Sun, Aug 18, 2002 page12

• Frequent fliers cashing in miles at a record pace

  Analysts say that airlines will face a public relations nightmare if they renege on promises to accommodate the demand for free seats

  • NY TIMES NEWS SERVICE
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  Americans are accumulating and cashing in frequent-flier miles at a record pace, scrambling for upgrades and free flights even as a dearth of paying customers has left the airlines losing billions of dollars.

  Experts say that the overall slowdown in travel is allowing airlines to partially accommodate a growing demand for free seats and upgrades. Customers have always complained about the difficulty of booking free trips for destinations and times they prefer, however, and that has not changed appreciably.

  But steps that the industry is taking to cut its losses -- chopping back schedules, eliminating first-class and business-class seats on some flights, and replacing some bigger planes with smaller regional jets that do not even have first-class seating -- may make it harder than ever for frequent fliers to redeem their miles for trips when travel revives, these experts said.

  

  Kevin Vukson spent $125 for a ticket that gave him 8,000 frequent-flier miles. ``It was the mother of all mileage runs'' he said.

  PHOTO: NY TIMES

  "The airlines are without a doubt creating a future customer-service liability for themselves," said Jim Corridore, an airline analyst for Standard & Poor's.

  Although air travel itself is off sharply this year, the rate of growth in miles accumulated under the frequent-flier programs has doubled this year to about 20 percent, with a total of about 8.7 trillion miles outstanding, according to Randy Petersen, the publisher of InsideFlyer Magazine, who is considered the leading analyst of airline frequent-flier programs.

  Meanwhile, the number of free trips claimed by passengers in the past 12 months has risen 17 percent. "That's the largest jump I've seen in the history of these programs," Petersen said.

  The miles are piling up for several reasons. Airlines, desperately scrambling for every fraction of a percentage point of market share, are distributing mile awards essentially as a "loss leader," Corridore said. Several airlines, for example, offer bonuses of 1,000 to 2,000 miles for each ticket booked on their own Web sites.

  As the airlines scramble for revenue, a growing number of businesses, notably credit card companies and hotel chains, have joined in promotions to exploit what seems to be an endless consumer demand for free trips, upgrades and products -- including jewelry and concert tickets -- that airlines and partners are selling or discounting in exchange for miles. A free domestic trip typically requires 25,000 miles.

  "Nothing in the history of these mileage programs has been as startling as what we've seen in the last few months" as credit card companies and others have been increasing promotions for bonus miles, Petersen said.

  For example, American Express, which issues credit cards linked to Delta Air Lines' frequent-flier program, and Bank One Visa, which is in partnership with United Airlines, have been offering two airline miles for each dollar charged on their cards this summer. For a new cardholder's initial purchase alone, United's Mileage Plus Visa offers 15,000 bonus miles in addition to the double miles on subsequent charges.

  Airline mileage partners purchase miles from airlines at US$0.01 to US$0.02 apiece, analysts said. In fact, with the rapid acceleration in participation in mileage programs, selling miles is one of the few money-making bright spots in the airline business today. Some analysts have even gone so far as to suggest that airlines spin off their frequent-flier divisions as separate companies.

  Meanwhile, with so many miles to be harvested, some of the most active participants in frequent-flier programs are going to great lengths to turn the industry's desperation into awards jackpots. Using the deeply discounted fares that airlines are offering on certain routes, they are booking complex, multistop trips designed to acquire the maximum number of miles and bonuses at the lowest possible cost.

  "It's an us-against-them mentality," said Matthew Bennett, publisher of First Class Flyer, a newsletter based in Monterey, California, that highlights strategies for using mileage promotions to obtain upgrades. Bennett, who writes under the name "Mr. Upgrade," estimated that if current trends toward using miles for upgrades continue, perhaps half of the miles redeemed on major airlines this year will be used for upgrades or outright purchases of first-class and business-class seats.

  As miles pile up in customers' accounts, analysts worry that airlines -- which have been accounting for free trips for years at rates that typically average 7 percent to 8 percent of their total paid miles flown -- are failing to prepare for the inevitable time when mileage-rich customers are going to be demanding trips and upgrades for a good number of those newly generated miles.

  They think that "they don't have to worry about it for a while," said Corridore, the Standard and Poor's airline analyst. "Right now, they're trying to get their revenues going at all costs."

  But, he added, "If they get to the point where they have to say, `You know, we're giving away too many free seats,' and they shortchange their frequent-flier programs, they're in for a major potential public relations backlash."

  Grumbling about hard-to-book free trips for desirable destinations at desirable times has been chronic since the programs began in 1981. "It's not easy now to find availability" for free trips, Bennett said. "Then again, it's never been easy."

  Airlines, beyond what they report as potential award liabilities on their yearly financial statements, do not discuss specific mileage-program data, which they consider proprietary and highly competitive in nature. The major airlines all claim that they are currently meeting or exceeding the usual levels of consumer demand for awards.

  "We continue to have a very high success rate meeting demand," said Kurt Ebenhoch, a spokesman for Northwest Airlines.

  A Delta spokesman said, "Our reward travel redemptions are increasing year to year."

  However, with the continuing frenzy of promotions, the value of the mileage currency is bound to tumble eventually, critics said.

  Airline miles are "the major inflationary currency in the world," said Gareth Edmondson-Jones, a spokesman for JetBlue Airways, an upstart carrier that is among the low-fare airlines bedeviling the major carriers. "It's a fairly worthless currency," he said. "You need to keep tripling and quadrupling points because they're worth less and less. It just looks more appealing as the numbers go up."

  Still, even the no-frills carriers like JetBlue and Southwest Airlines, which have been making money while the major airlines lose billions, have their own mileage programs. Both Southwest's and JetBlue's programs are far less complex than those of the majors. They essentially award one free trip for a certain number of trips flown, much like a pizza parlor giving away a free pizza after a dozen purchases.
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