Case Studies

Origins and Deregulation

In the late 1970s, airline deregulation sparked fierce industry competition, allowing new, smaller carriers to undercut traditional airlines on price. To retain market share and incentivize repeat business without lowering fares, American Airlines launched the first major frequent flyer program, AAdvantage, on May 1, 1981. Inspired by retail prize stamps, the initial concept was simple: reward loyal customers with free flights based on miles flown.

The Mileage Arms Race

Competitors like United and TWA matched American's program almost immediately. When United launched its version without an expiration date on miles, American was forced to follow suit. This open-ended structure sparked an industry-wide arms race to offer tiered statuses (e.g., Gold) and complimentary upgrades, fundamentally changing the economics of air travel.

From Aviation to Banking

The most significant shift occurred when airlines began treating miles as a proprietary currency, selling them directly to banks for cash. Banks then offered these miles as credit card rewards, meaning consumers could earn free flights through everyday spending rather than just flying. Today, loyalty programs are often more profitable than the actual airline operations; in 2023 alone, American Airlines generated $5.2 billion from credit card and other partnerships, while Delta brought in $6.6 billion.

Current Challenges and Scrutiny

As these programs have expanded, airlines have continuously recalibrated them to maintain profitability—often by changing the benchmarks for status or increasing the miles required for a flight. This has led to several modern challenges:

• • Consumer Frustration: Flyers frequently complain about the sudden "devaluation" of their accumulated miles, making it harder to book the flights they want.

  • Federal Scrutiny: In 2024, the Department of Transportation launched a probe into the four largest airline loyalty programs to investigate potentially unfair, deceptive, or anti-competitive practices.

  • Dwindling Influence: Recent research indicates that the ability of these programs to actually influence consumer behavior is declining, pushing airlines to find new, broader ways for customers to earn and spend their miles.

• Policy Shift: The Supreme Court recently ended the use of race-conscious holistic admissions, ruling that individual experiences must be considered instead.

• Historical Context: For decades, universities used affirmative action to address disparities in educational access and promote student body diversity.

• Consequences of Bans: Experience from California’s long-standing ban suggests a "cascade effect" where Black and Hispanic students shift to less selective colleges.

• Impact: This shift is linked to lower rates of STEM degree completion and reduced career earnings for impacted minority students.

• Effectiveness: Evidence indicates that current race-neutral alternatives have not yet achieved the same level of campus diversity as previous affirmative action policies.

• • The Origin: In the early 1990s, Costco noticed name-brand prices rising even as manufacturing costs fell. To capitalize on this, they began creating private-label products to control costs and offer lower prices with better margins.

  • The Consolidation: Costco initially used multiple private label names (like Chelsea and Cloud) but realized it caused brand confusion. Going against industry norms, they consolidated everything under one name—Kirkland Signature—to build consistent consumer trust across all product categories.

  • The Strategy: Costco operates in a "limited SKU" environment, carrying far fewer items than competitors. Introducing a Kirkland product creates intense competition for shelf space, acting as a powerful negotiation tool against name-brand suppliers (as seen when Kimberly-Clark secured the diaper slot over Procter & Gamble).

  • The Success: Today, Kirkland Signature is an $86 billion brand—larger than industry giants like Procter & Gamble and Kraft Heinz—and accounts for roughly one-third of Costco's total sales.

  • The Quality Control: Costco maintains strict oversight of the brand. Every Kirkland product ever made has required direct sign-off from the CEO in what are traditionally known as "green ink meetings."