Frequent-Flier Programs Undergoing Some Changes

It was 25 years ago this month that American Airlines introduced the first frequent-flier program. Since then, earning miles toward free flights and upgrades has become wildly popular among business and leisure travelers alike -- and surprisingly profitable for the airlines.

But frequent-flier programs are starting to show their age. Some travelers are becoming frustrated by the difficulty they’re having cashing in their miles as the airline industry struggles to stay aloft.

And one analyst warns that continued disenchantment among passengers could cause credit card companies and others that offer miles as incentives to pull out of the business altogether.

The stakes are huge: Today, travelers worldwide have accumulated 14.2 trillion frequent-flier miles, said Randy Peterson, editor and publisher of Inside Flyer magazine. That’s enough for 568 million free flights.

The programs are now major sources of revenue for the airlines. U.S. carriers sell some $2 billion worth of miles annually to other businesses to use as rewards for their customers. People who never fly can earn miles using credit cards, taking out a mortgage, eating in restaurants, buying flowers. It may seem odd, but a program that gives away free travel is today the most-profitable part of many airlines’ business.

It’s quite brilliant, actually. The airlines have complete control of the number of award seats (and refuse to share with fliers how many -- if any -- seats are made available on any given flight).

And the actual cost of fulfilling a free ticket is minimal: less than $15 on average, according to an article in April’s Harvard Business Review.

Frequent-flier programs serve two very different types of travelers.

There are the true frequent fliers who fly tens of thousands of miles per year and earn most of their miles by actually flying. For them, the programs are largely working.

Then there are the travelers who fly maybe once or twice a year and struggle to cobble together 25,000 miles for a free domestic coach ticket.

It is the latter group of fliers that has the biggest gripe. They are finding it harder than ever to book free tickets, in part because the airlines have cut capacity and are filling their seats with paying customers.

At the end of 2005, the legacy carriers -- the Uniteds, Americans and Deltas of the world -- had a combined fleet that was 22% smaller than it was in mid-2001, according to the Air Transport Assn., an industry trade group.

“If consumers continue to accumulate miles and are not able to use them, there will be a backlash,” said Joseph C. Nunes, associate professor of marketing at USC’s Marshall School of Business and co-author of the Harvard Business Review article “Your Loyalty Program Is Betraying You.”

He believes that at least in the short term, the programs are in good shape. Longer term, however, credit card or mortgage companies could one day wake up and say: “To heck with enticing customers with frequent-flier miles. They’re costing us too much and consumers aren’t as attracted to them as they once were. We’re going to compete on price instead.” That is what happened to the Green Stamps redemption program.

In an effort to make frequent-flier miles more attractive, United this month launched a new form of air currency it calls Choices.

Choices miles can be earned only by using a Chase United Mileage Plus credit card. And although they can still be added to regular Mileage Plus miles for awards, Choices miles offer more transparency -- but also more complexity.

Here’s how it works:

I have about 135,000 miles in my regular Mileage Plus account. Let’s say 15,000 of those were earned using my Chase United credit card since January, the retroactive start date of the Choices program. Those 15,000 Choice miles can be used for a number of things, including flights on United, hotels and car rentals that are booked on www.united.com.

I then purchase a United Airlines (or code-share partner) ticket using my Chase Mileage Plus credit card on united.com, without any blackout dates or seat restrictions. We’ll say my ticket costs $199.

My bill comes and I log onto United’s website and transfer all 15,000 of my Choices miles to apply against my $199 airfare. Choices miles are valued at a penny per mile toward flights, so my credit card bill is reduced by $150 and I end up paying $49 for my ticket. And unlike a regular award ticket, I earn frequent-flier flight miles.

Peterson says Choices is a step forward for travelers. He knows of no other airlines doing anything like it at the moment, though he said they were watching to see how it goes at United. The closest thing to it is the Delta SkyPoints program with American Express, but it isn’t as well integrated as what United is offering, he said.

Choices is clearly designed to compete with the Capital One credit card (of the David Spade commercials) which offers miles with no black-out dates.

Choices does add some confusion to an already perplexing frequent-flier scheme. Knowing when to use Choices miles versus regular miles -- or some combination of the two -- can perplex even sophisticated travelers.

“It is certainly a positive step,” said Tim Winship, editor and publisher of FrequentFlier.com. “But I take exception to the way they introduced a separate currency. It makes it unnecessarily complicated.”

James Gilden can be reached at james.gilden@latimes.com.