Air Miles - us ethem while you can

[SingaporeSteve]

Talking with a couple of leading travel industry guys the other day and one has a theory that could be turn out nasty for us mileage chasers.

 

 

 

Seemingly, as many of you will have read, airlines are desperate to reduce their costs.However the one area largely remaining untouched is the frequent flyer programme. Apparently these things cost a stack to run and none of the airlines want them in the 'new economic situation'. Problem is they need to wait for one airline to have the balls to cancel their programme first and run the risk that if the others don't follow, they will end up losing heaps of customers. That one airline may be closer than we realise. A certain large US airline is comtemplating going into Chapter 11 or bankrupcy protection. Seemingly the view of these industry experts is that that will happen and as a result, will mean that they can cancel the programme as a requirement to save the company. Waiting at the wings to also ditch their programmes are a couple fo other large US carriers. Interesting thought...no official view just a couple of guys over a rather expensive dinner, which I am happy to say they paid for (while they still can).

 

 

 

By the way, anyone want to buy any of my airmiles, I have got enough for 2 seperate business class tickets on BA from London to Bangkok - cost over 4,000 pounds each -all reasonable offers considered !!

[shygye]

I don't think it costs the airlines much to run the program. Actually I think AA makes money by selling miles to hotels, auto rentals, etc. The airlines can just reduce the number of award seats. Then we will all be fighting over that 1 award seat to BKK.

[jp1]

By the way, anyone want to buy any of my airmiles, I have got enough for 2 seperate business class tickets on BA from London to Bangkok - cost over 4,000 pounds each -all reasonable offers considered !!

 

 

 

I don't know the airfare btw LON and BKK in buz class, but don't forget that on any given flight there are only a few seats available for people who use their miles and, moreover the booking is made in the lowest segment of the buz. class. Therefore the value of the miles is considered to be less than 50 pct. of the normal airfare.

 

 

[SingaporeSteve]

Thats what I thought - a couple of years ago I remember BA boasting how much they made from their Air miles subsidiary selling off airmiles. Apparently these glory days are long gone and everybody is screwing them down on the price they have to buy the miles for. Might be a case of the bean counters looking at how many people are involved(employed) by this lot and just seeing headcount reduction is perfect opportunity to prove to Wall Street how well they are doing at reducing cost (these analysts never much look at the income they generate) and shoring up their fast falling share price.

[SingaporeSteve]

I'd be more than happy with someone wanting to offer 50% of face value - I had thought nearer 25-30%

[Guest]

Yes, I understand that, bottom line, the majors do make money on their FF programs.

 

 

 

I read an article last week about the UAL situation (Chapter 11?) and it indicated that FF miles would NOT be considered as another unsecured creditor in a bankruptcy. So they would continue to be honored. Maybe. I understand the unions have made concessions (again), so maybe 11 is not the way UAL will go.

 

 

 

But airlines are in a bind. They want people to use up their miles to get that big contingent liability off their books, but right now they need cash-paying customers, not free flyers.

[samak]

thanks for your offer; i have myself more than 500k unused miles on various programs.

 

i do not think, that this is going to happen. probably some us airlines will downsize their program, but european and asian airlines will continue.

 

 

[SingaporeSteve]

Hi Samak, I had a similar view when they started sharing this with me. Why ditch something that drives clients to you - if there must be one really good example of driving customer loyalty its an airline FF programme. (Not really any self interest here, purely speaking hypothetically !!!) They both agreed that these have doen a fantastic job in driving loyalty however the world has changed since their inception. They painted a picture as follows:

 

 

 

Programmes came into inception in the US when all fares were governed (eg set by cartels) and regulated. This is no longer the case. Prices vary by airline wheras before a FFP was a unique selling point and airline were all profitable.

 

 

 

When the programmes were brought in, nobody had travel policies, let alone preferred pricing with airlines for big corporate volume. Major corporations know dicate the carrier that travellers use regardless of traveller preference.

 

 

 

Airlines match each others FFP when large corporations switch carriers - so if you are AA top tier flyer and your employer switches to UA, you get automatically a top tier UA card.

 

 

 

It is corporations who are paying for the high yield business traveller. Very few individuals are paying the high flexible fares that airlines want to subsidise the cheaper tickets used to fill up the plane.

 

 

 

Corporations do not like FF programmes that accrue the benefit to the individual, if there is anything going thats paid for by the corporation, the company wants that benefit.

 

 

 

The subsidy cost since airlines have formed alliances has gone through the roof, particularly for US carriers, who offer 50+100% mileage bonuses to their top tier card holders - its the US carrier who is paying that not the carrier you fly on. So if your an AA platinum card holder (like me) flying from LAX - BKK via HKG on Cathay (One World alliance), recently I got normal mileage of some 15000 + double miles offer = extra 15000, plus 25% supplement for business class and then as they are such nice guys at AA valuing all the business I give them (I have not actually flown AA for 2 years, but kept my card because of the one world partners such as BA and Cathay), they added another 50% on top of the base miles and the 25% premium. I ended up with about 45000 miles for one trip. Also this is hurting UA just as bad - other carriers are, you are right less exposed I guess as they do not offer these bonuses. I know many friends in Singapore who fly SQ all the time but credit mileage to United where they get 100% mileage bonuses as its another Star Alliance carrier.

 

 

 

The liability of unused miles is I understand a liability on the airlines balance sheet. This will reduce their credit rating and cost of borrowing as well as gearing.

 

 

 

Given the overall facts as AIRLINES see it, they want rid off these programme. As soon as one does it, they will all follow. SQ will be the first to do it in Asia. SQ never wanted to do it in the first place. BA will be the first in Europe and for both very different reasons. BA has to demonstrate change in their operating principals to reassure the city and SQ can do it becasue its user base is so loyal out of Singapore that they can just get away with it. Airlines will continue to recognise their most frequent travellers but in a considerably different way to what we have today

 

 

 

Hope this shows it in a different light.

 

Cheers and by the way my miles (and no doubt a few others once they read this are still up for grabs)

[JJsushi]

I don't know who provided you with your info but the two largest US carriers(UA and AA) actually make money from their FF programs. The two lowest cost carriers who don't need FF programs because people would fly them anyway(Southwest and Jet Blue) actually have them.

 

Carriers have already cut or decreased several FF benefits by increasing redemtion amounts for mileage awards, upgrade awards, reward seat capacity, fare classes eligible for upgrades, closing FF servce centers, eliminating same day changes without fees, and a plethora of other benefits.

 

 

 

Airlines can control the costs of heir programs because they control the currency which is miles.

 

I seriously doubt if what your friends are telling you will happen. Airlines can't afford to currently ditch their FF programs because doing so would alienate thousands of customers and destroy the brand loyalty incentive. I think your friends were speculating.

[SingaporeSteve]

JJushi - The airlines you mentioned may make a paper profit from their FFP which is offsetting the billions collectively these 2 airlines have lost over the last 2 years. The downturn for the major carriers came well before 9.11.

 

 

 

The key issue here is that corporations dictate the terms they are prepared to move sometimes hundreds of millions of dollars of tickets from carrier to carrier. Airlines already know there system of pricing is f****d but they are not sure how to handle it. As a result of this huge downturn, nothing is sacred - The CEO of Americans parent has said as much - they are going to have to change the fundamentals and everything is under the microscope as far as costs go. Airlines used to make money on their kitchen operations but how many of them still have them?

 

 

 

The 2 guys I had dinner with are senior within the industry,. one is the managing partner of a US based consultant retained by a heap of blue chip clients to assist them with their airline negotiation startegies. The other is the head of Asia Pacific for a European Airline. These guys were chewing the fat but make no mistake, they knew what they were talking about and why it had to change. The big corporates do not want miles and the airlines want to get shot of a problem that is getting out of control. The issue of whether it makes money is secondary - this is far more strategic. Don't foget these airlines are bleeding - they even stopped paying commission to the travel agents that sell 90%of their tickets. Can you imagine Ford or GM doing that in the current business climate. Can you imagine buy a car from a dealer and it will cost you the list price plus $1000 for their time in helping you choose a colour. Other option of course is that you can buy your car over the internet like an airline ticket. Almost incomprehensible but thats whats happening in the travel industry.

 

 

 

I make around 500,000 miles a year out of these guys - I sure hope it does not change but from what I heard, I for one belive that nothing is sacred anymore as far as frequent flyers are concerned. After all we all work for the major corporations and in most cases it is not our money we are spending. Its out of our hands. Just my thoughts and dont mean to stoke a fire!!

 

 

 

Cheers