Frequent Flier Miles – An Alternate Currency

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July 31, 2013

Frequent Flier Miles – An Alternate Currency

Airlines merge.  Some declare bankruptcy, then restructure.  Bondholders and other creditors are at risk.  That’s not you, right?  You sleep soundly at night!  But what about your Frequent Flier mileage balance?  As a frequent business or leisure traveler, you may have an “asset” at risk.  Assume a value of two cents a mile and do the math.  A frequent flier with 1,000,000 miles has $20,000 at risk.

Frequent Flier programs are a very profitable business for the airlines.  Consider the American Airlines Advantage program, the oldest and largest Frequent Fliers program in the U.S.  It has 69 million customers and has been around for 30 years.  It issued 167 billion miles in 2011.  2/3 of its business volume is done outside the airline industry through partner firms like credit card companies.  In 2007, the American AAdvantage program itself was valued at $4 billion (Source: Citi Seeks Court Ruling on American Airlines Credit Card Contract, www.paymentsource.com, 5/24/13).

Not only are Frequent Flier programs profitable, they are at the heart of many airline “alliances,” STAR and Oneworld being the most popular.  If an airline curtailed, devalued or eliminated its Frequent Flier program, it would tarnish the brand and the value of the affiliated alliance.

On Friday, US Airways shareholders approved the proposed merger with American Airlines.  This moves the deal one step closer to closure.  All that is now needed is for the antitrust regulators to sign off on the deal.  This merger will create a strong competitor to Southwest/AirTran, Delta/Northwest, and United/Continental.  In total, these airlines will control about 80% of the entire domestic air travel market.

One of the goals of the merge is to reduce “excess capacity.”  Therefore, the merger may result in a reduction of available seating for “reward” fliers, making it more difficult to book seats where and when you need them.  Accordingly, you’ll need to plan ahead and treat your miles as “currency.”

As of 2010, 17 trillion Frequent Flier miles were in circulation worldwide (boardingarea.com).  The Economist magazine has called Frequent Flier miles the second biggest currency after the dollar.  Ten years ago, it was estimated the value in circulation amounted to $500 billion (bankrate.com).

Airlines are the central bank of the Frequent Flier world.  In the real world, currencies can be devalued.  So, too, in the Frequent Flier world, as airlines change the rules for the purchase of tickets with miles.  A 25,000 one-way ticket can become a 35,000 mile purchase under a new set of rules.  Your exchange may be less in the future, especially as demand exceeds the supply of available seats.

Airlines assign a two year life to miles held within inactive accounts.  Consider getting the airline’s affinity credit card.  Earning miles on your purchases keeps your frequent flier account active.

Use your accrued mileage!  I know it sounds so obvious…A December round-trip JFK to Frankfurt in Business Class might cost $4,300.  That same ticket might cost 100,000 miles round-trip if you plan in advance and catch the off-peak rates.  At a value of 2 cents a mile, you might spend only $2000 + $330 in taxes, a savings of $2,000.

Keep your rewards in mind for short hops!  Sometimes the commuter flight from San Francisco to Fresno (192 miles) runs the same as the JFK to Heathrow fare.  The short hop might cost $1,000+ round-trip or 25,000 miles (about $500 in mileage currency).  Using miles can be very cost-effective.

One-way flights typically aren’t half the round-trip fare on most major airlines; they are closer to 80% of the round-trip fare.  And sometimes you only need a one-way ticket.  Tickets bought with miles can be bought either one-way or round-trip at the same basic rates.

Travel plans uncertain?  Most airline tickets are non-refundable.  Although a $150 change fee is common, tickets bought with miles can be easily undone and recredited back to your mileage account.

Start treating your Frequent Flier miles as real “currency” this summer and enjoy the savings!