Airlines risk ballooning frequent-flyer payout
 

Well, I'm using my miles for two people to go to NRT. See you up front, Paul. :)
From Reuters:

NEW YORK - Bennett Porter, a globe-trotting Internet marketing executive, poses a big problem for U.S. airlines.

The New York-based traveler has amassed more than 1 million frequent flyer miles with American Airlines, and still others with additional carriers. She is one of a growing band of customers who plan to redeem those miles for free flights.

Frequent flyer reward schemes have ballooned over the years and accumulating points has become as common as buying a carton of milk. Carriers now risk paying a high price for the glut.

Airlines have awarded more than 19 trillion frequent flyer miles over the past 25 years — roughly equivalent to circling the globe 760 million times — and more than 14 trillion of those miles are unredeemed. The rate of awards is increasing annually, according to frequent flyer site WebFlyer.

While many of those miles may never be swapped for trips or merchandise and they expire more quickly than before, that overhang of unredeemed miles represents a risk for airlines.

AMR Corp., parent of American Airlines, which operates the world’s largest frequent-flyer program, carried a $1.6 billion liability on its books at the end of 2006, about $100 million more than a year earlier and up from $976 million in 2000.

Free travel awards represented 7.5 percent of American’s passengers in 2006, compared to 7.2 percent in 2005, according to company filings.

Delta Air Lines Inc. expected to award about 8 million free trips at the end of 2006, a million more than in 2005. The No. 3 U.S. carrier increased its liability at the end of last year to $887 million from $607 million a year earlier.

Bankrupt Northwest Airlines Corp. increased its frequent flyer liability to $269 million at the end of 2006, up from $248 million in 2005 and $215 million in 2004.

With planes fuller than ever, granting free trips could displace paying passengers, while unsettled U.S. consumers may be ready to cash in those miles to save money as the economy shows signs of slowing.

“The airlines just can’t handle that level of reward redemption,” said Rick Ferguson, editorial director at loyalty-program consulting firm Colloquy. “The liability’s a big problem.”

Miles glut
After the September 11, 2001, attacks sent the airline industry into a decline, carriers began awarding more and more frequent-flyer miles in order to encourage customers to fly. In addition, credit cards and other award schemes have allowed consumers to accumulate miles by buying anything from sliced bread to gasoline.

With the growing supply of frequent-flyer miles and the relative scarcity of available seats, airlines risk a devaluation of their loyalty programs.

“The risk is that these points become perceived to be less valuable,” said Andrew Watterson, a director in the aviation practice of consulting firm Oliver Wyman. “They have to mitigate this.”

Airlines have reacted by offering other alternatives to redeem miles by swapping points for merchandise like an iPod or trading for gift cards through sites like points.com.

But despite the liabilities and risk, the programs are a valuable part of an airline’s business.

“It’s so important for us,” said Billy Sanez, a spokesman for American Airlines. “The mileage program is one of the top-three reasons why people fly with us.”

“The liability is part of having a program,” he said.

Even with the average consumer belonging to multiple award programs, they still have a marked effect on buying behavior.

Porter says she has been swayed by frequent-flyer schemes.

“It does make a difference in the way that I fly,” said Porter, who used a chunk of miles to plan her December 2005 wedding in Belize. “I definitely think twice about booking a flight that’s not on American.”

Promotion is one thing, but obviously they've created their own little monster. Those Free Miles are going to cost the airlines another bankruptcy, which in some circles people will believe they did on purpose*

*not my view, just observation.

I understand that the fees from credit cards, etc. are a significant potential source of revenue, but the airlines have diluted a prime purpose of loyalty programs.

Because the benefits of membership dropped and free trips became more difficult to schedule, I just started flying whoever got me there the the quickest and least expensively (or combination of the two).

There is no real point in accumulating mileage and quite honestly; the inflight service is typically equally poor on most airlines.

All of those miles have no real value. The airlines will once again raise the threshold to use them thereby devaluing them even further. In the past couple of yrs the airlines instituted a rule that cause the miles to expire after X amount of time. Right now X is 18 months. SO thousands upon thousands of miles are lost monthly due to inactivity. A good number of people, possibly the majority of people that collect mile are more interested in using them for upgrades on long haul rather than free tickets, I happen to be one of them. There are a lot of companies out there that wont buy a traveling employee a biz class, or first class ticket but they will buy them a more expensive coach class ticket. Quite frequenlty the upgradeable coach class ticket costs more than a discounted biz class ticket. I know 'cause I am also in this catagorey. Airlines go BK because of freqent flyer miles, I hardly think so. All the have to do is devalue a valueless product even more.

Indeed. I just checked CO today for a R/T from EWR to SJU for two of us in coach. 35K miles one way per person, or 140K miles R/T for the two of us. Not worth it for me, and I'll save the miles for when I am traveling solo on a longer flight, then blow them on first class.... maybe.

I remember 4 years ago spending 90K miles to fly two of us first class from LGA to DFW on Delta, and 8 years ago spending 100K miles to fly two of us in Premium Economy on VS from JFK to LHR. Those days appear to be over.

I don't even bother with collecting miles, I just transfer points (one point per mile per $ spent) from my Amex card to the required airline. Even then, it is quickly becoming a waste.

Ultimately, I do not fly based on price. Domestically I fly CO, and since I live near their EWR hub, this makes sense.

I do not see airlines going bankrupt over FF miles, as they can just change the rules / restrictions to suit.

Indeed, FF miles are a valueless product to begin with and while the article has some merit, I do not believe everything I read. ;)

Did anyone watch the msnbc special A week in a life of American Airline quite interesting when they were talking about frequent flyer mileage almost as if it was the best thing in the world for them(aa). What I learned about the mileage is credit card companies like citi bank and other partners buy millions and millions of mileage from AA at an undisclosed figure . Then the credit card company or partner can disperse them how ever they feel through promotions etc. One other interesting thing they said was when a traveler does redeem their mileage it only cost AA 10.00 dollars variable cost for the seat, which kinda made no sense to me I would think it would be a lot more.