Travel reward cards: Canada's appetite for 'free' flights

It's as Canadian as lacing on a pair of skates on a frigid winter day: retailers offering incentives to try to win the loyalty of their customers. Giving away something for "nothing."

By the early 1980s, airline companies began offering frequent flyer programs to reward their best customers with free flights. (CBC)

Quebec's long-defunct Steinberg's supermarket chain handed out "Pinky" stamps in the 1960s. Fill up a book and you could exchange it for merchandise. At least one cigarette company included coupons with its product that you could save and cash in for maybe a set of golf clubs you couldn't use because you'd smoked enough cigarettes to keep you hooked to an oxygen tank.

Those programs eventually disappeared. By the early 1980s, airline companies began offering frequent flyer programs to reward their best customers with free flights.

By September 2005, North Americans sat on more than nine trillion frequent flyer points — a 50-per-cent jump in just five years. That's enough for more than 300 million trips around the world. Canadians were cashing in their points for "free" flights through Aeroplan at a rate of one flight every 20 seconds.

Organizations that track points say they are being earned four times faster than they're being redeemed. The problem is that even if no more were awarded, it would take 23 years to use them up.

The flights are hardly free as the customer must pay all the fees, taxes and surcharges that people who buy tickets the old-fashioned way have to pay.

How do frequent flyer programs make money?

Frequent flyer programs are much more than simple loyalty programs. The companies that own them can make a lot money off them.

Let's use Aeroplan as an example. It's what's called a coalition program (like Air Miles) because it has many participating companies. Aeroplan has more than 60 commercial partners in the airline, car rental, hotel, consumer products, entertainment and financial services industries. One of its main partners is, of course, Air Canada.

Every time an Aeroplan member flies on Air Canada, or uses a CIBC Aeroplan credit card, or stays in a partner hotel, or fills up at an Imperial Oil station, the customer "earns" Aeroplan reward miles. What is actually happening is that the Aeroplan's commercial partners buy miles from Aeroplan — paying for the benefits of belonging to a popular travel reward program. Aeroplan then credits its members with their miles. In the year ending March 31, 2005, Aeroplan took in $701.4 million from all of its partners. It's worth noting that only 27 per cent of its gross billings came from Air Canada. The vast majority came from financial services companies like CIBC and American Express, which offer Aeroplan-affiliated credit cards.

When it comes time to redeem their miles, Aeroplan uses the revenue it has received from its partners to buy preferentially priced Air Canada seats or a host of other rewards. Aeroplan makes money on the spread between what it sells its points for and what it costs the program to buy the relevant reward. It also makes money by managing the rewards program for Air Canada. It further benefits from what is called "breakage" — the estimated 17 per cent of Aeroplan miles that will never be redeemed.

What are the major travel reward programs?

Air Miles

This is Canada's biggest customer loyalty program. It was founded in 1992. Since then, more than 15 million Canadians have signed on. The Air Miles program has about 20 partner companies where you can spend your money and earn travel miles at the rate of one mile for every $20.

The program's major travel partner is WestJet, which offers flights across Canada and to several U.S. destinations - especially winter vacation spots. But you can book flights on about a dozen other airlines, including Air Canada.

One of the company's major partners is the Bank of Montreal, which offers three versions of its Mosaik Mastercard that allows you to collect Air Miles. The cards have different levels of annual fee depending on how quickly each allows you to collect miles. The bank's gold card option allows you to book any flight with WestJet for no more than 1,600 miles. In addition, the charge card can be combined with an Air Miles card, allowing you to collect miles more quickly.

Aeroplan

This is the country's best-known frequent flyer program, with more than five million members. Aeroplan is the most profitable component of ACE Aviation, Air Canada's parent company. It spun off 12.5 per cent of the loyalty program in 2005, offering shares to the public.

On Oct. 16, 2006, Aeroplan announced more changes to the program. By Jan. 1, 2007, plan members will have to use their points within seven years of the date they were earned or the points will expire. By July 1, 2007, if there is no activity on your Aeroplan account for 12 months, your account will expire. The account can be restored for a fee of $30 plus one cent for every restored mile.

Aeroplan dropped "blackout periods" a few years ago in response to increased competition in the loyalty program sector.

Air Canada sets aside eight per cent of its seats for "classic" reward flights. It sets aside another seven per cent of its seats that you can purchase for up to 50 per cent more points. By the end of 2006, the airline is planning to offer any unsold seats on a flight for Aeroplan members.

Aeroplan has deals with the Canadian Imperial Bank of Commerce and American Express. Both financial institutions offer credit cards that allow you to accumulate points that go straight into your Aeroplan account. CIBC Aerogold Visa charges an annual fee of $120 plus $50 for supplemental cards. American Express charges annual fees of between $60 and $499 per year, depending on the level of benefits you want to pay for.

Diners Club

The world's first credit card also offered the world's first card-based travel rewards program, back in the early 1980s. Diners Club cards are issued by Citibank.

You earn one point for every dollar spent that you can redeem for travel on just about any airline in the world. A short-haul flight within Canada can be had for 15,000 points — the same point level as Aeroplan. But the ticket must carry a price of no more than $400.

To get to Europe, you would need 65,000 points and a maximum ticket price of $1,350. If the price that you would pay for the ticket is higher, you can pay an extra fee or use up more points. You would have to cash in 100 points for every dollar in additional ticket price.

If you were 5,000 points short of what you needed for the ticket, you would have to pay $150 (three cents for each point). If your ticket to Europe was priced at $1,400 — or $50 above the maximum — you could pay the $50 or cash in 5,000 (100 points for every dollar over the maximum allowed ticket price).

You can also convert your Diners Club points to travel miles in 10 other frequent flyer programs.

The annual fee is $99 with a charge of $35 for supplemental cards.

Other bank cards

RBC Avion Visa

• Earn 1 points for every $1 charged.
• A short-haul flight within Canada can be had for 15,000 points, as long as the ticket carries a price of no more than $350.
• To get to Europe, you would need 65,000 points — maximum ticket price of $1,300.
• If ticket price is higher, you face similar charge to Diners Club.
• Tickets must be booked at least 14 days in advance and include a Saturday stay.
• Annual fees range from zero to $120 depending on the card's features.

TD Gold Travel Visa

• Earn one point for every dollar charged.
• Cash in points for free or discounted tickets on virtually any airline through TD Visa Travel Rewards Centre.
• 5,000 points equals $75 discount on plane ticket.
• Annual fee of $120 plus $50 for each supplemental card.

• Earn one point for ever dollar charged
• Cash in points for free or discounted tickets on virtually any airline.
• 5,000 points equals $50 savings on your ticket.
• No restrictions, no Saturday night stay required.
• Annual fee of $110 ($65 for people 65 and over)