United-Continental Merger May Devalue Your Miles

Millions of people are hooked on frequent flyer programs, and lots of them probably want to know the same thing a reporter asked me over the weekend: “What’s going to happen to frequent flyer programs after the big airlines merge?”

The short answer is, “You won’t lose any miles, but you’ll probably have a tougher time using them.”

Here’s why: No matter what else happens, you can be sure that in either Continental-United or some future mergers with American or others, nobody will lose any miles. Airlines prize their frequent flyers as among their best customers, and they won’t allow any of them to lose miles. Look at Delta-Northwest, American-TWA, America West-US Airways, or any other past big-line combinations, and you’ll note that in every case the merging lines merged their frequent flyer programs and consolidated personal accounts.

But that doesn’t mean “no changes.”

The big airlines publicly admit that one of the prime benefits they expect out of the mergers is the ability to “reduce capacity.” What they really mean is that they want to fly fewer unprofitable seat-miles, and that means cutting back on total flying. The cutbacks will likely amount to more than just the elimination of duplicate routes—Continental and United, certainly, don’t duplicate enough to make any real gains there. What they really want to do is to cut the total amount of flying they do.{{{SmarterBuddy|align=left}}}I’m not convinced of the industry wisdom that merger is the only way the big airlines can cut back on their flying, but that’s a side issue. That’s their story and they’re sticking to it. And, logic or no, they’ll push ahead with the mergers.

From the very beginning, a basic premise of frequent flyer programs has been that, if properly managed, airlines can limit the “free” seats they give out on awards to seats that would otherwise go unsold. It was a classic “something for nothing” proposition. But that business model was formulated when load factors were in the 60s. Now that loads are in the 80s, airlines hate to designate any seats as those “that would otherwise go unsold.” And with the additional merger cutbacks, they’ll find precious few of the “otherwise unsold” type. The predictable result is that you’ll have an increasingly tough time finding award seats at the lowest basic rates—and airlines will probably increase the miles you need for a “sure thing” seat.

In case you hadn’t noticed, frequent flyer programs have morphed significantly over recent years. The miles are now about money, not loyalty; the loyalty issue is handled by “elite” frequent flyer status.

Now that you can earn multiple miles through you credit cards and by buying things, your accumulated miles no longer measure your loyalty, and their value is therefore no longer your real reward. The real loyalty rewards are based on status: upgrades that don’t require any miles or certificates, priority claims to good seat assignments, and other perks that basically insulate you from the miseries of ordinary coach flying.

The miles are the scorecard, not the value. And the real score is in the “elite qualifying” miles—the miles you earn by actually flying, not those you get on your credit card. What really matters is the “elite” status those miles measure, and the higher the status, the higher priority you get for those true perks.

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The Miles Shell Game

By now, miles have become a big profit source for the largest airlines. Look at it this way: They sell millions of dollars worth of miles to credit card companies and others that hand out miles as a benefit to their customers. Although the airlines don’t disclose the prices at which they sell miles, estimates floating around the industry suggest it’s somewhere above one cent per mile—maybe about 1.2 cents. Of course, they’ll be even happier to sell you “top off” miles for retail price of more than two cents a mile, or charge you more than two cents a mile to transfer miles you’ve already earned. As long as they can limit the number of seats they assign to awards, the airlines are happy to pump out as many miles as they can sell.

Given growing frustrations with trying to find seats, some airlines are moving toward allowing use of miles for merchandise rather than just for vanishing seats. And look at the math: They sell the miles for, say 1.2 cents, then allow you to redeem them for merchandise at the typical rate of one cent per mile. But those mile-based merchandise “prices” are retail, and the airline probably has to pay only 0.6 or 0.7 cents per mile for the merchandise. Sell something for 1.2 cents, redeem it for half that with virtually no expenses, and pocket the other half as pure profit: That system sure beats selling cheap tickets.

Tough Outlook

Even without the mergers, the outlook for award seats was already bleak for non-elite frequent flyers. The mergers will just make seats even scarcer. And the really sad element to all this is that if you don’t fly enough to earn elite status, there’s nothing you can do about it.

Possible AmEx Ploy

Sidenote to this discussion. If you (1) really think the merger will take place, (2) you have a lot of accumulated AmEx “Membership Rewards” points, and (3) you often fly current United routes, consider dumping some of your AmEx points into Continental miles. If the merger does go ahead, those miles will transfer to the new United. Whether the new United will continue the old Continental’s agreement with AmEx or will instead follow the old United’s “no AmEx” policy, you’ll still get United miles.

What do you think the future holds for frequent flyer miles? Have you had more difficulty redeeming miles lately? Share your opinion in the comments space below!