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The Year in Miles: Looking Back at ’04, Looking Ahead to ’05

One year ago, as we closed the books on 2003 and looked ahead to 2004, I was certain of very little. The airline industry was a mess in every respect, disenfranchising everyone from customers and employees to stockholders, regulators, analysts, and the media.

My most certain prediction was that the roster of U.S. airlines would be shorter on December 31, 2004, than it was on January 1, 2004. But it wasn’t until November that we had our first airline fatality, with the abrupt shutdown of the small regional carrier, Southeast Airlines.

While the loss of Southeast was less than earth-shaking, 2004 had its share of memorable events. Following are a few that I thought were especially noteworthy. And while predictions about the airline industry are notoriously apt to prove misguided, I’ll engage in a bit of future-focused ruminating as well.

Airline liquidation

Looking back: After four consecutive years of spectacular losses, the Big Six airlines remain in business only due to government bailouts and the U.S. bankruptcy code.

The free-marketers contend that the long-term health of the industry depends on the fittest surviving while the unfit shut their doors. The protectionists counter that the greater good is in preserving the tens of thousands of jobs that would be lost if just a single major airline liquidated.

While that argument raged on, consumers spent 2004 worrying that their airline would fall victim to the industry’s woes, and that their frequent flyer miles would simply disappear.

Looking forward: There is a limit to the patience of the government and taxpayers. And I believe that limit has been reached. So I’m reprising my prediction of a year ago: a) One or more of the Big Six airlines will fall by the wayside during 2005, and b) the miles in the affected carriers’ programs will be lost.

Ticket protection

Looking back: Congress has finally passed an amendment extending for one year Section 145 of the Aviation and Transportation Security Act of 2001. Section 145, which expired on November 19, 2004, directed airlines to honor the tickets of travelers stranded by the shutdown of an insolvent carrier, on a space-available basis, for a fee not to exceed $25 in each direction.

Looking forward: If my previous prediction proves correct, the passenger-protection provision of the intelligence bill will be put to the test before it expires again, on November 19, 2005. While there remains some uncertainty as to whether that protection applies to frequent flyer award tickets, my guess is that airlines will apply the policy to revenue and award tickets alike.

Elite upgrades

Looking back: During 2004, unlimited complimentary domestic upgrades became the de facto industry standard for elite-level frequent flyer program members.

Looking forward: The jury is still out on whether this policy worked for or against its intended beneficiaries. Did elite members receive more upgrades than in past years? Or, because of the additional demand created by the unlimited-upgrade policy, in conjunction with an overall decline in the number of first-class seats, did they find themselves stuck in coach more often than not?

We won’t know for sure until some time in 2005. But I suspect that this policy may turn out to be a classic case of overpromising and under-delivering, a miscue the airlines can ill afford, especially since the good will of their best customers hangs in the balance.

Ticket fees

Looking back: At the outset of 2004, frequent flyer award tickets were free. Well, free except for security service fees, departure taxes, federal inspection fees, or rush charges. But as we end the year, most airlines have imposed a fee of $5 for bookings—including frequent flyer award bookings—made via their reservations centers and a $10 fee for award tickets booked at the airport.

In the past, airlines used mileage incentives to persuade us to transact business over the Internet. Now they charge extra for the “convenience” of making off-line transactions. We saw a similar evolution with e-tickets. First airlines used bonuses to train consumers to adopt the new technology; then they imposed a surcharge for using the old technology.

Looking forward: Expect more fees and penalties for non-Internet bookings in 2005.

Third-party booking

Looking back: Most major hotel chains in 2004 began restricting points and miles to bookings made through the most profitable distribution channels—their own websites and call centers.

Looking forward: The new tactic has already proved very effective. Hilton recently reported a 30 percent increase in bookings made on its branded sites, even as bookings on third-party sites decreased to 2.5 percent, from 3 percent last year.

This raises an intriguing prospect for 2005: Will the airlines stop awarding frequent flyer miles for tickets purchased through the likes of Expedia, Travelocity, and Orbitz?

The future of legroom

Looking back: American Airlines has always had one of the industry’s most robust mileage programs. And for the past few years, their More Room Throughout Coach program meant that economy-class passengers received industry-leading legroom. That combination amounted to a solid value proposition.

To the dismay of many, American announced in late 2004 that they would pull the plug on their more-legroom initiative, adding back seats and reducing coach seat pitch throughout their fleet.

Looking forward: American’s move amounts to a prediction by the world’s largest airline that comfort doesn’t sell. I am hoping (but not predicting) that they will be proved wrong.

The future of frequent flyer programs

Looking back: If you pore over industry financial reports, as I do, you will have read about the $600 million line of financing Delta received from American Express. If you read the entire story, you noticed that $500 million of the total amount was a prepayment for miles American Express will purchase from Delta to award users of the SkyMiles credit card, which is issued by American Express.

To the extent that the financing in question helped Delta stave off bankruptcy, you could say that the revenue generated by Delta’s loyalty program saved the airline.

Looking forward: Frequent flyer programs may die along with the failed airlines that operate them. But contrary to a recurring rumor, the airlines have no incentive whatever to disband the programs. The large programs are hugely profitable.

Will my predictions come true? Keep reading this column in the coming months to find out what 2005 will bring. And to all my readers, I wish you much comfort and many miles in the new year!

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