Two weeks ago I was in the Turks and Caicos, last week I was in Vail.
Now I’m a few thousand miles south and east in Mendoza, Argentina. This is the home of the second annual Masters of Food and Wine.
First and foremost, it is imminent that an announcement will be made in the next seven days that Northwest is going to attempt—and the emphasis is on the word “attempt”—to merge with Delta. The new airline will be called Delta. It’s supposedly going to be based in Atlanta.
There are lots of regulatory hurdles to handle. Is this going to be good for you? In my book, the answer is a huge no.
Every airline today wants to be able to say that the only way they can save the airline is by shrinking it, and that means a newer merged airline that is going to be smaller, with fewer flights, more crowded flights, higher fares, and you can kiss your frequent-flier miles goodbye.
If you saw the Today show last week, you saw that I talked about what some people call the “fraud” of frequent-flier miles. As I’m talking to you today, there are more than 17 trillion unredeemed frequent-flier miles. That means the airlines are carrying a liability, if you’re to put it into dollar amounts, of $480 billion. That’s a 16-year inventory of miles that the airlines will never, ever redeem.
Here’s the big problem: The airline are under no regulation to redeem those miles. They’re under no government mandate to redeem those miles. There’s nobody overseeing those programs. As a result, they are the most profitable divisions of the airlines.
Frequent-flier mile programs are making more money than the core operations of the airlines. The actual market valuation of the American Airlines frequent-flier mile program—it’s the oldest program, it’s the largest program—is valued at over $6 billion.
Did you know that the entire market capitalization of American Airlines is $5 billion? The same is true with Northwest, Delta and United.
So, if you think that the answer to saving your airline is shrinking it, and you never want to displace a revenue passenger, and you’re under no obligation to redeem those miles….
This is why the airlines make so much money with their frequent-flier programs. They make a gazillion dollars selling those miles to about 15,000 separate marketing partners. But the airlines also control the redemption.
This is better than Tony Soprano time. If they keep the redemption levels to fewer than 11 percent, which is about where it is right now, they get a return on investment of 89 percent. Who gets that? Well, the airlines get that.
So having given you the bad news, let me give you the less bad news. Without starting a run on the bank, start redeeming your miles now. Don’t plan that trip when you’re ready to go, start planning your trip when you’re not ready to go. Redeem the miles now. I don’t trust the airlines as airlines. Why would I trust them as banks? Get them out of the accounts.
The airlines are actually changing redemption levels almost daily. Northwest just sent out a press release saying we’re going to give you an “enhancement” to their program. They called it an enhancement—how silly is that?
Now if you want to redeem miles for 20,000 miles and $600, you can get a ticket. Wait a minute. The inducement to join the program was that you got a free ticket for 25,000 miles!
Fifty-four percent of all mileage earned is earned on the ground. That’s usually when you use your credit card and they give you a mile for every dollar you spend. So assuming they even give you a 25,000-mile ticket, you just spent over $12,000 to get it.
Now they’re saying here’s another way to redeem miles—you can buy a magazine subscription. What a nice thought. Okay, let’s do the math. For a 12-month subscription for Readers Digest, they want something like 800 miles. At that 54 percent figure, you just spent $450 for a magazine subscription.
That’s why you have to get those miles out of those accounts and start redeeming them for flights you may want to take within the next year. You need that document in your hand. Because a, they’re going to change the rules or the mileage eligibility limits, or guest what … you are, as they say in the airline business, SOL.
They’re even changing the expiration rules. It used to be that even if you didn’t fly, your mileage stayed good for 36 months. You know what it is at most airlines now? Eighteen months. And last year alone in 2007, 39 billion miles were forcibly expired from your account.
You don’t have to the math any further to realize that it’s a great deal for the airlines and not a great deal for you.
Read more from Peter’s Travel Detective Files blog.
Check out recent interviews from Peter Greenberg Worldwide Radio.