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As United Struggles, Mileage Options Shrink

SmarterTravel

As airlines stagger into and out of bankruptcy, frequent flyer program members’ apprehension over the future of their miles has escalated in direct proportion to the airlines’ financial losses.

Even as US Airways emerged from Chapter 11 bankruptcy, Hawaiian Airlines and Air Canada were filing for bankruptcy protection themselves. And other airlines—including American, the world’s largest—could slip into that state at any time.

Of the carriers currently in bankruptcy, United is both the largest and the most in danger of outright liquidation.

Members of United’s Mileage Plus program who doubt the carrier’s long-term viability, and by extension the longevity of their miles, have three options to choose from: Use their miles, hold them, or convert them.

Redeem now

The only way to get full value for frequent flyer miles is to redeem them for award travel.

For worried frequent flyers, the corollary to that maxim is “do it now.” Cash in those miles as soon as possible, and take that award trip while United is still flying.

In the real world, that’s not always possible. Some consumers have too many miles to use in the short term. For others, there’s no time available for a trip. And then there are those who simply have too few miles for an award.

(Don’t forget that most programs allow members to use their miles to have award tickets issued for friends or family members. So that’s a short-term option as well.)

Since United’s very future is in question, it is worth considering what might happen to award travelers if United were to shut down completely. There are two possible scenarios, depending on whether miles were redeemed for award travel on United flights, or for flights on a Mileage Plus partner airline.

Redeem for United flights

If United ceased operations today, holders of unused or partially used United revenue tickets would be somewhat protected by section 145 of the Aviation and Transportation Security Act.

Section 145 requires U.S. airlines, “to the extent practicable,” to accommodate ticketed passengers stranded due to another carrier’s failure, “on a space-available basis, without significant additional charges,” not to exceed $25 each way.

Unfortunately for consumers, there’s no specific reference to mileage awards in section 145, and the Department of Transportation has issued no guidance on whether section 145 applies to those traveling on frequent flyer awards. According to a DOT spokesperson, the policy is “up to the individual airlines.”

(Editorial comment: The DOT owes it to the traveling public to issue a definitive ruling, so consumers traveling on mileage awards know where they stand in the event that their airline suddenly disappears.)

Redeem for partner flights

There is no less uncertainty when it comes to Mileage Plus award tickets issued for travel on partner airlines.

As a legal or contractual matter, airlines participating as partners in Mileage Plus would be under no obligation to honor award tickets if United were no longer solvent. But they might do so anyway.

Consider the case of Ansett, the Australian carrier that suspended operations in March 2002. Eventually, award tickets issued to members of Ansett’s Global Rewards program for travel on Air New Zealand and Singapore Airlines were honored.

(On the other hand, points earned in Ansett’s program but not yet redeemed for award tickets were frozen and ultimately forfeited—a frequent flyer’s worst nightmare.)

From a consumer standpoint, Air New Zealand and Singapore Air did the right thing, partly because Ansett was a co-partner in the Star Alliance, and partly because they calculated it would be in their long-term marketing interests to be generous in the short term.

Would United’s partners be likely to put good will ahead of formal obligations, as Ansett’s partners did? The answer is a definite maybe.

As was Ansett, United is a member of the Star Alliance, which includes Air Canada, Air New Zealand, ANA, Asiana, Austrian, bmi, Lufthansa, Mexicana, SAS, Singapore, Spanair, Thai, and VARIG). Other Star Alliance partners would probably feel some pressure to step in, if only to maintain the alliance’s overall credibility. And if Lufthansa, say, were to refuse to accommodate a Mileage Plus award ticket holder, it would almost certainly be sacrificing any future business from that customer.

The salient difference—and it could be a deal-breaker—is one of scale. Whereas Ansett’s program had fewer than three million members, and a proportionate number of outstanding awards, United’s Mileage Plus has more than 40 million members. Even on a space-available basis, the prospect of rescuing stranded Mileage Plus members would be daunting, especially for smaller airlines with limited seats available for award travel.

Redeem-and-hold

What the above suggests is that, in addition to “redeem-and-fly,” there’s a “redeem-and-hold” strategy that warrants consideration. That is, Mileage Plus members could cash in miles for an award ticket—for travel either on United or on one of its Mileage Plus partners, preferably a Star Alliance member—and wait.

If United liquidates, there is at least a possibility that the award ticket will be honored by another U.S. airline or one of its program partners.

And if United survives the current shakeout, the miles can be redeposited into the member’s account. Normally, United charges $75 to redeposit miles, but that fee was waived through April 19 for awards booked prior to March 31, in consideration of the uncertainty associated with war in Iraq.

Hold ‘n’ hope

For many frequent flyers, inertia will win out over fear, and they will leave their miles parked in their accounts, hoping for the best.

Of course, if United overcomes its problems and survives, Mileage Plus miles will survive as well, making any panic-induced moves look foolish in hindsight.

And even if United were to liquidate, there’s a possibility that the Mileage Plus program—its members and their accumulated miles—would be acquired by another airline, in the asset sale that typically follows a company’s dissolution.

Indeed, there’s precedent for such an outcome, most recently in the case of American’s acquisition of TWA’s assets, including the Aviators program that was folded into American’s AAdvantage.

However, in today’s environment—with airlines in bankruptcy court, petitioning Congress for financial bailouts, or both—the odds of an airline stepping up and assuming the liability of Mileage Plus members’ miles are close to zero.

In past years, an adjunct to the “hold-‘n-hope” approach was mileage insurance. Through AwardGuard, frequent flyers could insure their miles up to a value of $7,500 for $119 per year. But for reasons not directly related to United’s situation, AwardGuard recently suspended insurance availability for new customers.

The conversion option

Exchanging miles from a struggling program—United’s in this case—into a program with better long-term prospects is appealing in theory, if less so in practice.

In recent weeks, one of the two conversion options formerly available to Mileage Plus members was taken off the table, apparently as a direct result of concerns over United’s viability.

On March 20, Hilton announced that Mileage Plus miles could no longer be exchanged for points in the Hilton HHonors program. (The move followed a similar HHonors change that eliminated Delta from the Reward Exchange program.)

The single remaining conversion option for Mileage Plus members is Diners Club Rewards, which, like HHonors’ Reward Exchange, has exchange capabilities for both miles-to-points (for the American AAdvantage and United Mileage Plus programs only) and points-to-miles (for 26 airline programs and nine hotel programs). Since Club Rewards is linked to the Diners Club card, you have to be a cardholder to transfer miles. The entry-level Diners Club card carries a $95 annual fee.

With miles-to-points, miles convert 1:1 for Club Rewards points. And with points-to-miles, 2,000 points convert to 1,000 miles in most airline programs.

So, exchanging 50,000 United miles (the maximum annual allowance) would yield 50,000 Club Rewards points. You could then redeem those points for half that many miles on another airline—an overall 50 percent loss in value.

That’s certainly a steep penalty for conversion. On the other hand, if you don’t transfer your miles to another program, and Mileage Plus ceases to exist, you’ll have lost 100 percent of what you started with. Whether you should convert or not depends on how high you think the chances are of that happening.

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