Consumers Redeeming Miles for Travel

A woman named Mary Jane Credeur wrote a really nice article for Bloomberg this week that was published in many papers (Greetings from Asbury Park). It explains that consumers are burning miles for travel more than in the past, as evidenced by growing redemption tickets. Awards become more attractive as fares have increased. Further, banks are buying and giving away miles like drunken sailers. [Ed. note - Have we learned nothing from the mortgage crisis?] IdeaWorks is cited as claiming that half of all miles earned are not from flying.

We thought it was interesting to compare the reported increases in redemptions with the carriers' published traffic statistics:


Pretty clearly the redemptions are up much more than capacity, load factor, and passengers carried. Taken as a whole, this table is a roundabout way of confirming that carriers were selling fewer tickets in the first half of the year (ARC transactions were down 3.9% in 1H08). Hence the flurry of capacity cuts announced for 2H08 and 2009.

Interestingly, it also suggests how important banks' money from buying miles is for the overall airline revenue eco-system. If consumers won't directly buy air travel; let them do it indirectly via credit card purchases! As such, we'd like to see carriers continue to invest in tools that make it easier to redeem miles. And get a little more creative about how they manage the "price" of a ticket in miles. We'd also like to see a Cubs vs. White Sox World Series...but there's only so much an airline can do.

Ouch Redux: Northern Exposure Edition

What goes on here? Just last month we wrote about Ryanair shutting down their reservations for 3 days to upgrade their systems.

Now comes word that Alaska Airlines will shut down access to their mileage plan systems in April for a week! No redemption, no mile-based upgrades, no signing up for the program, etc.

We suppose the business impact is relatively small. They gave loyal customers a month notice, and most passengers will be able to figure it out and work around the outage. But you can rest assured that some know-it-all customers will be pretty hacked off to find out that they can't redeem their miles right-then-and-there for that all-important dream trip to Anchorage.

It just seems hard to believe that system migrations like these can't happen a little quicker. A few days we get - but a week?? A $3.5-Billion bank like Bear Stearns can teeter on the brink of bankruptcy, get bailed out by the Fed, nearly fail again, then get liquidated by a quasi-partership of the government and an opportunistic white knight in just two days -- and an airline can't migrate a few customer profiles in less than a week? What kind of a world do we live in?

Take Off, Eh

Wednesday's WSJ reported (subscription required) that Aeroplan is hatching a maniacal plan for global domination. Well, that's a paraphrase. In fact Aeroplan acquired LMG, an operator of retail loyalty programs in Spain, the Netherlands, New Zealand, Canada, and the Mideast, as well as the UK's (apparently) popular Nectar program. Perhaps more interesting to us, was the Aeroplan CEO's comments that the firm remains interested in the US market. Aeroplan believes that an acquisition is the way to go in the States.

Now maybe you've heard, approximately EVERY US carrier has some sort of militant shareholder insisting that said carrier should divest its loyalty program. That includes not only American, but also United and US Airways (Star Alliance cousins to Air Canada) and Northwest (effectively based in Canada). We can imagine that any of those programs would be a tasty morsel for Aeroplan.

In the past we'd ignore this invasion from the north, but not after Rush and Bryan Adams. All signs point to credibility:

- Aeroplan is pursuing some corporate structure changes to facilitate deal-making (i.e. they want to raise money);

- Aeroplan's revenue is up over 20% so far this year over last (i.e. people will give money to them);

- The Canadian dollar is up more than 60% over the last 5 years to parity with the US dollar (i.e. the money will go a long way).

The next several months should have some fun news on this issue. Building a global loyalty brand with some leading carriers seems like a good way to mine a lot of customer data and mint some cash. Let's be honest, a lot of consumers are just fiends for acquiring loyalty points, cheap trinkets, and other shiny objects (Exhibit A: Flyertalk.com). Now imagine if you could use points for anytime rewards to Las Vegas *OR* Toronto. Nice.

In related news, earn two frequent flyer miles for every purchase you make using Google Checkout this month. Woo hoo!

We use miles for magazine subscriptions

Another article in The Wall Street Journal to fuel passengers' frustrations with frequent flyer plans ("Mileage Plans Add to Flier Ire", 10/17/2007). There are some nice factoids in there to illustrate just how pervasive, yet useless, plans have become (e.g., Northwest Airlines has 510 partners for WorldPerks, including 41 new partners this year).

The best gem comes from American Airlines. To support their argument that reward seat availability is NOT declining, a spokesman notes that frequent flyer travellers actually increased from 2005 to 2006, from 7.2% of passengers boarded to 7.5% of passengers boarded.

That sounds impressive, but it's actually misleading. Especially if you take a look at two other facts:

1) If you look in the American Airlines' 2006 Annual Report - it tells you that the number of award redemptions was actually FLAT for the period at 2.6 million [tickets].

2) During the same period, AA's "Passenger Boarded" (segments) volume increased 0.1% (per Airline Business Magazine statistics).

All this tells you is that the Frequent Flier Passenger-Boardeed has increased - but NOT the number of actual tickets. This suggests that frequent flyer availability is tighter, and these fliers are having a tougher time booking direct fligts. But kudos to American for representing the numbers to their favor.

OK - Extra credit for Airline Numbers Nerds follows. AA's PB's in 2006 were reported to be 98.139 million. 7.5% of that means 7.360 million PB's were associated with 2.6 million reward tickets. This yields 2.83 PB's per reward ticket, which is a bit higher than a common industry assumption of 2.5 PB's / Ticket.

FMV has learned long ago that you have to go into the numbers to get the real story - Any time you need a peek behind the WSJ's numbers, you know where to find us.

Rewarding Sites

FMV caught up on some reading over the weekend, so we'll share the wealth with you. First, we present a review of the new reward booking sites at Continental.com and Delta.com.

One interesting note, author Ed Perkins found that he could not access all of Delta's new functionality without logging in as a SkyMiles member:

"On Continental, you can search for seats without logging in as a OnePass member. On Delta, however, you can get yes/no answers to flights on specific dates without logging on, but you must enter your frequent-flier number and PIN to use the new flexible-date system."

Why would this be? Perhaps most likely, Delta is trying to keep their IT costs down. Or could it be that Delta wants to gather information about where their most valuable customers would like to travel for free? FMV would be shocked, but certainly applaud that effort.

Overall, Perkin's has a common gripe about almost all Frequent Flier programs:

"Sadly, however, improved search capability doesn't increase the number of available seats; it merely makes it clearer, more quickly, how scarce those seats really are."

This may be true since airines typically offer somewhere around 8% of seats available for award redemption, but cusomers now have more ways to earn miles as ever. However, improving the online capabilities are still crucial for airlines because the call center times needed to address award travel are staggering. FMV has heard averages of 20 minutes - so there are huge cost savings here by automating this functionality. Even if it means a little more transparancy on the dearth of seats.

Kudos to both carriers (and American Airlines) for investing in functionality to help users find reward flights. Especially if customers find some surprising rewards they may not have originally considered.

Top 15 Reward Markets

Given how much we fly - FMV loves frequent flyer reward tickets. One great source to learn more about this corner of the biz is IdeaWorks. Last week they published a new study where they've estimated the Top 15 U.S. markets (based on US DOT data) for reward travel. Take a look, it's an interesting read.

FMV likes the observations and conclusions presented, especially the theory that customers are trying to maximize their reward by choosing transcons. However, maybe that hypothesis deserves a bit longer haul?

"Surprisingly, the major vacation destinations of Las Vegas, Phoenix and Orlando are nearly absent from the list. Florida is completely absent, and Las Vegas and Phoenix only make a single appearance."

We're not really sure why this would be surprising. The study JUST said customers are trying to maximize their rewards - Flights to Orlando and Vegas are plentiful and usually not very expensive given all of the LCC competition on these routes. If we're making the choice to burn 25,000 miles, or pay $200 - FMV may just save those miles for something more expensive.

In addition, note that many of the top markets include major hubs and/or international gateways for US carriers. LAX - SFO - ORD and LGA represent 12 of the top 15 city pairs. Perhaps many of these reward tickets are in fact connecting to an international destination not reflected in the US DOT data?

For example, maybe two seats from the ORD - SFO market were simply United Airlines 1K's continuing on to Maui, Sydney, or Shanghai? Or the Dallas - LGA routes were like that American Airlines commerciAAl with the old guy and his latchkey kid going to New York, but then continuing onward to a "business meeting in London"?

We'd need to ask the carriers to know for sure, and not that Newark isn't a great vacation destination, but we think this expansion of the "more bang for your buck" theory has wings.