DOT initiates formal investigation into major airline frequent flyer programs

On Thursday, the U.S. Department of Transportation began a formal inquiry into the frequent flyer programs of the four largest domestic airlines, focusing on what it termed the "fairness, transparency, predictability, and competitiveness of airline rewards programs."

In a letter to the airlines, obtained by TPG, Transportation Secretary Pete Buttigieg urged the carriers to submit detailed records and information regarding these programs.

"These programs influence how customers engage with airlines," Buttigieg mentioned in the letter, "and many Americans reportedly have point balances significant enough to be considered part of their savings."

The four airlines under investigation are American Airlines, Delta Air Lines, United Airlines, and Southwest Airlines.

The formal investigation arises nearly nine months after the DOT initiated a preliminary inquiry into possible unfair or deceptive practices in these programs and follows a congressional hearing on rewards programs held in Washington, D.C., this spring, jointly organized by the DOT and the Consumer Financial Protection Bureau.

In an order accompanying Thursday's letter, the DOT specified requests for a comprehensive array of information and details, shedding light on the investigation's anticipated trajectory. A template of the complete letter and attached order can be found at the end of this article.

The order requested that airlines provide complete information on how awards are earned and redeemed, the methods used to determine their value, passenger fees, and details regarding agreements with cobranded credit card partners. Airlines were also instructed to outline and clarify every modification made to their rewards programs from July 31, 2018, to this summer.

In recent years, rewards programs have become vital components of the U.S. airline business model, contributing, in some instances, billions of dollars annually to the financial results of carriers.

Most of this revenue is generated by selling miles in bulk to banking partners that issue cobranded credit cards. The banks compensate airlines for these miles, which are then allocated to cardholders as rewards for their spending.

Value assessment: Are airline credit cards still worth it?

In recent years, airline loyalty programs have garnered increased scrutiny from federal regulators and lawmakers.

Last October, Senate Judiciary Committee chair Dick Durbin, a Democrat from Illinois, along with Sen. Roger Marshall, a Republican from Kansas, urged the DOT and the CFPB to clarify their enforcement actions regarding these programs in light of "concerning reports of unfair, abusive, and deceptive practices by airlines related to their loyalty programs."

This request followed six weeks after Delta revealed modifications to the elite status criteria in its SkyMiles frequent flyer program. These modifications, some of which the airline partially reversed while retaining others, provoked customer backlash and highlighted the considerable control airlines have over these programs, as well as the limited restrictions or regulatory frameworks governing them.

Durbin and Marshall, along with other lawmakers, have individually sponsored legislation that would impact the payment networks utilized by certain credit card issuers. Airlines and issuers have lobbied against this legislation (as has Dinogo, warning that the proposed law could adversely affect rewards programs).

In a statement, Airlines for America, the trade organization representing U.S. carriers, asserted that frequent flyer programs enable airlines to reward their customers and enhance competition among them.

"Millions of individuals appreciate being part of various loyalty programs, which allow them to earn rewards for travel or other perks," Airlines for America stated. "U.S. carriers are open about these programs, and policymakers should ensure consumers can continue to access these valuable benefits."

A representative for Southwest mentioned in a statement that the airline's Rapid Rewards program offers flexibility and advantages for customers, highlighting that it has recently doubled the industry average number of seats that can be booked using points.

Representatives for American and United referred inquiries to Airlines for America, while Delta did not promptly respond to TPG's request for comment.

DOT Template Letter Regarding Airline Rewards Investigation by David Slotnick on Scribd