Outlook Is Murky for Airlines, Frequent Flyer Miles

The Extra Mile
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Editor's Note: This story was originally published on April 15, 2008. To see the most recent SmarterTravel articles on related topics, please click on any of the following links: bankruptcy, frequent flyer, low-cost airline, mileage earning, mileage redemption, The Extra Mile, Tim Winship.

As a consumer advocate who writes about the airline industry, I make it my business to hold travel companies accountable for their treatment of customers. And in the interest of consistency—accountability cuts both ways—I hold myself liable for my own lapses, when for example I provide my readers with faulty advice, or fail to caution them about impending troubles.

So when Aloha Airlines and ATA shut down abruptly, leaving members of their mileage programs empty-handed, I was acutely aware of my own failure to predict the insolvencies and to recommend that members of the two carriers' loyalty programs redeem their accumulated miles before their accounts were voided.

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As it happened, tens of thousands of members of the AlohaPass and Travel Awards programs were caught off guard and millions of frequent flyer miles were lost. (I also failed to anticipate the closure of Skybus. But that carrier had no loyalty program, so no miles were in play.)

Was I the only one who missed the telltale signs of this industry meltdown? And, looking ahead, which other airlines should be of concern to travel consumers?

As I discovered in discussing the recent bankruptcies and the potential for future failures with four industry experts, I was hardly alone in failing to anticipate the disruptions, or in my distress at having done so.

Acknowledging my own shortcoming to Randy Petersen, publisher and editor of InsideFlyer.com and other print and Internet publications, he admitted that he too had been taken by surprise by the recent bankruptcies, and had just finished writing an editorial in which he apologized to his readers for having failed to give them advance warning of the coming disruptions.

I asked Petersen whether the airline failures had caused him to reassess the industry overall, and the prospects for individual airlines in particular. The "tough market," he said, had forced him to "readjust the radar" and take a closer look at the finances and operations of airlines which might be more susceptible to the inhospitable forces roiling the industry.

On Petersen's recalibrated radar screen are two carriers: Frontier, which filed for Chapter 11 bankruptcy protection the day after we spoke; and Spirit, whose business model and slim margins he likened to those of ATA and Skybus.

My next call was to Robert Mann, who spent 15 years working for American, Pan Am, and TWA and now heads an airline industry consulting firm, R.W. Mann & Company. Mann stopped short of naming specific airlines that might be in trouble, citing his concern that such predictions could contribute to a "run on the bank" which might nudge troubled carriers over the edge. But he was willing to identify factors likely to push an airline into insolvency.

First and foremost, in a period of declining demand and $100-a-barrel oil, the carriers at greatest risk are those with the least cash and no hopes of securing financing to keep them flying through tough times. "And that's not the Big Six. Those airlines have $20 billion in cash on hand." In other words, it's most likely that the next failed airlines will come from the ranks of the smaller carriers, "perhaps the third carrier in markets dominated by two larger airlines."

Darryl Jenkins, an independent airline consultant and former professor of airline management at Embry-Riddle Aeronautical University, is not particularly concerned about any specific airline, but cautioned that "90 percent of the airlines' current routes are unprofitable." The culprit: high oil prices. The problem: "The airlines simply don't have long-term business plans for operating with current fuel costs."

In spite of the challenging operating environment, Jenkins expressed confidence in at least one segment of the industry. "With their substantial cash reserves, there's no reason to worry about the legacy carriers." Among low-fare airlines, he picked AirTran and Southwest as carriers with the wherewithal to survive long-term.

But he ended on a decidedly cautionary note: "The airline gods are a curious group, and you never know when they're going to screw you."

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