Pricing and travelers' decision to use frequent flyer miles: evidence from the U.S. airline industry

Previous research on Frequent Flyer Programs (FFP) covered various topics, from analyzing the effect of international airline alliances on domestic travel demand to the effect of airport dominance and FFP on pricing. However, one important constraint in previous empirical research on FFP is the lack of a measure of these programs at a specific time-variant route and carrier level. In this chapter we use a novel way to measure the extent of FFP which allows us to analyze how these programs change from route to route, across carriers and over time. The dataset, that covers the quarters from 1993.1 to 2009.3, was constructed with data obtained from the Bureau of Transportation and Statistics and it has information on prices, proportion of frequent flyer tickets as well as various route and carrier variables. Using panel data techniques to control for unobservables along with the use of instrumental variables to control for potentially endogenous regressors, the results found are consistent with our economic model: travelers are more likely to redeem their frequent flyer miles in more expensive routes. Moreover, business travelers, who usually pay higher prices, were found to be less price sensitive than tourists when switching to buy with accumulated miles.