The Extra Mile

Troubled Airlines Downsize to Survive

Result: fewer frequent flyer miles, awards

October 31, 2005 - Airline bankruptcies (and near-bankruptcies) have always tested travelers' nerves. The recent Chapter 11 filings by Delta and Northwest, and the persistent rumors that Independence Air will soon follow suit, are no exceptions. Once again, anxiety levels are high, questions abound.

Will the bankrupt carriers successfully reorganize while in Chapter 11 and emerge as healthy competitors? If so, when? And if not, will they simply liquidate, as National did in 2002, or will they merge with a stronger airline, as US Air has done with America West?

How will flights and service levels be affected while the airline is in bankruptcy?

And how will frequent flyer miles and awards fare?

Those questions fuel plenty of speculation. But at the end of the day, there are few hard and fast answers. There is, however, one certainty that applies to all three struggling carriers: while the details differ, each plans to shrink into profitability.

According to Delta CEO Gerald Grinstein, "Delta will move quickly and decisively to do what is necessary to beat our competitors and meet our financial commitments, and this means we will become a smaller, more cost-efficient airline, with a strengthened network and a stronger balance sheet."

Specifically, Delta's restructuring plan calls for cutting domestic flights by 15 - 20 percent and laying off as many as 9,000 employees by 2007.

Northwest plans to remove 10 percent of its available seat-miles domestically and 8 percent overall in the fourth quarter compared with a year earlier. The human toll: Northwest will furlough 400 pilots and 1,400 flight attendants in coming months.

Downsizing is also the watchword at the financially shaky discounter Independence Air.

By the end of October, Independence will have pared back its current 350 daily flights to 230. Just a year ago, they operated 600 flights a day. The cutback will reportedly mean the loss of 600 jobs from the airline's current workforce of 3,400.

While there's nothing inherently wrong with a smaller airline, an airline's right-sizing can result in wrong-sizing for individual travelers. Delta's flight reductions at Cincinnati, for example, mean that Delta may no longer be the best choice for frequent flyers from or to that airport. And Independence Air partisans who normally fly from the airline's Washington-Dulles hub can no longer count on Independence Air's previous wide range of flights from that airport.

On the frequent flyer program front, fewer flights mean fewer opportunities to earn miles, and to redeem them. And, over and above the overall decrease in seats, there's the niggling concern that the most profit-starved carriers are also likely to be the least generous in making seats available for award travel.

While to the airlines less may be more, for the airlines' customers, less is apt to just be less.

Insurance for frequent flyer miles

In response to widespread fears of losing their frequent flyer miles, American Express last month began offering its credit card customers Air Miles Protection, an insurance policy for airline miles. (Policies are currently available to residents on 38 states, including Hawaii. American Express is waiting for approval to offer coverage in other states.)

For $5.40 per month, members can protect up to 60,000 miles in the programs of American, America West, Continental, Delta, Northwest, United and US Airways. So in the unlikely event that a traveler had 60,000 or more miles in each of the seven programs, the protection would cover 420,000 miles. For $9.00 monthly, the coverage increases to 100,000 miles per program. There are also rates available for annual coverage and for joint coverage.

Should one of the covered airlines liquidate, or for any other reason terminate its program, and the miles are not transferred to another airline's program, Amex will credit the policyholder's Amex card account at the rate of $50 for every 3,500 miles lost, up to the maximum number of covered miles, when an airline ticket is charged to the card.

Based on that formula, the reimbursal rate for 60,000 lost miles would be $857; for 100,000 miles, it's $1,429. In either case, it amounts to 1.43¢ per lost mile. Given the current value of frequent flyer miles, that's fair.

Does it make sense to pay a premium to insure miles at all? If the history of airline liquidations is any indication, the odds of any major program shutting down and leaving members without their miles are microscopically small. So it's highly unlikely policyholders would ever recoup their premium payments. But for program members who are losing sleep over their miles' prospects for survival, the peace of mind might be worth the modest monthly payment.

Further information is available from American Express by calling 1-877-294-6103.