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The Miles Bye Club

Frequent-flier miles are becoming the Zimbabwean dollars of business travel-increasingly worthless.

The airline guys who invented frequent-flier programs almost 30 years ago and then turned them into wildly successful marketing vehicles eventually began calling miles "the nation's second currency." After all, they said with a warranted appreciation for what they had wrought, what else in America was so easily earned, so widely accepted and so valuable?

These days, however, frequent-flier miles are looking a lot like Zimbabwean dollars. The currency is being devalued with spirit-crushing regularity. There's less and less to buy with it now that airlines are slashing their route networks and seating capacity. And today's frequent-flier program managers have been given a mandate from their C-suite bosses: Generate fast cash by squeezing frequent fliers with a battery of fees-even though the new charges are destroying the long-term allure and profit potential of the plans.

"I understand why business travelers are disgusted," the manager of a major frequent-flier program told me a couple of weeks ago. "My bosses want revenue and they want it now. They want it from the partners who buy the miles and from the travelers who earn awards. And they don't want me to have access to the seats [for awards] that the revenue-management guys think they can sell. So what am I left with? Travelers understand that they can earn all the miles they want. But using them? Not so much."

Want a graphic example of how fast the frequent-flier programs are devolving? Consider the developments at United Airlines, which operates Mileage Plus, the nation's second-largest plan:

To shore up its cash position last month after another quarter of multibillion-dollar losses, United turned to Chase, the bank that issues Mileage Plus credit cards. Chase promptly ponied up a $600 million prepayment for miles that will be distributed to Chase customers in the form of bonuses for taking and using any of the half-dozen flavors of Visa cards emblazoned with the Mileage Plus logo.

Although the mileage deal was bundled with other cash considerations that Chase extended to United, it's not hard to figure out how many miles that $600 million bought. Big frequent-flier program partners like credit card banks usually pay around a penny a mile, so United will need to mint about 60 billion new miles for Chase. That'll expand United's current pool of 511 billion unredeemed miles by about 12 percent.

The devaluation of United's "currency" is worrisome enough. But since United's route network is shrinking-by the end of the year, the airline estimates its worldwide seating capacity will be 10 percent lower than it was at the end of 2007-Mileage Plus members are looking at double-digit inflation even as the supply of goods to "buy" with Mileage Plus miles is contracting by double digits.

United is not alone in using its mileage program as a cash cow. Continental Airlines, which operates the OnePass program, recently received a cash infusion from Chase, also the issuer of OnePass credit cards. And Delta Air Lines might not have survived its 2005 bankruptcy without a huge forward purchase of SkyMiles by American Express, which issues Delta's credit cards. And just like United, all of the big airlines are slashing their seating capacity by 10 to 15 percent this fall as they mint and sell billions of new miles.

The inevitable economic effect of too many miles chasing too few seats: Airlines are hiking, sometimes by hundreds of thousands of miles, the amounts needed to claim an award.

Delta, for example, revised its award chart again just last week. Last year it took the unprecedented step of slapping restrictions on its most expensive (and formerly unrestricted) SkyMiles awards. For the first time ever, Delta told its fliers: There are seats you can't have no matter how much of our currency you want to spend. The new three-tiered award structure Delta unveiled last week revives unrestricted awards, but at a brutally high cost. The best ones, redeemable for international business-class travel to Europe or Asia, now cost upward of 370,000 miles round-trip, or about 100,000 miles more than last year.

Continental's program is also undergoing a major devaluation. Earlier this year, it raised award levels by thousands of miles. Last month, it raised fees and now charges a co-pay of as much as $500 to claim an upgrade award. And last week it announced it would do what Delta has just abandoned: impose restrictions on its most expensive, previously unrestricted awards.

And the concept of a "free" seat as a frequent-flier award is gone too. Years ago airlines decided an award ticket didn't include applicable taxes and fees. Then they imposed charges if you booked an award too close to departure, claimed one by telephone, or changed your booking after the award was issued. Last month came the next wave: Fees of as much as $100 simply for claiming the award. American Airlines even invented a $5 omnibus fee. Its purpose? By the airline's own admission, the fee applies if you somehow managed to avoid all the other award fees it now charges. Depending on the airline, your destination, and your time frame, a formerly free award seat can cost you as much as $300.

As a result, airline programs now give fliers less for their loyalty than hotel frequent-guest plans, gas-rebate credit cards, or other frequency schemes.

About a month ago, one frequent-flier program manager told me that he thought "a penny a mile is a pretty damn fine return on your loyalty." That's a shocking assertion considering that frequent-flier programs once paid you three to five cents. And it also behooves frequent fliers to look elsewhere for a return.

Take Chase, for example. Its United Mileage Plus and Continental OnePass cards generally give customers one mile of credit for each dollar charged. In other words, a 1 percent rebate for every dollar spent. But why settle for that when Chase's Freedom Visa Signature offers you $50 cash back after your first charge, a 3 percent rebate on selected purchases, and 1 percent back on everything else?

The Fine Print.
Should travelers simply stop playing in the frequent-flier programs? No, because the plans remain the vehicle the airlines use to confer elite status recognition and upgrades. So the obvious solution is to use frequent-flier programs only to accrue miles earned from flying. In most cases, those are still the only miles that count toward elite airline status anyway. For some other thoughts about how to beat the system, read last fall's Frequent Flier Fallacies column.

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