Bean counters from Wall Street financial houses have been running around talking to the U.S. domestic airlines, trying to convince them to spin off their frequent flier programs into separate entities outside of the airline itself. Air Canada’s done it, and it seems others are talking about it…

Why, You Might Ask?

It turns out (according to these pretty smart number crunchers) that if the airlines did spin off their frequent flier program the new entity would be more profitable than the airline itself.

How Can That Be?

It turns out that the airlines have done a pretty good job of selling these miles to every business under the sun — the obvious ones are credit card companies, hotels, and car agencies to name a few; the not so obvious ones are dry cleaners, grocery stores and thousands of other small businesses. These businesses merrily pay 2 to 3 cents per mile to the airlines for the right to give them away as promotional gifts; and this works out to billions of dollars a year.

What is a Frequent Flier Mile — Really?

What the airlines are selling to us (yes, include me as a collector of miles) is the “promise” of future redemption for air travel or in some cases other consumer retail goods.

As you might imagine, a program or company that can get businesses to pay cash for a “promise” to be handed out to individuals who then become more loyal to the business, well, very lucrative. Other than selling tap water for $14 a gallon, I can’t think of any other business model which could possibly do a better job at that!

This must be a win-win, right? Businesses get to provide miles to us and we in turn are grateful to that business for their generosity. We hungrily accumulate these miles like children diving for candy under a freshly smacked piata.

But Hold on a Minute - Is the Promise Really Fulfilled?

With billions of these miles floating around, one might wonder how the promise is ever fulfilled. Of course, we all know we can get to Orlando, Cancun or Hawaii anytime we want with these miles - *RIGHT*?

Time for the reality check.

The Secrets

This is where the hidden little secrets I am about to share with you come into play (culled from conversations and raw data):

• Who really controls how many seats are released to fulfill the promise of a “free” trip? It’s those pesky guys in the back room (airline revenue managers) who make sure that a plane load of 130 people have all paid a different price for their seats. Guess what? They treat seat miles as non-revenue (free is not really in their vocabulary or something they want to fathom–after all revenue is part of their title). So, they pretty much have unfettered reign when deciding how many seats to release to the “promise” pool
• The airlines have been known to actually reduce the number of flights to popular mile redemption destinations like Hawaii, simply because the planes were not profitable; they were too full of people redeeming the promise
• In certain cases, instead of removing flights, they simply reduce the size of planes on these “overly free” routes, opting to service the popular destinations like the Caribbean with smaller planes instead of “comfy” larger planes (which are not profitable with all those redeemers)
• I don’t know the numbers exactly on how many people never accumulate enough miles to actually redeem anything, but there are estimates that there are as many as 14-TRILLION unredeemed frequent flier miles out there. Not that this is necessarily a bad thing; the business that gave away the miles still got what they wanted (more loyalty) and the airlines got what they wanted - cash and more loyalty for those who continue to choose them over another airline because of their miles program. I am pretty sure these “unredeemed consumers” would have been better off buying the cheapest seat on any airline rather than paying a premium for their loyalty to any airline’s frequent flier program.
• Most of the airlines have reduced seat capacity by 20% or more the past few years, and this summer saw 90% load factors which means planes are flying completely full. I wonder how many seats were filled with those loyal customers that redeemed the promise?
• The airlines have to carry those miles on their balance sheets (after all, the miles promised can, in theory, be redeemed). I have heard that if everyone were able to redeem their miles for travel next year, there would be few paying customers. So how does an airline reduce all these miles on the balance sheet? First, you change the program’s policy so that miles expire; then, you change the rules so that if you don’t have any activity in your account during a certain time period, the miles expire. I wonder–did the bean counters have anything to do with these changes?
• Last but not least: you are charged a fee for redeeming your miles, which helps the airlines recoup some of that “free” redemption cost. This is especially painful in some programs where the fee is $100 or more for “last minute” redemptions

So am I bashing the miles loyalty programs? Not really (well, maybe just a teeny bit). As I said earlier, I am one of the loyalists who accumulates and redeems points periodically (they do have many useful aspects especially for road warriors and those that have last minute emergencies - see FareCompare’s newsletter, 6-14-07).

But what I AM trying to point out is, air travelers who are informed about all aspects of one of the most complex activities in the world (shopping for air travel, actually taking the trip, and getting home safely) can make better decisions.

That’s my story and I am sticking to it.