The Extra Mile

Managing the risk of lost frequent flyer miles

November 29, 2004 - During the July-September quarter -- traditionally the travel industry's most profitable -- the major U.S. airlines collectively lost more than $1 billion, putting them on track to lose $6 billion for the full year.

As a group, the airlines haven't been profitable since 2000. As a result, Midway and National Airlines stopped flying altogether. Four carriers -- United, US Airways, Hawaiian and ATA -- are operating under Chapter 11 bankruptcy protection. Delta and Independence Air have warned that they may be forced into bankruptcy as well. And even after massive layoffs and wrenching restructuring, a return to profitability is nowhere in sight.

Never before have so many frequent flyer program members been at so much risk of losing so many miles.

While there's no consensus on which airlines will fail, there's widespread agreement that one or more carriers will not survive the shakeout. And that prospect leaves consumers wondering how to protect their miles.

A game plan for worried mileage misers

In the course of counseling many concerned mileage collectors over the past few years, I have developed a two-step plan for identifying mileage risk and hedging against it.

The first step is assessing the risk that the airline hosting a particular mileage program will liquidate.

For the sake of simplicity, the universe of airlines can be divided into three categories: those carriers that are likely to survive long term; those that are in serious but not critical condition; and those that have less than a 50-50 chance of remaining airborne for the next six months.

My picks -- with the caveat that such handicapping is as much art as science -- are as follows. Among the largest airlines, the so-called Big Six, the long-term survivors are shaping up to be American, Continental and Northwest. Delta and United are on the watch list. And US Airways is more likely to fail than to succeed.

Once a carrier has been given a prognosis, the action plan is straightforward.

Consumers who participate in the programs of stable airlines can continue to earn and redeem miles as usual, with a reasonable degree of assurance that the companies will survive, and so will their miles.

In the medium-risk category, because Delta and United could slip quickly from serious to critical condition, the prudent approach is to shift emphasis from earning miles to redeeming them. And, for the time being, until those airlines' long-term prospects are clearer, choose a loyalty program from one of the healthier carriers, and focus mileage-earning activity in that program.

Participants in the most at-risk programs have the most to do to reduce the odds of losing their miles.

Begin by immediately putting a stop to mileage-earning in the precarious program; those miles are simply too risky to have much value. Next, and more difficult, program members should begin redeeming already-earned miles for award trips. The premise: if an airline fails, unredeemed miles in its program will probably be lost forever, while an award ticket may be honored on a space-available basis by other airlines.

Wherever possible, award trips should be booked for travel sooner rather than later, because the further in the future you book, the less assurance there is that a failing airline will still be flying, or paying other airlines to honor award tickets. And award trips booked on global alliance partners are better bets than bookings on non-alliance partners, because alliance members have a vested interest in protecting the alliance's brand equity and are therefore more likely to protect customers of a failed marketing partner.

US Airways, for instance, is a member of the Star Alliance, which includes United, Lufthansa, Singapore, etc. When another Star carrier, Ansett, ceased operations in 2001, other Star airlines banded together to transport stranded members of Ansett's award program.

To be sure, Ansett award-ticket holders suffered anxiety and inconvenience. But most were able to complete their trips after Ansett's demise. In a worst-case scenario, that may be as good as it gets.