Travel reward cards: Flights of fancy and points to ponder

It's almost impossible to resist: the ability to turn ordinary purchases of gas, clothing and groceries into something extraordinary an airline ticket, say, or a vacation at an exotic destination. It's the opportunity to seemingly get something for nothing.

CBC News Posted: Aug 07, 2009 11:15 AM EDT | Last Updated: August 7, 2009

Aeroplan, one of Canada's most popular rewards programs, celebrated its 25th anniversary in 2009. ((CBC))

"Spending money is no fun," says Ellen Roseman, a Toronto Star business writer.

Thanks to reward programs, however, credit cards can actually add an enjoyment factor, she says. "Reward cards make you feel that you are not only spending money but you are also creating some value," Roseman says.

Still, there can be risks. "It's certainly not free," she says. "It encourages you to put lots of your spending on the card."

Card users should also be aware of terms and conditions that can be detailed and complicated. Credit card companies "will often change the rules to your detriment," Roseman points out, adding that "there is no such thing as grandfathering. You can discover you're subject to new rules."

Points can be lost

As well, if you don't keep your purchasing and your payments up to date, you could discover your points are gone. "You think they're your property, but they can be taken away from you under certain circumstances," Roseman says.

And consumers should be aware that, while reward flights themselves are free, they will still be saddled with all the fees, taxes and surcharges that people who buy tickets the old-fashioned way have to pay.

'Reward cards make you feel that you are not only spending money but you are also creating some value' Ellen Roseman

The idea of earning rewards is not new. 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, say,a set of golf clubs.

Those programs eventually disappeared. Then by the early 1980s, airline companies began offering frequent flyer programs to reward their best customers with free flights.They proved to be wildly popular.

Today, many Canadians admit that the prospect of earning rewards keeps them tied to their plastic. A study released in July by a marketing specialist at the University of Toronto and an economist at the Federal Reserve Bank of Kansas City found that people would, in fact, rack up less credit-card debt if card companies were barred from offering rewards based on the value of purchases.

Still, even with those rewards gone, most people would continue to use their cards. The study found that the majority of consumers who currently receive rewards on credit/debit cards would continue to use those cards even if rewards were no longer offered.

How do frequent flyer programs make money?

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

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 70 commercial partners in the financial, retail and travel sectors. It has four million active members and 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 (Esso) gas station, the customer "earns" Aeroplan reward miles. What is actually happening is that 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. Aeroplan makes money from the sale of its Aeroplan Miles to its commercial partners.

By the end of 2008, Groupe Aeroplan reported that more than two million rewards had been issued to members, including more than 1.5 million round-trip flights on Air Canada and other Star Alliance carriers. Also, in its annual report in 2008, the company calculated that in the past 25 years, Aeroplan members had accumulated approximately 821 billion miles.

Interestingly, Groupe Aeroplan has observed that more reward miles are accumulated in the last six months of any given year, while more miles are redeemed in the first half of any given year.

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 known in the industry as breakage the estimated 17 per cent of Aeroplan miles that will never be redeemed.

The major travel reward programs

Air Miles

Founded in 1992, Air Miles is Canada's biggest customer loyalty program. Miles can be earned with purchases made at 120 stores as well as 100 more online retailers.

The program offers the ability to book flights on many airlines, including WestJet and Air Canada. It also lets people book accommodations at numerous hotel chains such as the InterContinental Hotel Group (including the Crowne Plaza and Holiday Inn chains), BestWestern, Sheraton and Delta.

One of the company's major partners is Bank of Montreal, which offers a no-annual-fee Air Miles MasterCard where users can earn one reward mile for every $20 in card purchases. There is also a Gold Air Miles MasterCard, which comes with a fee and which allows users to earn one reward mile for every $15 in card purchases.

As well, reward miles can be earned with a BMO debit card (one reward mile for every $40 in purchases), and from purchasing or investing in a variety of BMO products such as insurance, term investments and mutual funds.

Air Miles has a partnership with American Express: a no-fee card allows users to earn one reward mile for every $20 in purchases, or a Platinum card which comes with a fee and which allows users to earn one reward mile for every $10 in purchases.

Aeroplan

This is the country's best-known frequent flyer program, with more than four million active members. Aeroplan was spun off from Air Canada and is partnered with more than 30 airlines, including Air Canada and US airlines. It is now owned by Groupe Aeroplan Inc. which also ownsboth Nectar, a coalition loyalty program in the United Kingdom, and Air Miles Middle East, a loyalty program in the United Arab Emirates, Qatar and Bahrain. In 2008, Aeroplan took in $1.37 billion in revenues.

It has commercial partnerships with CIBC and American Express, which offer Aeroplan-affiliated credit cards. Both financial institutions offer credit cards that allow you to accumulate points that go straight into your Aeroplan account. CIBC offers both an Aerogold Visa and an Aerogold Visa Infinite card. Each has an annual fee of $120. American Express charges annual fees of between $60 and $499 per year, depending on the level of benefits you want to pay for.

Aeroplan also has commercial partnerships with Home Hardware, Imperial Oil (Esso), Star Alliance, Sobeys, hotel chains and car-rental companies.

Beginning Jan. 1, 2007, Aeroplan implemented a new rule under which any miles not used after seven years will expire and will be deducted from an Aeroplan member's account. Expired miles can be reinstated for a cost of $30 plus one cent per mile.

On July 1, 2007, Aeroplan also started to require members to have either added or redeemed miles once in a 12-month period or, again, the miles in the account would expire.

In July 2009,a group moved to file a class-action lawsuit against Aeroplan to try to get expired air miles reinstated. Aeroplan said itwas served with a motion toauthorize a class-action in Quebec, the first step before a case may be filed.

The petitioners are seeking the court's permission to sue Aeroplan on behalf of program members in Canada to obtain reinstatement of expired miles, reimbursement of money spent to reinstate expired miles, $50 in compensatory damages and an undetermined amount in exemplary damages, Aeroplan said.

Aeroplan said it will oppose the motion and "vigorously defend any class action, should one be authorized by the court."

Other cards

RBC Avion Visa

Royal Bank of Canada's Avion Visa cards lets users earn one point for every $1 spent.

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 additional charges.

Tickets must be booked at least 14 days in advance and include a Saturday stay. The card's annual fee is $120.

TD Travel Visa

TD Canada Trust offers three types of Visa travel cards, each with different benefit arrangements. They are: the TD First Class Travel Visa Infinite, which has an annual fee of $120; the TD Platinum Travel Visa Card, which has annual fee of $99; and the TD Classic Travel Visa Card, which has an annual fee of $19.

Users are able to cash in points for free or discounted tickets on virtually any airline through TD Visa Travel Rewards Centre.

In terms of points, 10,000 TD Points are worth $50 off the cost of travel.

Scotia Gold Passport Visa

Cardholders earn one point for ever dollar charged. Users are able to cash in points for free or discounted tickets on virtually any airline, and other travel and vacation options.

The annual feeis $110 ($65 for people 65 and over).

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