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The Year Ahead for Mileage Programs

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.

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.

It’s one thing to charge consumers a fee for making award reservations (and paid bookings—it’s the same policy) by phone. Migrating such transactions to the Internet permits the airlines to reduce the ranks of their customer-service employees, saving costs in the process, and generates extra revenue for services that were historically fee-free.

But instead of a forthright descriptor of the new reality, many airlines have promoted the new policy with a tagline of supreme speciousness—”no online booking fee”—as though there had been an online booking fee that the airlines subsequently rolled back. That’s just plain false, and to imply otherwise is, to put it politely, the sort of marketing sleight of hand (like advertising one-way fares when a round-trip is required) that has undermined the public’s trust in business generally and airlines in particular.

While we aren’t likely to see any widespread rescinding of existing fees, the airlines have pushed nickel and dime-ing to the limit. Travelers have said “Enough.” And airlines have grudgingly gotten the message.

Partnerships will expand

American boasts more than 1,500 program partners in its AAdvantage program. AAdvantage is also the leader in generating revenue from the sale of miles to its partners. The formula is simple: more partners means more money.

More partnerships also means more opportunities to earn miles. That’s turned out to be a mixed blessing for consumers. While more miles in theory translates into more awards, the aforementioned scarcity of award seats has left many program members rich in miles but poor in actual free flights.

Nevertheless, partnership rosters will continue expanding in the foreseeable future, particularly in smaller programs, which currently have fewer partners than their larger competitors.

Miles will last longer

In 2005, Southwest took a long-overdue step in the right direction by extending the life of Rapid Rewards credits from a paltry one year to two years. That still leaves Southwest at a significant competitive disadvantage against the major carrier programs, which typically allow miles to remain viable as long as there’s account activity every three years. But it gives Southwest a competitive edge over other discounters that modeled their programs after Southwest’s and continue expiring points after 12 months.

AirTran, ATA, and JetBlue now feel some pressure to at least match Southwest’s newly liberalized policy. And my prediction is that some will, although it’s impossible to say which. More interesting is the possibility that one or more of Southwest’s competitors will leapfrog Southwest’s new policy and go directly to a three-year extendable policy, like the majors’. That would be real progress.

No program cuts

Since we’ve brought the low-fare carriers into the discussion, it’s worth addressing a prediction I’ve seen made elsewhere. Because the discount carriers have been succeeding even as the legacy airlines have been hovering on the brink of extinction, the older airlines have been forced into adopting some of the discounters’ business practices, such as more point-to-point flying, fewer in-flight amenities, and faster aircraft turn-around.

Citing the trend toward mimicking low-cost carrier tactics, some industry experts are predicting the majors will redesign their loyalty programs along the lines of the discounters’ programs, including draconian mileage-expiration policies and spartan partner rosters.

It won’t happen.

Because the large airlines’ programs are both more efficient marketing vehicles and more effective revenue generators, there’s no reason to follow the discounters’ lead in mileage programs. On the contrary, it’s more likely that we’ll see discounters build out their programs to more closely resemble the robust programs of the legacy airlines.

Continued industry turbulence

While the general trend will be favorable, turbulence and uncertainty won’t disappear altogether. So enjoy the improvements, but keep your seatbelt firmly fastened.

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