Shrinking airlines will cause frequent flyer pain

Over the past two weeks, U.S. airlines have been reporting their earnings for the first quarter of 2008. The losses were large and widespread.

American Airlines lost $328 million. US Airways lost $236 million. United dropped $537 million. Continental was down $80 million. Northwest lost $4.1 billion. And Delta managed to lose $6.4 billion.

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Smaller airlines took their lumps as well. Alaska lost $36 million. AirTran lost $35 million. And JetBlue was down $8 million.

In spite of the fact that flights are running full—around 85 percent during March—the airlines' response to the profit squeeze is a reduction in flights.

From American's earnings release: "The biggest impact on mainline capacity is planned to occur in the fourth quarter, when mainline domestic capacity is expected to decline by 4.6 percent from fourth quarter 2007 levels."

Delta will reduce overall system capacity for the second half of 2008 by 0 to 2 percent compared to 2007, with domestic capacity down 9 to 11 percent.

Bankrupt Frontier is cutting flights at its Denver hub.

JetBlue plans to reduce capacity by 2.8 percent from the fourth quarter of 2007.

United will cut capacity 9 percent by the fourth quarter, on top of a 5 percent reduction in the fourth quarter of 2007.

And US Airways plans to cut capacity 2 to 4 percent in the second half of the year.

So, here's the big picture: an industry that's shrinking, and in particular shedding domestic flights.

Earnings and load factors, growth and no-growth ... who cares?

Consumers hoping to redeem their frequent flyer miles for free seats should care. Because while the number of airline seats is declining, there's no corresponding reduction in the number of frequent flyer program members or outstanding frequent flyer miles. On the contrary, the airlines continue devising ever more ways to earn miles, further adding to the supply in members' accounts.

The focus on domestic flight reductions is especially painful, since the great majority of award tickets are issued for travel within the continental U.S.

So for the foreseeable future, demand for award seats will continue growing, even as the supply continues shrinking.

Think it's difficult to cash in miles for a capacity-controlled seat today? Just wait! Or rather, don't wait. Since the outlook is for even tougher times ahead, the smart move is to redeem sooner rather than later. If you can.

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