Free miles a complex award

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Frequent flier plans now key source of income for airlines

April 02, 2008|By New York Times News Service

Travelers have been complaining more often about frequent flier programs - namely, the lack of award seats on desirable flights, escalating fees for ostensibly free tickets and quicker expiration dates for miles.

The airlines counter that they are giving away more awards than ever, despite generally fuller planes, and that most programs allow members to book any open seat on any flight, albeit in exchange for more miles.

In a sense, both sides are right. But this debate misses a fundamental change that has occurred in the economics of frequent flier programs in the past decade. What began 27 years ago as a way to win the loyalty of travelers has turned into a lucrative business for the airlines.

Many airlines now earn hundreds of millions of dollars a year by selling miles to partners such as credit-card companies and hotel chains. Those companies, in turn, give the miles to customers as sign-up bonuses or rewards for hotel stays. That revenue is critical for the airlines in an era of escalating fuel prices. But it has also changed frequent flier programs into more complex businesses, in which fliers are just one of the constituencies carriers are trying to please.

"The real change over the years has been the evolution from being a loyalty program for the airline's best customers to today being a currency program for anybody's best customers," said Randy Petersen, publisher of InsideFlyer.com, which tracks frequent flier programs.

The currency is measured in accumulated miles, which consumers value so highly that thousands of companies now purchase them at prices ranging from 1 to 3 cents a mile. (About half of all miles given out these days, in fact, do not involve flying.)

But as consumers can earn miles in more and more ways, the number of miles accumulated each year has vastly outpaced the number redeemed, an imbalance many airlines are now being forced to address.

"We're at a turning point," said Jeff Robertson, managing director for Delta's SkyMiles program. He said that its members earned 27 percent more miles in 2007 than in 2004, yet the capacity allocated for award seats remained flat.

"We at Delta and as an industry cannot continue to have customers earn a significantly greater number of miles year after year without providing customers some flexibility in ways to use those miles," Robertson said.

Delta's SkyMiles members had 510 billion unused miles in their accounts at the end of last year, while the MileagePlus program offered by UAL's United Air Lines had 488 billion unused miles and the AAdvantage plan of AMR's American Airlines had 613 billion.

The AAdvantage program, the largest in the world with 60 million members, awarded 200 billion miles last year, while 150 billion miles were cashed in.

Airline executives point out that the number of awards redeemed each year has generally been increasing. In American's case, 4.8 million awards were used in 2007 versus 4.4 million in 2006. That number includes tickets on American and its partners, flight upgrades and products such as magazine subscriptions or vacation packages.

"We redeemed more rewards in 2007 than in the prior five years, and our load factor in 2007 was at an all-time high," said Rob Friedman, president of AAdvantage.

The number of awards issued by Continental Airlines also increased, to 1.8 million in 2007 from 1.5 million a year earlier, as it did on United, to 3.1 million from 2.9 million, though United's figures do not include upgrades. Delta has not released its 2007 figures, but it expects to exceed the 3.3 million awards given in 2006, not including upgrades.

One way that carriers are trying to reduce the mileage backlog is by adopting stricter expiration policies. Miles now typically expire after 18 months or two years of account inactivity, instead of three years.

Airlines are also offering more ways for members to use their miles, including bidding for things such as Broadway tickets at online auctions, trading miles for merchandise or using a combination of cash and miles for air travel.

But even these moves may not provide enough of the free seats on which the frequent flier business is built, and that may jeopardize a critical source of revenue for the airlines.

While most carriers have traditionally been tight-lipped about how much they earn from these programs, more details are starting to emerge. United reported revenue of $800 million last year from selling miles, while Qantas earned $218 million in the last half of 2007 from mileage sales to third parties.

American Airlines has revealed only that it sold 100 billion AAdvantage miles in 2007, but assuming an average price of 1 cent a mile - a conservative estimate - that adds up to $1 billion. None of these figures includes fees, including $100 to change a ticket or redeposit miles.

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