Straight from smartertravel.com comes this comparison of Ponzi schemes and airline frequent flyer programs. I found it entertaining and hope you do, too.
Five Ways Mileage Programs Are Like Ponzi SchemesThe Extra Mileby Tim Winship - April 21, 2009
Frequent flyer programs have come in for considerable bashing from consumers exasperated by their ever-shifting rules and flagging value.
The mileage schemes have been described as unregulated lotteries, cons, false advertising, games of musical chairs, pyramid schemes, and outright scams. And those are just a few of the milder epithets.
The latest term of derision is ripped straight from today's most sensational headlines: Ponzi schemes.
Well publicized pyramid scams operated by the likes of Bernard Madoff and Robert Allen Stanford have cost thousands of investors hundreds of billions of dollars, in the process capturing the public's attention and inviting comparison with the airlines' loyalty programs.
Among the similarities are the following five characteristics shared by Ponzi schemes and loyalty programs.
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1. The Appearance of Propriety
The 'con' in con game is short for confidence. And confidence is key here, because unlike a smash-and-grab heist, Ponzi schemes play out over months and years, as money from later investors is used to create the appearance of legitimate earnings for early investors, which in turn attracts more investors, and so on.
It's easy to forget that until he was exposed, Madoff's credentials were impeccable. Among his resume's line items, he is the former chairman of NASDAQ. And he has a distinguished record of philanthropy. A criminal, yes, but Bernie Madoff was hardly a hoodlum in a cheap suit.
The airlines too have a claim to legitimacy. The major carriers' stock is traded on the venerable New York Stock Exchange. They employ hundreds of thousands of workers directly, and many more through subcontractors and related businesses. Their brand names are globally known.
So while they may be unloved and routinely demonized as nickel-and-dimeing bunglers, the airlines are generally assumed to be essentially upright. As a result, most consumers expect that frequent flyer miles have the full faith and credit of legit companies behind them.
2. Lack of Transparency
Madoff was famously secretive about his investment strategies and tactics, refusing to divulge any details of his trading and insisting that clients should judge him by his results.
There's a similar black-box aspect to frequent flyer program participation.
In place of Madoff's simple "just trust me," the airlines' implicit assurance runs something like this: "If you contribute to our profitability by purchasing airline tickets and doing business with our business partners, we might reward you with a free trip. Or we might not. But hey, trust us. Because ... well, just because."
3. Too Good to Be True
Ponzi schemes are, by definition, unsustainable—eventually they collapse under the weight of promises that can never be met.
Are mileage programs similarly doomed to implode, leaving participants empty-handed?
Just as Madoff owed his investors more than he could ever hope to repay, there are trillions of outstanding frequent flyer miles on the airlines' books. And every year, the airlines issue more miles than consumers redeem, expanding rather than shrinking that unfunded liability. The scenario certainly seems Ponzi-ish in that crucial respect.
But as anyone who has tried to cash out miles knows, the airlines have capacity controls in place that prevent a run on award redemptions that could overwhelm the airlines' ability to fly customers for free.
The airlines, in other words, are effectively issuing a currency they are under no legal obligation to honor.
4. Lack of Oversight
While Madoff's activities were clearly in violation of laws and regulations on the local, state, and federal levels, he managed to avoid detection for over a decade, operating in plain sight of those charged with preventing just such misdeeds. (The full story of that regulatory breakdown has yet to be written.)
Loyalty programs don't so much elude regulators and law enforcement agencies as they preemptively exempt themselves from oversight. In a neat legal maneuver, the airlines in their terms and conditions have claimed for themselves the right to modify the programs howsoever they choose, whenever they choose, no matter how negative the consequences for consumers.
Imagine how many more investors Charles Ponzi and Bernie Madoff might have bilked had they reserved the right to operate pyramid schemes.
5. Benign Beginnings
Neither Charles Ponzi nor Bernard Madoff started down the road to perdition with criminal intentions. Rather they eased into criminal behavior gradually, as their bad bets required ever-larger illicit countermeasures to conceal their escalating financial insolvency.
Mileage programs too began on the up and up, as uncomplicated rebate schemes. The Travel Pass program of Western Airlines, for example, awarded $50 in travel certificates to passengers that flew five trips with Western. The earliest versions of the modern era's mileage programs were similarly straightforward in the value propositions they offered travelers.
In the cases of Ponzi and Madoff, it was a combination of greed, desperation, and a lack of regulatory oversight that gave rise to criminal activity.
Significantly, those same forces are in play in the case of airline mileage programs.
Madoff Under Indictment, an Industry Under a Cloud
Having pled guilty to 11 felonies—including securities fraud, wire fraud, mail fraud, money laundering, perjury, and misleading the SEC—Ponzi schemer extraordinaire Bernie Madoff is currently incarcerated as Inmate #61727-054 at New York's Metropolitan Correctional Center, while he awaits sentencing.
Madoff was eventually exposed not because of any regulatory perspicacity, but because he ran out of money to maintain the illusion of solvency, as all too-good-to-be-true propositions must.
Throughout the history of Ponzi schemes, investors who cashed out early—whether by chance or through prescience—escaped the crushing losses faced by those whose money remained invested when the meltdown occurred. There's a lesson there for frequent flyers.
Whatever you call them, mileage programs pose a clear risk to participants. Even if the programs remain a fixture in the travel landscape, the long-term trend is decidedly negative: A frequent flyer mile earned today is less valuable than a mile earned a year ago; and a mile earned a year from now will likely be worth less than a mile earned today. The best way to minimize that risk—short of abstaining altogether—is to redeem miles as soon as award thresholds are reached. In the language of finance: Minimize your exposure.
For all the similarities, it's not clear that loyalty schemes are truly Ponzi schemes. The very fact that they haven't collapsed under the weight of their liabilities suggests that they're not. Still, consumers would do well to treat them as though they were.
