The Worst Is Over: Frequent Flyers May Find a Brighter Road Ahead

Feel whipsawed by the travel industry’s wild swings, from bad to worse to terminal and back to bad again? Need a scorecard to keep abreast of which carriers are merely troubled and which are toast? Wondering whether your frequent flyer miles are worth one penny, two pennies, or no pennies at all?

Join the club. For now, I’m calling it the “frequent criers coalition.” Millions of travelers are honorary members. We welcome your participation, and your tears.

The mess

The travel industry has been a continual train wreck for the past five years. For the two weeks between the bankruptcy filings of Delta and Northwest on September 14 and US Airways’ emergence from Chapter 11 on September 27, more than 50 percent of the U.S. airline industry’s flights were operated by carriers in bankruptcy.

Almost as unsettling as the bad news itself has been the uncertainty generated by the industry’s ill health. For example, two years ago, American Airlines had the lowest costs of any legacy carrier and was widely seen as a safe bet. Now it has the industry’s second highest costs and could be a candidate for bankruptcy.

This uncertainty leads to even more questions: Will there be more mergers? More bankruptcies? Will some carriers actually liquidate? Are you safe booking travel for next summer?

I have my own opinions on all those issues, but I can tell you a couple of things without resorting to idle speculation. I’ll finish by sharing with you a hope that I wouldn’t mention if I didn’t think it was more than likely to come to pass. But that’s the good news. First, the bad.

Less is more

Travelers are flying more but enjoying it less. The lines are longer. The planes are more crowded. The in-flight meals have all but disappeared. Customer service is practically nonexistent. Frequent flyer awards are scarce at best.

The only bright spot on the flying front is prices. Despite the pressures on mainline carriers to raise fares, the discount carriers have prevented them from doing so. So we get to fly on the cheap, though we’re paying a price for those cheap tickets. The mainline carriers have lost $30 billion since 2001, and their misfortunes have led to discomfort for the traveling public as the airlines take drastic measures to stay aloft.

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While no universal template exists for reviving the airlines’ fortunes, the struggling carriers do share one survival strategy: contraction. They think that the road back to profitability is via route optimization—maintaining profitable routes and abandoning unprofitable ones.

For example, Delta plans to reduce domestic flights by as much as 25 percent, while adding flights on overseas routes where competition is less intense. Northwest is taking the same approach, shedding 20 percent of its domestic capacity and expanding internationally. Independence Air is in the process of reducing the number of flights it operates by half.

Of course, since most travelers fly domestically more than internationally, fewer flights to and from fewer airports may cause grumbling among the general public. Shrinking networks will negatively affect frequent flyer programs as well. Fewer flights lead to fewer opportunities to accumulate miles and diminished award-seat availability.

Ultimately, the specifics will matter: which flights are cut, which hubs are downgraded, which airports are abandoned altogether. If you’re a customer of one of the major carriers, stay tuned for details on revised route networks. If an airline trims flights to or from your regular destinations, you may need to reassess your loyalty and revise your choice of preferred airline and mileage program.

Just over the horizon

While both the airlines and their customers will face challenges in the coming months, it is my hope and conviction that finally the worst is behind us. In the world of investing, this is referred to as “calling the bottom.” It’s the point in the business cycle where stock prices have hit bottom and have nowhere to go but up. It’s easy to discern in retrospect, but it’s notoriously difficult to pinpoint in real time.

At the risk of incurring the scorn of fellow members of the frequent criers coalition, I’m calling it: We’re at or near the bottom of the travel cycle. Here’s what I expect to see:

• Ticket prices will rise. A recent survey of corporate travel managers by the National Business Travel Association predicted a six-percent increase in ticket prices over the next year. I expect a somewhat larger increase. Sure, that’s bad news for consumers’ pocketbooks. But the few extra dollars per ticket is a small price to pay for the peace of mind that comes with a financially sound industry.
• One of the remaining legacy carriers will disappear, but it will be a benign disappearance. Just as America West merged with US Airways, resulting in a new US Airways and the disappearance of the America West name, so will the next move toward consolidation be a marriage rather than a liquidation. The merger I have in mind is between Delta and Northwest. For marketing reasons, the new company would be likely to fly as Delta rather than as Northwest, which has a regional ring to it. In any case, the combination of the two companies will be a long-term survivor. And no frequent flyer miles will be lost.
• The frequent flyer programs will return to stability. In their desperation to maximize revenues and minimize costs, the airlines have limited award availability and generally left travelers wondering whether mileage programs are worth the trouble. As they regain their financial composure, the airlines will rededicate themselves to the programs’ importance and the needle will swing back in the direction of meeting members’ needs and expectations.

Does this newfound optimism mean we’ll be disbanding the frequent criers coalition? Eventually, yes. But even if we are indeed poised for a rebound, it will be a slow-motion process, playing out over the next several years.

In the meantime, frequent flyers will have plenty to cry about. But being on the road to recovery rather than the road to ruin should be some comfort. And lately, comfort has been as scarce as frequent flyer award seats.