KRALEV: Frequent fliers question loyalty schemes

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By Nicholas Kralev ON THE FLY

Who is to blame for the recent series of frequent-flier-program "enhancements" that have made it increasingly difficult to redeem miles for "award" tickets and reduced membership benefits?

Many of us in the press and elsewhere have often attributed those changes to the troubles of the industry caused by fuel-price fluctuations and the global economic crisis.

However, a closer look at the activities of most major U.S. carriers' loyalty schemes by airline experts suggests that the main reason for those programs' need to tighten their belts is the way they have been run for years.

"Frequent-flier programs are major businesses, but unfortunately, in most cases, they haven't been run as businesses," said Jay Sorensen, president of IdeaWorks, an airline consulting firm. "There is fiscal recklessness, and the outcome for the consumer is not attractive."

U.S. airline programs are subsidiaries or divisions of the companies that own the respective carriers. They are usually profitable, even if the rest of the company is not, and their profitability is due in large part to their co-branded credit cards, Mr. Sorensen said.

This is where the problems began years ago, he added. The airline programs "have had a windfall of cash that has landed in their laps. With that comes a tremendous amount of responsibility, and that's what the carriers have forgotten."

They receive billions of dollars from selling miles to credit-card issuers, but they don't use enough of that money for the loyalty schemes' benefit, choosing instead to "spread the wealth" and help out other parts of the company. Sometimes, the frequent-flier programs are left with insufficient funds to cover their own costs, such as mileage redemption for "award" tickets.

That's the case with United Airlines, Mr. Sorensen said. Last year, its Mileage Plus program pre-sold miles worth about $1 billion to its credit-card partner Chase - a major chunk of its annual revenue.

As readers of this column might recall, United has been blocking access for Mileage Plus members to thousands of "award" seats made available by its partner-carriers in the global Star Alliance, making it difficult for many of the miles it sold to Chase to be redeemed for flights. United, which has to pay partners for "award" tickets, says the blocking was put in place because otherwise it would exceed the budget it has to cover those payments.

The airline hasn't said why that budget hasn't been increased, given the new miles it has encouraged its customers to amass - not only from Chase, but also through the recently invented "award accelerator," which allows fliers to double and triple their miles for a fee.

Mr. Sorensen's answer is that "the cash [from Chase] is gone - it's been spent on fuel" and other expenses. "In a sane business, a good chunk of the cash should have been set aside for 'award' redemption," he said. "There is a tsunami of miles on the books that can't be used, and in difficult times, the consumer doesn't always get served very well."

Even though United increased the mileage required to redeem "awards" by as much as 40 percent earlier this month and halved the lifetime of unused miles to 18 months last year, the blocking of partner flights is still around.

All major U.S. carriers have either upped redemption requirements or are soon expected to do so. Some, such as Delta and Alaska Airlines, have created new "award" levels meant to mask the reduced availability of regular mileage seats and charge even more miles, and Delta has also introduced "award" booking fees.

While United is the only carrier known to block otherwise available "award" inventory to save money, Mr. Sorensen said he wouldn't be surprised if other airlines did it on a smaller and less detectable scale.

Keith Jarett, a frequent traveler from Lafayette, Calif., likened that and other practices aimed at persuading customers to accumulate miles that can hardly be redeemed to a pyramid scheme.

"The trick is to keep the investors (members) thinking they can withdraw (spend) their miles at any time, even though this is increasingly not the case," he said. "Frequent-flier programs have spent almost all their credibility already, and I doubt they would be able to recover even if they wanted to."

Mr. Sorensen said the recipe for recovery may be spinning off the programs as separate companies, as Air Canada did recently and United has considered. Until then, it may be better to use credit cards linked to hotel chains, which have been run properly as businesses, he added.

• Click here to contact Nicholas Kralev.