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Video: Frequent-flier miles

By
TODAY contributor
updated 2/13/2008 9:24:08 AM ET 2008-02-13T14:24:08

The programs are now more than 26 years old, and chances are you’re a member of at least one of them. Some of you are members of multiple programs. And the numbers, to say the least, are absolutely staggering. Welcome to the addicting, confusing and frustrating world of the airline frequent-flier programs.

You’ve worked hard to earn your miles — either by flying or using a credit card — and chances are just as good that you’ve had difficulty in redeeming those hard-earned miles.

Consider this:

As of the end of last year, there were 17 TRILLION unredeemed frequent-flier miles, and the number grows by the millions every day. Some have argued that the real value of these miles is over $480 billion. It’s a 16-year inventory that airlines know they can’t — or won’t — redeem.

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And, as more and more fliers discover, earning the miles is easy; you can earn miles from thousands of mileage partners by using affinity credit cards, dining out, buying flowers, refinancing your house ... everything short of breathing.

In fact, last year, more than 307,000 frequent fliers earned at least one million miles in their individual accounts.

Redeeming them, however, is another matter. A number of airlines changed eligibility restrictions and expiration dates of miles. They not only upped the ante for the base number of miles needed to redeem an award, in 2007, because of some of the rule changes, 39 BILLION miles actually expired from accounts.

It is probably the most profitable, yet misunderstood, aspect of the airline business. One could argue the question of what’s the point of a loyalty program that doesn’t reward you for your loyalty?

But it does reward the airlines ... BIG TIME.

In fact, the frequent-flier programs are often the single most profitable division of the airlines, making more money than the core operation of the airline operations themselves! How is this possible?

Airlines make hundreds and hundreds of millions of dollars selling mileage to thousands of those mileage partners. For the airlines, that averages out to about 1.7 cents per mile in revenue.

But the airlines also control redemption, which most keep at about 11 percent. What does this mean? The airlines know at the very moment they sell those miles they have no intention of redeeming about 89 percent of them! This is a bigger return on investment than just about any legitimate business you can imagine. It is, from the airlines’ point of view, a brilliant scheme.

And since there is no government regulation of these programs, the airlines can — and do — change the rules at will; they are not required to reveal how many award seats are available on any flight (if at all), and therein lies the big payoff for the airlines.

How big is their payoff from the mileage programs? The numbers vary, but at American Airlines program, considered the largest frequent-flier program in the world with 46 million members, the program itself carries an estimated valuation of more than $6 billion. This is actually more than the total capitalization of the airline ($5.5 billion)! There are even shareholder movements at a number of airlines to spin off the frequent-flier programs as separate business entities.

The annual revenue to American from its frequent-flier program: $1 billion, and almost all of that is pure profit. And while the airlines have to carry the unredeemed miles in their programs as liabilities on their books, the reality is that most of this liability is artificial, since the airlines control redemption without regulation or rules.

For consumers, even though we are addicted to these programs, it’s becoming tough, and in some cases impossible, to redeem the miles.

Why? Airlines are shrinking capacity. That’s one reason why you’re stuck in a center seat next to two sumo wrestlers. And this is when you are flying on a paid ticket. Since no airline wants to displace paying passengers, you can now understand why, in a world of shrinking capacity, fewer flights and higher fares, it’s so hard to cash in your miles.

And now, with a number of airlines publicly disclosing discussions about mergers, airline mileage is on the threshold of being devalued yet again.

Some quick background:

The inducement for so many of us to join these programs was that first 25,000-mile mileage award level, which promised us a free domestic coach ticket. Now, in almost all cases, when you go to redeem your award, you’re told that there are no seats available at 25,000 miles, but the airline might have them at 50,000 miles.

Under most state laws, that constitutes a violation of the bait-and-switch laws. For example, if I’m a car dealer and I want to sell you a Camry, I must list the vehicle identification number of that Camry and how many other Camrys I have for sale. That way, when you come into the dealership I can’t tell you there are no Camrys available and then try to step you up to a Lexus. But the airlines, under deregulation, practice this every day with their mileage programs.

Then, you can lose your miles. United, for example, now deletes all your miles after 18 months of inactivity. (It used to be 36 months.) And two months ago, Delta announced it was making even fewer seats available on popular flights, even for loyal customers willing to redeem double the miles to get that “free” ticket.

Want the real insult? Assuming an airline does, in fact, redeem your mileage for a ticket, the actual average cost to the airline to do so is slightly more than $23. That’s it. Just $23. Now you can understand how wildly profitable these programs are.

And it’s only going to get worse for consumers. Without regulations or government supervision, the airlines continue to change the rules. And while many airlines allow you to search up to 330 days out to redeem your mileage, the reality is that on many flights there’s no availability nearly 11 months out.

So what can we do?

Some attorneys (who are frequent fliers themselves) are suggesting a class action lawsuit, charging the airlines with essentially running an unregulated lottery with their frequent-flier programs.

For some folks, including at least one legislator, the idea is simply to give up on mileage. A bill just introduced in the Washington State House of Representatives would allow people to sell their unused miles. This isn’t likely to happen, but it does reflect the growing frustration out there.

My advice, if you want to successfully redeem your miles:

For starters, think alternate airports, and even more important, alternate routings. Want to go from Los Angeles to Hawaii? Instead of trying to redeem miles from LAX to HNL, think LAX via Las Vegas or Phoenix and then Honolulu. Then think partner airlines. All the major airlines have strategic alliances with international carriers. Want to fly from Los Angeles to Tokyo? Think JAL and their One World partnership with American Airlines.

Think off-season — Paris in March, Sydney in June, Madison, Wis., in February or even Denver in July.

Don’t think nonstop when redeeming miles. Instead, book frequent-flier tickets on flights with more than one connection (this allows you to find flights with available seats) and on partner airlines.

For example, if you want to fly Los Angeles to Athens, instead of going the normal route: Los Angeles to London and then London to Athens, go Los Angeles to Chicago, Chicago to Zurich, Zurich to Athens.

If you’re flying New York to Hong Kong, go New York to Vancouver, Vancouver to Hong Kong. And finally, if you’re trying to get from Dallas to Hawaii, again, the nonstop will probably not be available for frequent-flier award tickets. Instead, fly Dallas to Phoenix, then Phoenix to Honolulu, and on the return, Honolulu to Seattle, Seattle to Dallas.

Then if that doesn’t work, go to plan B. What’s really important here is to confirm the outbound flight and date you really need, and worry about the return flight later.

For example, want to fly from San Francisco to New York on March 29 and return April 7? The airline might be able to confirm an award seat on the 29th but not the flight on the 7th. No problem. Get the airline to confirm a flight on the April 8, 9, 10 or later, and then stand by for the flight you really wanted on the 7th. You need to get that ticket issued in order to use any portion of it.

Also, even if you’re not sure about where you want to go or when, try to redeem your miles now for future flights at the current mileage award levels. You can always try to change the ticket later, but remember, those mileage eligibility levels are only going to increase, and at the same time the number of available seats will decrease.

Some other tips:

Using miles for merchandise, ranging from appliances to magazine subscriptions (there are some programs that offer this) in lieu of free tickets is perhaps the most inefficient use of mileage. Let me explain. Fifty-four per cent of all mileage earned these days is earned on the ground (credit card purchases, etc.) where you receive one mile for every dollar spent. What this means is that a 25,000-mile award actually breaks down — in real dollar terms — to your having spent at least $12,000 in goods and services, not counting the money you spent on airfare for the other 13,000 miles to get you to the 25,000-mile level. Now, let’s do the math ... if a magazine subscription costs 800 miles, you just spent the equivalent of $450 for 12 issues of your favorite periodical!

If you have miles in another account — like American Express — you gain nothing by leaving those miles in that account. Transfer them over to one of your individual airline frequent-flier mileage accounts — even if you have no plans on flying soon. If you don’t, it can take two to three weeks to make the transfer when you want to redeem the miles later. And the airline won’t recognize your miles until they are in your airline account.

Here are more tips:

  • Dump your airline mileage credit card. Credit cards like Visa and MasterCard linked to airline frequent-flier programs cost more, and generally charge higher interest rates. Instead, consider getting a rebate credit card. Lower interest rates, no annual fee — and you actually get money back, not the promise of miles you may not be able to redeem. For example, a cash returns MasterCard from Citibank has no annual fee and offers a 5 percent rebate on all purchases during the first three months and 1 percent rebate thereafter.
  • It’s now more important than ever to track your miles in various programs. Milemaven.com lists bonus mile promotions that you can get based on the route you’re taking. webflyer.com has a mileage converter that tells you how to convert miles from one loyalty program to another (like how many miles on Alaska it takes to redeem for flights on American, or how many Starwood points it takes to get a free flight). Awardgrabber.com calculates the date when award seats are actually released and available for booking free flights (about 330 days before your flight date).

 

   

Peter Greenberg is TODAY’s Travel editor. His column appears weekly on TODAYshow.com. Visit his Web site at PeterGreenberg.com. 

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