2005: Industry Upheaval Yet Mileage Program Status Quo

It was an eventful year for the airline industry. The defining moment was a stretch of 13 days, spanning the day Delta and Northwest both filed for Chapter 11 and the day US Airways ended its two-year stint in bankruptcy, during which more than half the country’s airline capacity was operated by bankrupt airlines.

These are unquestionably momentous times for the airlines, but the same cannot be said for their mileage programs. Airlines offered the usual predictable bonus-mile offers, gained and lost partners, and made token policy changes.

However, a few developments did stand out, mostly fueled by airlines’ attempts to generate more revenue, satisfy customers’ desires for more mileage redemption opportunities, and hold their heads up in a very competitive market. Here are the highlights of an otherwise lackluster year.

Revenue-generation tactics

Finding new ways to earn money from frequent flyers was high on the agenda this year. Through December 31, 2005, American is permitting AAdvantage members to reactivate expired miles earned after December 31, 2002. Of course, it’s on a pay-to-play basis: You’ll be out of pocket $50 for every 5,000 miles revived, plus a $30 processing fee. So the cost to reactivate 25,000 miles, the price of an entry-level award ticket, is a hefty $280, enough to buy an advance-purchase coach ticket on many routes. Because a revenue ticket would not be subject to the onerous capacity controls that make award tickets such a hit-and-miss proposition, there’s very little reason to take American up on its offer.

As another example, Continental has bundled together bonus miles, discounts, and other benefits, and is selling the packages to OnePass members. The Executive Pack costs $100 and includes 5,000 bonus miles, one $99 round-trip domestic companion certificate, two one-visit Presidents Club passes, a 20-percent discount at select hotels in Latin America, and an upgrade on qualifying Hertz rentals. There’s a more expensive package available as well, with proportionately more benefits.

Innovations in mileage redemption

Several airlines got creative about how frequent flyers can redeem their outstanding miles. The biggest news was Southwest’s extension of its longstanding one-year credit expiration policy. Credits now expire after two years, with no options for extension. And, Southwest awards are now capacity-controlled. So the “stingy” label still applies. Further detracting from Rapid Rewards’ already limited luster, Southwest allowed its online booking bonus—in effect for eight years—to lapse in April.

Additionally, America West’s FlightFund members can now create round-trip awards on America West by combining restricted and unrestricted segments, as well as segments in coach and first. Midwest Miles members can book one-way award trips for 15,000 miles, a significant improvement over the alternative: booking a round-trip for 25,000 miles and throwing away the unused portion of the ticket.

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Several airlines also increased options for non-flight awards. In March, American launched “redeemAAmiles,” a program that allows AAdvantage members to redeem their miles online for hotel stays, points in leading hotel programs, and Diners Club Rewards points. To offset the good news, the airline will charge AAdvantage members a stiff $25 transaction fee for the convenience.

Frontier generated buzz, briefly, with the introduction of the More Store, an online store where elite members of its EarlyReturns program can buy or bid their miles for “lifestyle-oriented merchandise,” from jewelry to restaurant meals and golf outings.

United shakes things up

United has a history of playing follow-the-leader (the leader being its arch-rival, American Airlines) rather than acting as a leader in its own right. But the combination of bankruptcy’s imperatives and management changes has roused the sleeping tiger. Over the past 12 months, United has been a true mover and shaker in the mileage program arena, unlike its competitors.

Mileage Plus initiatives in 2005 include:

• Members of United’s program can now bid their miles for “innovative travel experiences and big-ticket items” on the Mileage Plus Auction site, including private cooking lessons, a spa treatment, a helicopter ride, a shark diving experience, and a Chrysler Crossfire coupe.
• Throughout 2005, Mileage Plus members who use their Mileage Plus Visa credit card to charge airline tickets on united.com earn one elite-qualifying mile for every dollar charged, up to 5,000 elite-qualifying miles.
• United offered elite status to anyone purchasing prepaid travel cards: Premier status for purchasing a $5,000 prepaid card, Premier Executive for $10,000, and 1K status for $20,000.
• As part of its new Business1 service, United offered 500 miles to compensate passengers delayed by at least 30 minutes on flights between Chicago (O’Hare) and seven destinations.
• Through the end of 2005, Mileage Plus members can redeem fewer miles for domestic award trips of 750 or fewer miles each way. With the discount, round-trip coach awards are 15,000 miles and business or first awards are 30,000 miles.

A year of modest changes

While in some ways cause for disappointment, the lack of meaningful growth shouldn’t come as any great surprise. After almost 25 years of changes both great and small, the programs have reached a delicate balance among their costs and benefits, and the ebb and flow of competitive pressures.

Against the backdrop of the airlines’ continuing financial challenges, the focus has been on revenue generation and cost cutting, rather than on rewarding loyal customers. But there are reasons to think the pendulum is about to swing back in the opposite direction, toward restoring some of the programs’ lost value.

Intrigued? You’ll have to wait. Where the programs are headed in 2006 is the subject of next month’s column.