse of how lucrative these programs are when major U.S. carriers raised at least $20 billion in funding during the Covid-19 pandemic using their loyalty programs as collateral.

Carriers generate revenue by selling points or miles to companies they partner with on their co-branded credit cards, which then offer them as rewards to customers when they make purchases with the card. They may also sell points or miles directly to consumers on their websites or to other companies they partner with, such as hotels, retailers or car rental companies.

Proponents of these programs and co-branded credit cards say travelers get a range of popular perks, from priority boarding to airport lounge access. And nearly one in four American households has an airline credit card, according to Airlines for America.

But consumer advocacy groups and lawmakers like Sens. Dick Durbin, D-Illinois, and Roger Marshall, R-Kansas, have been pressing the Transportation Department to take steps to ban potentially unfair practices. The senators raised many of the concerns Buttigieg echoed at the May hearing in a letter he sent to the department and the CFPB last year.

Allyson Versprille and Mary Schlangenstein for Bloomberg