Airline Mile Primer
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Airline Mile Primer

Michael Heiko An airline mileage report folded into a paper airplane. Michael Heiko
Award tickets and upgrades are now harder to come by than ever. With customer satisfaction plummeting, loyalty programs are at a crossroads. But one thing is certain: the airlines can't survive without them.

Last year was a tough one for the airline industry. Delta and Northwest joined United in
declaring bankruptcy, nearly every major airline reduced its total number of flights, and
rising fuel costs—made worse by a devastating hurricane season—strained airlines'
already strapped budgets. (For United Airlines, which finally posted a profit in the third
quarter of 2005 as it began to emerge from bankruptcy, fuel actually eclipsed labor as its
biggest cost.)

Despite the bad news, consumers could be sure that their mileage coffers would overflow.
But while accumulating miles is easier than ever, some travelers are finding them as useful
in the real world as Monopoly money. Last year, Victor Komlos, who had accumulated a million
miles traveling as regional sales manager for a California winery, tried to cash in his Continental
miles for an anniversary trip to Rome with his wife. "I tried booking three months in advance,
but still, all the available seats had already been taken," he says. The tickets, which were
not available at 50,000 miles each, round-trip, were available at 200,000 each. "It felt like
a bait and switch," he says. In the end, with the help of a reservations agent, he was able
to find tickets for 150,000 miles apiece. With hundreds of thousands of miles still lying
dormant in his account, he's considering switching to a credit card, such as Citi's Dividend
Platinum Select card or the Blue Cash card from American Express (T+L's parent company), which
offers cash back instead.

As the airlines try to wring as much revenue as possible from seat sales while selling more
miles to partners like co-branded credit cards, passengers are finding that the problem is
not accruing miles, it's cashing them in.

The Backstory: What's Really Happening?

It's now so easy to earn miles through the airlines' partners—such as retail stores,
restaurants, and hotels—that the number of miles awarded has far outpaced the number
that can be redeemed. The major airlines say they have devoted 6 to 8 percent of their seats
to award redemption (though they won't disclose a per-plane percentage), but with the gross
number of outstanding award miles calculated to be as high as 10 trillion, it's no wonder
there's such fierce competition for rewards. Delta Air Lines alone had around 15 million unredeemed
seat awards at the end of 2004.

These days, most fliers collect more miles from non-travel-related purchases than from flying.
At last count, American Airlines said it had 1,500 partners offering miles to its customers.
By some estimates, half of all miles accrued come from co-branded credit cards; the credit
card companies buy miles in advance from the airlines and place them in their members' accounts.
The companies will pay the airlines around one penny per mile—thus, for every 30,000
miles it sells, an airline will make $300. Although not every airline breaks out its income
from loyalty programs, Frontier disclosed that it earned more than $4.2 million from its mileage
relationship with Juniper Bank Mastercard during fiscal year 2004. Meanwhile, credit card
companies continue to profit by luring consumers with the promise of miles—in exchange
for high interest rates and fees. And though they don't go out of their way to advertise it,
Delta, American, United, Frontier, and Midwest all offer fee-free mileage credit cards, which
accumulate miles at half the rate of those with fee.

It's hard to blame the airlines for flooding the credit card market with miles: the card
companies are their best customers. In fact, they're playing a critical role in bailing out
the airlines from their bankruptcy woes. In October, JP Morgan Chase, which issues United's
Mileage Plus Visa card, agreed to make a "substantial" advance purchase of miles from United
that will help cover the airline's $3 billion in bankruptcy-exit financing. Delta received
a $350 million term loan from credit card partner American Express, though the airline was
already in debt to Amex for $500 million in prepaid SkyMiles. Juniper, the new co-branded
credit card partner of the recently merged US Airways and America West airlines (which will
take on the US Airways name), has prepaid $325 million for miles.


As unlikely as it sounds, some industry experts believe that these loyalty programs could
be keeping the airlines afloat. "The joke," says Tim Winship, publisher of FrequentFlier.com,
"is that the airlines are now running their core businesses as a way of servicing their frequent-flier
programs."

Award seats are also harder to come by because of the number of passengers being jammed onto
planes. According to airline strategist Michael Allen of Back Aviation Solutions, as of June,
the seven so-called legacy airlines were filling a record 82.8 percent of their seats, topping
a previous June record of 81.4 percent the year before. The reason: more people are flying,
and at the same time airlines such as United are offering 17 percent fewer seats than they
were five years ago. In October, American Airlines said that it planned to cut 1,800 flights
over four months to counter rising fuel costs. The September bankruptcy plans of Delta and
Northwest called for cutting up to 20 percent and 10 percent of their domestic flights, respectively.

At press time, none of the major carriers had made changes to their frequent-flier programs.
But during 2005, most airlines lowered the barriers for elite-status qualification, which
meant that there were more elite members competing for upgrades. And some airlines, such as
Delta, have lowered overall first-class fares, resulting in first-class sections full of people
who've actually bought their tickets with money—bad news for those seeking upgrades.

What This Means for You

• Devalued miles You'll continue to earn more miles, but they'll be
worth less. Airlines will continue to profit from their mileage programs by selling miles
to credit card companies and retailers, who will in turn offer them as limited-time promotions
and double-mile bonuses. At the same time, Wisconsin-based IdeaWorks, a brand- and product-development
firm that has generated co-branded credit cards for Frontier and ATA, estimates that the buying
power of the award mile, based on the number of miles it costs to buy a domestic ticket, has
fallen by 33 percent since 1994, from 2.1 cents to 1.4.

• Less frequent upgrades Bankruptcy and rising fuel costs will continue to
spur airlines to squeeze more money out of each flight, further decreasing the number of award
seats available, with a trickle-down effect that will mean fewer upgrades. Over the past 20
years, bankrupt carriers decreased capacity by 5 to 10 percent on average in the year following
their filing, according to a Bear Stearns report issued in September. Mileage experts anticipate
that airlines will continue to offer mileage bonuses to offset customers' worries about using
their programs, which leads to a double whammy: more people vying to use more miles for fewer
available upgrades.

• Fewer award seats—but better ways to find them With more miles
out there and not as many seats available, there appears to be no relief in sight. But in
the long run, experts believe, the situation may improve. Now that the credit card companies
are bankrolling many of the mileage programs, Jay Sorensen, president of IdeaWorks, predicts
that they will begin using their power to pressure the airlines to increase the number of
available seats—or decrease the number of miles consumers need to redeem tickets, so
that credit card customers like Victor Komlos won't be tempted to drop their mileage cards
in favor of those with lower fees and lower interest rates.

At present, although award seats are still elusive, at least the airlines are instituting
easier ways to find them. Northwest's Web site now has a color-coded calendar indicating which
dates during a month have seats on the route you want. Continental has set up a calendar that
allows you to book award miles on it and its code-share partner Northwest. And American Airlines
now has a downloadable Hot Spots calendar that shows availability for popular destinations.

• Selling up You may see more on-the-spot markups—when 25,000-mile
restricted-award tickets are unavailable, you'll be offered a 40,000-mile ticket instead.
But at least, says Randy Petersen, editor of InsideFlyer.com, scenarios like the one Komlos
encountered, in which the award price tripled, shouldn't become the norm.


• More opportunities to spend miles on merchandise Magazine subscriptions
for miles have been available for years, but lately some airlines have begun offering more
unusual products. Last year, Frontier launched the More Store, an on-line shop where members
can purchase luggage and dining certificates, and can bid on concert packages such as a Bruce
Springsteen deal, which included four tickets, airfare, two hotel rooms, and a rented Jaguar
convertible. (This went for a mere 32,000 miles —$768 based on Frontier's standard 15,000
mile domestic ticket award price.) United has a new auction feature: adventurous travelers
can bid to charter an America's Cup racing yacht or drive 10 laps at a Nascar track. United
Mileage Plus members can also redeem miles for cruises. Continental's on-line auction allows
customers to swap miles for items like Houston Texans tickets, a dinner party with a chef,
and a Star Wars popcorn machine. On Continental's Miles for Merchandise site, frequent fliers
can purchase household items, electronics, watches, or clothing with a combination of dollars
and miles. Most of these options are best for members with more miles than they can use for
flying; converted miles are worth even less in merchandise than they are in travel

.

How to Make the Most of Your Miles

• Consider buying merchandise, but do the math An airline that charges 25,000
miles for a standard domestic round-trip ticket values your miles at approximately 1.4 cents
each. To get the dollar cost, simply multiply the number of miles charged by .014.

• Monitor your program's changing rules Bankruptcies and mergers often lead
airlines to revise their award ticket prices. To stay on top of the latest news, read FrequentFlier.com
and InsideFlyer.com. If you maintain several frequent-flier accounts, sign up for MileageManager.com
($14.95 per year), which keeps track of them for you and tells you when you've earned enough
miles for a free ticket.

• Try upgrading on new routes You'll have less competition from other frequent
fliers, who tend to upgrade on their favorite routes.

• Don't hoard miles Despite the simple logic that you shouldn't squander award
miles when you could buy a ticket for a low cash price, the value of your miles isn't likely
to increase, as ticket prices aren't likely to rise significantly anytime soon. Use them before their value drops further.


These days, you can buy everything from Bruce Springsteen tickets to high-end luggage with
your miles. But is a $50 Starbucks gift certificate worth 11,444 miles?Here, the real value
of merchandise from five domestic airlines' on-line stores. —A.B.

American Airlines

Points.com

aa.com or points.com

Item: Starbucks gift certificate

Retail Value: $50

What It Costs in Miles 11,444

What You'll "Pay" * $160

Continental

Miles for Merchandise

continental.com

Item: Toshiba 14" TV/DVD player

Retail Value: $200

What It Costs in Miles 100 plus $159 (includes shipping)

What You'll "Pay" * $160.40 ($1.40 + $159)

Delta

Magazines for Miles

delta.com

Item: Economist magazine subscription

Retail Value: $50

What It Costs in Miles 3,300

What You'll "Pay" * $46.20

Frontier

More Store

frontiermorestore.com

Item: Tumi gift certificate

Retail Value: $300

What It Costs in Miles 15,000

What You'll "Pay" * $360

United

Mileage Plus Music

mileageplusmusic.com

Item: 100 songs, downloaded via Sony Connect

Retail Value: $100

What It Costs in Miles 10,000

What You'll "Pay" * $140

* All airlines value their miles at 1.4 cents a mile except for Frontier, which values
each mile at 2.4 cents.


Still want to use your miles to fly?Here are a few tips to help you snag that much-coveted
award seat.

• Book tickets early

Airlines post seat availability 330 days in advance. The likelihood of capturing an award
seat begins diminishing immediately.

• Pick up the phone

Though you should still use an airline's mileage program site to research which days you'll
be most likely to find an award seat, do your booking with an agent over the phone, says Insideflyer.com's
Randy Petersen. Unlike Web sites, a reservationist has access to partner airlines' award-ticket
availability.

• Don't take no for an answer

Not all reservation agents are created equal; if yours isn't thinking imaginatively, hang
up and call another.

• Book on partner airlines

Though Delta and Northwest declared bankruptcy earlier this year, both are honoring mileage
awards. However, you may have more choices on their healthier partner airlines. —A.B.

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