The Rewards for Loyalty Are Slowly Shrinking

Whether you’re on the giving or the receiving end of it, change is painful. The airlines know that. And so do their customers.

Over the past two years, in response to a perfect storm of recession, terrorism, and corporate cutbacks, the large, full-service airlines have begun tinkering with their business models in an increasingly desperate attempt to regain lost profitability.

Like old geezers set in their musty ways, the majors’ embrace of change has been reluctant and slow. But as billions of dollars in losses piled up, month after month, the do-or-die seriousness of their predicament kept them stumbling forward: cutting flights, rethinking fleets, revising routes, renegotiating labor contracts, reducing staff, and removing meal service.

It should come as no surprise to anyone reading this column that the majors’ mileage programs have not been immune to this reconstructive surgery. And, as with the airlines themselves, when the dust settles, the programs will be recognizable, if somewhat diminished, versions of their former selves.

Convince yourself of the truth of the next four points and no program change will surprise or anger you again:

• Miles are worth less (which is not to say they’re worthless)
• Awards cost more miles, or are harder to come by, or both
• Elite status is more difficult to attain
• And it’s likely to get worse before it gets better

Loyalty, reevaluated

Like most of the recent developments, there’s an overriding theme driving the changes in the loyalty-program arena: profits.

Commenting on the modifications Delta has made to SkyMiles, program director Rob Borden explained that the program now aims to “recognize those customers who contribute the most revenue to Delta.” Operationally, that means “a shift from rewarding frequency to rewarding overall revenue contribution.”

And Ed French, president of the world’s largest program, American’s AAdvantage, seems to be singing from the same hymnal when he calls for an increased focus on the most valuable customers, those who drive the most benefit for the airline.

For the rest of us? French acknowledged that the new approach might entail some “disinvesting” in less profitable customers.

It’s how much you spend, not how far you fly

What Borden and French are alluding to is the “dollarization” of the programs—establishing a tighter fit between what a member spends (as opposed to how far he flies) and the rewards he receives.

We’ve already seen moves by Delta and Continental to put that principle into practice. In particular, both will count only 50 percent of actual flown miles toward elite status when members of their programs travel on discounted coach tickets. Northwest, which is part of a trilateral alliance with Continental and Delta, will almost certainly adopt a similar policy for the sake of consistency. And with three of the top five programs headed in that direction, it’s probably only a matter of time before the other airlines follow suit.

Hand in hand with the dollarization drive, the airlines are making it more costly for consumers to participate in mileage programs.

Read which awards are getting more expensive: [% 5675 | advice | Hawaii gets farther away as Delta ups award travel costs | aBodyTextLink %]

To the consternation of the mileage set, almost all airlines have upped the miles required for select awards, although so far the benchmark award—a restricted round-trip domestic coach ticket—has been left untouched at 25,000 miles in most programs.

(As we wrote this article, a fellow journalist reported that she heard from a “reliable source” that one of the major carriers will soon announce an increase in the base award, from 25,000 to 30,000 miles. Whether or not the rumor turns out to have some basis in fact, it’s telling that a change to such a fundamental building block of the programs is even being discussed.)

In addition to the policy changes mandated by management, the programs are evolving in response to external changes that have no direct connection with published terms and conditions.

Such incidental changes, including overall reductions in seating capacity and industry-wide fare decreases, have made award seats harder to come by, and less valuable once obtained.

There’s no telling exactly where these changes will lead. But it is clear that there will be more changes, with the same basic themes, as the airlines continue reinventing themselves.

The rich get richer and the rest get poorer

How will these changes affect us over the coming months and years?

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There is no single answer to the question. Rather, it depends on where your travel falls on the dual axes of frequency and type of ticket purchased. At the risk of oversimplifying, let’s divide the universe of travelers into three category types, as follows:

The very frequent traveler, who often flies on full-fare tickets

These are the airlines’ most profitable customers, typically business travelers who fly often and who—because they require the flexibility of unrestricted fares—routinely purchase very expensive walk-up tickets.

This group has the most to gain under the new regime, especially insofar as they place a high value on the perks associated with elite status, particularly upgrades. As the airlines reduce the number of elite members in their programs by raising the entry requirements, there will be less competition for those few highly prized upgrade seats at the front of the plane.

So for these road warriors, the elite changes are a boon. And because upgrades are far more important to them than yet another free trip, the increase in award levels is less bothersome.

The very frequent traveler, who rarely flies on full-fare tickets

This is the group that has the most to lose from the programs’ dollarization. And that’s a possible problem for the airlines, because it’s the fastest-growing segment of the business-travel market. Why? Both Fortune 500 corporations and smaller companies have begun shifting from pricey walk-up fares to the cheaper tickets traditionally used exclusively by leisure travelers.

In stark contrast to the past, when all coach fares earned full elite-qualifying miles, these thrifty road warriors will now have to travel twice as often to reach elite thresholds. For many, that will put elite status out of reach altogether—a bitter pill to swallow for those who have become accustomed to the upgrades and generally deferential service accorded top-tier travelers.

The average traveler (everyone else), who flies occasionally, and almost always on advance-purchase fares

For the less-than-frequent traveler, the changes to the top tiers of the programs are moot.

What will rankle the rank-and-file flyer are the changes, both published and implicit, in the basic value proposition represented by frequent flyer programs.

For many years, the expectation was that in exchange for flying 25,000 miles, a consumer would be rewarded with an award ticket for coach travel within the continental U.S. Yes, there were certain destinations that were in short supply during peak travel periods, but there were work-arounds to those capacity controls.

That core expectation has been severely undermined, and will continue to be downgraded, leaving the average consumer deeply pessimistic about her chances of securing an award ticket to the destination of her choice, on the day and time of her choice, at the lower, restricted mileage levels. In fact, there’s a trend, which the airlines are supporting, toward replacing the restricted award with the unrestricted award (typically 40,000 for a domestic coach ticket) as the basic expectation for the leisure traveler.

New rules, new game plan

It’s tempting to dig one’s heels in and resist this current wave of changes. Indeed, there is an unprecedented amount of naysaying coming from the ranks of those frequent travelers flying on cheap fares (see SaveSkyMiles.com for an example).

And as someone who covers these programs with a consumer advocacy agenda, I continue to encourage my readers to be vigorous in their oversight and vocal in their criticism.

But in this case, given the fundamental economic forces in play, resistance, ultimately, is probably futile. And it may be irrational as well. After all, sometimes change is not optional, it’s imperative.

Do you agree with Tim’s take? E-mail [email protected]

Rather than fret about the programs’ tilt toward stinginess, frequent travelers are better served by recognizing that the changes, however distasteful, are necessary to insure the long-term survival of the programs.

What I’m doing—and what I suggest you do, too—is lowering my expectations.

We may as well embrace the new reality. After all, a half loaf is better than no loaf at all.