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The future for frequent flyer programs

Frequent flyer programs, frustrating enough as they are, can get even worse, and the future of those programs seems to be worrying lots of you. One recent email from a reader, for example, asked about one specific development. “I see that United’s CEO is considering selling off Mileage Plus or perhaps making it a stand-alone subsidiary. My gut reaction is to use up all my miles and to start with some other program—another airline, a hotel, or cash-back. A change in ownership can also mean a drastic change in the current program rules and benefits. What would you suggest or advise?”

The short answers to this reader:

  • An ownership change does not necessarily mean drastic revisions.
  • Programs will nevertheless change—perhaps faster than in the last few years.
  • If you fly a lot, you’ll still be better off with an airline program than with any other; but if you earn most of your miles from a credit card and other non-flying sources, by all means switch to a cash or gasoline card program.

Clearly, there’s no “one size fits all answer.” But I think I can add a bit of clarity to what is often a very confusing situation.

Loyalty or profit?

When frequent flyer programs first came along—and later the copycat programs from hotels and other travel suppliers—the generic term for them quickly became “loyalty” programs. The fundamental purpose was to keep you flying on one line (or staying at one hotel chain), even when a competitor maybe had a slightly better schedule, more convenient location, or lower fare or rate. And that system worked pretty well for the airlines. With load factors hovering around 60 percent, they had plenty of extra seats to give out for award travel without displacing paying customers, and everyone was happy.

Two developments upset the early equilibrium:

  • Airlines found they could make more money selling miles to other companies—especially banks that issue credit cards, but including just about any kind of consumer marketer you can name—than by selling seats at their lowest advertised fares. As a result, the inventory of miles in the hands of travelers skyrocketed.
  • During succeeding financial crunches—especially post-9/11—airlines started to control capacity more aggressively, and load factors grew to between 70 and 80 percent, meaning fewer seats to “give” away.

The net result is that airlines (and Wall Street) now view their frequent flyer programs more as profit centers rather than as loyalty programs.

Sellout possibilities

Combine their ability to sell lots of miles and limit the number of “free” seats awarded, frequent flyer programs have acquired a significant value as freestanding independent operations. According to some analysts, Mileage Plus, as a stand-alone entity, is worth more than United Airlines itself. Air Canada sold off its Aeroplan program a few years back, and several other lines—not just United—have been reported as considering similar divestitures. Future sell-offs by cash-hungry parent companies seem to be in the cards for quite a few lines.

Even if several programs are spun off, however, major changes will come slowly. And probably no faster than changes in programs that remain in the airlines’ corporate portfolios. Chances are Air Canada would have made the same changes regardless of who owns Aeroplan. I have some significant worries about the future of frequent flyer programs, but sell-offs aren’t at the top of my list.

A loyalty ladder

Although loyalty still matters, some varieties are more important than others. Specifically, the only loyalty that still really matters to airlines is that of travelers on the top rungs of the ladder: very frequent business travelers and a tiny segment of upscale leisure travelers who buy lots of high-priced tickets. Those of you on the lower rungs—who take two or three round-trips a year, on the cheapest economy tickets you can buy—really don’t matter. Ditto those of you who pile up your miles mainly on credit cards.

The loyalty ladder will guide the future evolution of frequent flyer programs. Without getting into excessive speculation, I’d predict some combination of (1) upward revision of award schedules, maybe including different schedules for elites, (2) limits on even the double-miles “limit buster” awards (Delta is doing this), (3) reduction of mileage awarded for low-fare tickets, (4) an extra charge for tickets that earn miles, as Air Canada now does, and (5) shorter time limits for redemption.

Elite or out

Your place on the loyalty ladder also holds the key to your best future course.

  • If you fly enough to earn even the first level of “elite” status with at least one airline, your best course is probably to stick to an airline frequent flyer program. In the future, airlines will increasingly bias all aspects of their programs in favor of elite—and especially gold or platinum elite—frequent flyers. The higher your elite status, the easier it is to access to award seats, upgrades, and the other program perks. If you can earn and retain elite status, no matter how the airlines devalue benefits—and they will, gradually—airline miles are still the better option. And they’re the only viable option if your primary objectives are upgrades or premium-cabin award travel.
  • The corollary to that conclusion is that if you don’t fly enough to earn elite status on any line, you’re probably better off looking at other reward programs. That’s especially true for those of you who earn most of your points through a credit card. Given the shrinking number of “free” seats and upgrades available, lots of other reward programs offer you a higher payout value to your points than airline miles.

These days, for non-elite travelers, my guess is that airline miles are worth well under one cent each. And that value will decrease over time. By contrast, lots of credit cards return at least one cent per dollar charged in cash; some gasoline, automobile, and other cards return well above one cent. Figure out the values for yourself, and act accordingly.

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