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The Year Ahead for Mileage Programs

On Frequent Flyer Miles
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Editor's Note: This story was originally published on January 3, 2006. To see the most recent SmarterTravel articles on related topics, please click on any of the following links: frequent flyer, On Frequent Flyer Miles, Tim Winship.

The big-picture outlook for travel in 2006 isn't a rosy one. In particular, ticket prices will be on the rise, both because the airlines' costs have increased and, more importantly, because the carriers will regain some pricing power by cutting flights on their domestic routes. And, with fewer available seats, already high occupancy rates will rise higher still, leading to increasingly claustrophobic flying conditions. It would be fair to say that travelers will be paying more for less comfort.

There is a positive side to this latest chapter in the gradual unfolding of airline deregulation, though. The old-line carriers, after posting more than $30 billion in losses since 2001, are on the road back to profitability. That's not just good for shareholders and airline employees. Travelers stand to benefit as well from an environment in which the airlines' futures aren't constantly in question, and carriers can afford to turn their attention to delivering service rather than cutting costs.

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How will these developments affect the airlines' frequent flyer programs over the next year? Let's take a look.

Award seat availability will rise

Award-seat availability has developed into the key issue for frequent flyer program participants. Hard data is impossible to come by, but there's been a steady increase in complaints from program members unable to redeem their miles for award travel at restricted levels (e.g. the 25,000-mile award for domestic travel). The anecdotal evidence leaves no doubt: The airlines have reduced the number of seats available to mile redeemers.

That finding is consistent with the airlines' focus on maximizing revenue. A seat given away to a frequent flyer in exchange for miles is a seat that cannot be sold for cash. And cash in the short term trumps long-term customer loyalty. Or at least it has for the past four years.

While I don't anticipate any dramatic changes in 2006 and beyond, I do expect the general trend to be in the direction of increased award availability. And I base that cautiously optimistic prediction not on the airlines' good will but on their recognizing that generosity serves their own self-interests.

First, there's the dawning recognition by the airlines that consumer patience has its limits, and that if the programs prove persistently unrewarding, consumers will cast any remaining loyalty to the wind.

And secondly, there's the matter of the programs' little known (and rarely reported) ability to operate their mileage programs as profit centers. Solely through the sale of frequent flyer miles to its many partners—CitiBank, Hilton, Hertz, etc.—American generated an estimated $1 billion in 2004. And unlike revenues derived from its core airline business, a significant portion of its AAdvantage-related revenues are profit.

But as the airlines realize only too well, partner companies will only continue buying miles as long as the programs maintain their power to affect buyers' loyalty and purchase behavior. If consumers throw up their hands in frustration and throttle back their engagement with mileage programs, program partners will deploy their marketing dollars elsewhere. That's an outcome the airlines simply cannot afford.

Airlines will alter elite benefits

If award seat availability is the make-or-break issue for the majority of mileage program participants, upgrade availability is the top-of-mind consideration for the airlines' very best customers: elite program members.

In an informal survey of SmarterTravel readers in 2005, elite members were mostly satisfied with the airlines' delivery of elite upgrades. But with the ongoing cutbacks in domestic flights, the downsizing from larger to smaller aircraft (some of which have no first-class cabins), and the increased affordability of first-class tickets, airlines will be challenged to maintain even that modest level of satisfaction in 2006.

How can airlines maintain the value of elite status even as upgrades are fewer and farther between? If I had a ready solution to that problem, I'd sell it to the airlines and collect a small fortune in consulting fees. All I can say for sure is that the airlines' creativity in this area will be tested over the next year.

No new fees

Stymied in their attempts to raise ticket prices, the airlines have resorted to an a la carte pricing model, charging extra for just about any service that can be easily separated out from the core travel product. The latest: offline booking fees.

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