Where are we headed? The Business of Airline Miles

Airlines are going thru tough times and interesting times. (Boy, did I resist starting this post with – It was the best of times, it was the worst of times). The global economic slowdown has hurt airlines; they have an ageing fleet (at least all the older carriers do); they have an ageing staff looking to retire, that too with benefits; and they have liabilities that are beginning to exceed their revenues and the margins required to fulfill them afloat. On the other hand, we have become a truly global workforce and a truly global leisure travel population. Furthermore there are new revolutionary aircraft in the air, be it the super-jumbos A380 and B747-8 or the technologically advances B787. Times are interesting…

So what’s the impact of all of this on Airline Miles and us who work hard to earn and redeem them?

In this article, which is our first in our recently introduced series on the Business of Airlines and Airline Miles, we will explore how these tough times have affected the business of Airline Miles.

Airline Miles are a liability:

Airline Miles that have been awarded to customers and are sitting in their accounts are a liability to airlines. Airlines owe us travel – tickets or upgrades – for all the miles that we have. This makes the miles appear in the liabilities column of their balance sheets, reducing their net worth in dollar terms. On the other hand, a large miles balance builds loyalty. If you have Half a Million miles in your account and/or are an Elite, you are not likely to jump ship anytime soon.

These tough times have however resulted in airlines coming up with creative ways to limit the free flights and upgrades we can get from all those miles or even come up with ways those ‘free’ tickets and upgrades can result in revenue for the Airlines. Airlines have put all kinds of restrictions on how and when you can redeem miles by limiting inventory and in some cases limiting how close to the travel date you can redeem miles, with or without a fee. Fees for booking that ‘free’ award booking or upgrade is exactly how airlines have used these actions to generate revenue. Several airlines now have ‘Fuel Surcharges’, ‘Booking Fees’ and even ‘Co-pays’ for using miles for awards and especially upgrades.

Airline Miles are a source of revenue:

When a partner company, say a credit card or a retailer doles out miles to its customers, it actually results in revenue for the airline. They actually sell those miles in bulk to the vendor, who in turn gives them to its customers.

In these tough times, we have started seeing these miles being given out more willy-nilly and more abundantly. Think Credit Cards Gone Wild . While this is a windfall for you mileage junkies, in the long run it dilutes miles, especially for those of us who actually earn most of their miles the hard way – by putting our butts in an aircraft seat.

Airline Miles can be zeroed out:

In case of a bankruptcy, your airlines miles are in jeopardy. The chances of your airline miles being zeroed out are slim – someone will probably buy the airline and its mileage program. But the possibility exists. When Independence Air went bankrupt, they had to liquidate. No one bought them. If they had had a mileage program, you would have been out of luck.

In these tough times, the more likely scenario would be that if an airline gets bought, severe changes can be made by the new parent airline to the terms of the original airline miles program. We are already seeing some pretty interesting changes to United and Continentals programs as they merge to one. And this was a merger, not a fire sale.

More to come on the Business of Airline Miles. Do read my past series on the Economics of Airline Miles.

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