Wednesday, September 24, 2008

With Rising Airline Fares More People Burning Their Miles

Passengers at U.S. carriers including American Airlines and United Airlines are burning through record numbers of frequent-flier points to avoid paying higher fares, and the companies couldn't be happier.

Not only are the airlines adding surcharges of as much as $100 on frequent-flier tickets, but getting rid of unused awards — sometimes by raising the number of points required for flights — eliminates millions of dollars in liabilities for them.

Other payoffs include deeper customer loyalty and more money from credit-card companies including JPMorgan Chase.

"More points and higher fees are an easier way of essentially charging more for the reward ticket," said Jay Sorensen, who helped run Midwest Airlines' awards program and is now president of consulting firm IdeaWorks.

"Credit-card companies are happy when people earn more points, and the airlines are happy when people use them."

Redemptions are running ahead of last year's pace, when airlines distributed a record 10.9 million free trips.

The free seats have become more attractive because domestic ticket prices are up 20 to 40 percent at the major airlines this year, according to FareCompare.com.

The higher fares are a reaction to surging fuel costs that contributed to $17.1 billion in losses at the country's five largest full-fare airlines in the first and second quarters.

"It makes no sense to sit on these miles anymore," said Dan Berman, 46, of Atlanta, who has redeemed 350,000 points from Delta Air Lines in 2008.

Buying a one-way coach ticket for a 6,400-mile flight to Tel Aviv would have cost $3,000 in cash, so turning in 80,000 points — worth about $800, by Berman's calculation — "was a bargain," he said, even if it cost 50,000 points for round-trip overseas flights two years ago.

American Airlines said it granted 10 to 15 percent more award tickets in the first half of 2008, while redemptions rose 12 percent at United Airlines, 3 percent at Delta and 15 percent at Northwest Airlines.

Continental Airlines said its cheapest awards rose 34 percent but didn't give a total.

"We certainly do encourage customers to utilize their miles," said Rob Friedman, president of marketing for American's AAdvantage program. "It's a great way to engender loyalty and hopefully more return trips."

Airlines want customers to use up awards because they are accounted for on their books as "deferred," "unrecognized" or "unearned" revenue.

American recorded unrecognized revenue of $1.6 billion last year for future awards, up 33 percent since 2003.

Delta passengers earned 25 percent more points over the past three years, and the airline's balance sheet shows $3.3 billion in deferred revenue for future awards.

Banks spend an estimated $4 billion a year on airline miles for credit-card rewards. United said last week it will get $1.2 billion in additional liquidity from JPMorgan's Chase Card Services under an extended frequent-flier agreement and the advance purchase of miles.

Continental said in June it would receive $413 million from Chase for miles and other marketing commitments.

"Our best and most satisfied customers are those who earn and redeem their rewards often," Chase spokesman Paul Hartwick said in an e-mail.

Should oil prices decline and carriers reduce fares, passengers may revert to hoarding frequent-flier points, said Bob Soukup, managing director of marketing for Northwest's WorldPerks program.

"If the ticket prices are low, people aren't willing to spend even 25,000 for an award ticket," he said. "When fares are up, especially to the more popular destinations, people are more willing to part with some more miles."

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