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Airline Mile Primer

Michael Heiko An airline mileage report folded into a paper airplane.

Photo: Michael Heiko

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.


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