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AirMiles (Loyalty Scheme)

Introduction

Air Miles programmes are a form of complementary currency that function as a brand loyalty scheme, in this case for frequent flyers. Air Miles are ‘points’ or ‘credits’ awarded by  airlines or other companies to customers,  which may be redeemed against flights or as discounts on purchases. Many other industries such as supermarkets and other retailers offer similar loyalty incentives. Since there invention in 1981, the issuance of air miles has grown exponentially. Indeed, by 2005,  it was estimated that the value of air miles in circulation far surpassed that of US dollars – or any other national currency. According to an article in The Guardian, this huge growth “has spawned its own economy of trading schemes, charitable donations, enthusiasts and scams” 1.

If such points are accepted by more then one company and can be used as a medium of exchange between differnt parties, it is easy to see how such systems become currencies. In this sense almost everyone, at least in developed market economies, is already used to dealing with complementary currencies in some form.

Similar to Air Miles there is a wide variaty of other loyalty or reward programs which can be classified as currencies, depending on how they operate and which transactions they allow.

Purpose

The Air Miles is a reward scheme designed to attract new customers and retain existing ones. Air Miles act as tools to steer consumer behaviour. In order to accumulate more and more Air Miles, and therefore receive even greater commercial advantages, consumers have to change their ordinary consumption patterns and prefer those goods or businesses associated with the Air Miles system 2.

Organisation and History

Although the idea of frequent flyer miles predates it, the concept “Air Miles” was originated by British company Loyalty Management Group (LMG), which licensed local rights to the concept to various operators in different countries. It was originated by Sir Keith Mills, and began operating in the UK in November 1988.

There are several attmepts and patents in place to leverage the concept even further, for example in form of a reward clearing house by American Express 3.

The system in numbers

Almost every airline in operation either runs their own or is part of a larger frequent flyer program that rewards travelling customers with airmiles. Research conducted by the Economist showed that as of 2005 there were over 14 trillion airmiles in circulation, which if redeemed could be valued at over $700 billion 4.

Function and Unit of Account

The airmiles function as a means of exchange within the limited network that the particular airline or airline group have established. This can often include many redeeming options outside of the sirline industry such as hotels, car rental and gifts.

The programme uses physical units ‘miles’ as unit of account.

The underlying value of the airmiles is based on the ability of their owners to exchange them for goods and services. It remains the right of the issuer to change all aspects of the programme without consultation which can lead to dramatic reductions in the value of earned airmiles 5.

Issuance – Backing

Loyalyty or reward points are typically issued by a company or service procider to customers when making a purchase, e.g. byuing a airtravel ticket. They are backed by the redemption options that the compamy or network of companies offer. In general, the points held by customers can be viewed as a liability of the company, details are prescribed in the terms of conditions of the individual schemes.

Taxation and Compliance

In most jurisdictions airmiles and other such loyalty schemes do nto need to be reported to tax authourities for the purpose of calculating income 6.

How does it work in practice?

After signing up in one of the Air Miles programme in the country of residence, you will receive an Air Miles Card, which will hold the points you accumulate while purchasing within the network of businesses and airlines. Every time you buy a flight with the associated airline or buy goods or services at partner  companies, just show your Air Miles Card or, in case of an online purchase, just insert the code onto the online form. Your Air Miles points will be credited to your account.

Redeeming points is just as easy. After you have accumulated a sufficient quantity of points (amount depend on individual programmes), just purchase in one of the partner airline or at a shop and you will receive a discount or will be awarded a free service.

Practice in other types of loyalty currencies might very greatly.

 

References

  1. http://www.theguardian.com/money/2005/jan/08/business.theairlineindustry
  2. Catherine Liston-Heyes, 2002, ‘Pie in the Sky? Real Versus Perceived Values of Air Miles’ Journal of Consumer Policy, Volume 25, Issue 1, pp 1-27. Abstract available at http://link.springer.com/article/10.1023/A:1014594718701
  3. http://www.finextra.com/news/fullstory.aspx?newsitemid=23113
  4. http://www.economist.com/node/5323615
  5. http://www.businessweek.com/articles/2013-12-19/value-of-frequent-flier-miles-will-soon-drop-for-delta-and-united-travelers
  6. http://www.hmrc.gov.uk/manuals/eimanual/eim21618.htm
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