With financial troubles plaguing many major airlines, concern is rising that free miles may vanish. Should you cash in your stash now, or take a chance and hold on?
By Salvatore Caputo, Bankrate.com
If you're a frequent flier, what can you do to preserve the miles you earned on a failing airline?
Chances are good that you will want to answer this question sometime soon. The industry is reeling from declining traffic and spiraling costs.
"We've never had a situation anywhere close to this one where not just one big airline but a bunch of big airlines are in serious financial trouble," says Ed Perkins, a consumer advocate and founding editor (retired) of Consumer Reports Travel Letter.
U.S. carriers that have been particularly hard hit include:- Hawaiian Airlines, which filed for Chapter 11 bankruptcy protection for the second time on March 21.
- United Airlines, which entered Chapter 11 in December. Some industry scuttlebutt says liquidation is being seriously considered.
- American Airlines, which was threatening to file for Chapter 11 if unions didn't agree to cost-cutting concessions. The carrier got the concessions, but its condition remains shaky.
- Delta Air Lines, which lost $466 million in the first quarter of this year, up from a loss of $397 million in the same quarter of 2002.
The situation may imperil billions of unused frequent-flier miles. For instance, American Airlines' AAdvantage program has more than 45 million members worldwide, and United's Mileage Plus program has 41 million. Estimating that the air miles currently in circulation are worth $500 billion, The Economist magazine labeled frequent-flier miles as the second biggest "currency" after the dollar.
Bailing out
Concern about the industry's situation forced the suspension of one long-standing form of protection, AirGuard. This membership program (it's often mislabeled as insurance, but unlike real insurance, no policies are issued and no cash claims are paid) honors frequent-flier miles when a carrier goes out of business and that carrier's frequent-flier program is not absorbed by another carrier.
AirGuard was itself insured by a London company that would pay it for any losses it incurred to honor mileage claims. In light of the current airline-industry turmoil, the insurer braced for the possibility of major claims by AirGuard by drastically raising the premium, says Randy Petersen, president of AirGuard.
"The premium is too expensive for us right now, but we're still going round and round with them," he says. AirGuard is not accepting new members now, but claims by existing AirGuard members still will be honored.
The easiest way to protect the value of your miles would be to sell them, but that would be wrong. Frequent-flier programs prohibit that. Even though there are brokers willing to sell award tickets for you (they can't do anything at all with miles sitting in your account), if someone else is caught with your award ticket, it will be confiscated and your frequent-flier account permanently frozen. That's not a good tradeoff for a quick fix.
To squeeze some value out of those unused miles, consumers have three options:- Use them up while the carrier is still flying
- Convert them and redeem them elsewhere
- Hang onto them and use them whenever it's convenient
Burn, baby, burn
Even when the industry was not shaky, Perkins says, the best strategy has always been to use up the free miles. "Burn your miles? I'd say unequivocally yes, that's always been the case. Frequent-flier miles do not improve with age. That's been true forever."
Programs have seen a "steady drip, drip, drip" eroding their benefits, he says. "So under any circumstances, you're better off using than holding them."
And the best strategy for burning them? "The highest and best use of frequent-flier miles is for air travel," he says.
However, many people can't redeem the miles from the carriers as fast as they can earn them, says Petersen, who is CEO of a number of travel-related businesses besides AirGuard, including Inside Flyer magazine.
"In the original frequent-flier programs, you could only earn miles by flying," he says. There were no partners offering miles for hotel stays or credit card purchases. "Now, you can walk out your front door and earn miles. We've become spoiled because they've made it too easy to earn miles."
American, for example, says that 6.4 million AAdvantage members earned more than 95 billion miles through companies other than airlines in 2002 alone.
Mile conversion
That's why the "highest and best use of frequent-flier miles" isn't always practical. The other alternatives for burning miles include converting miles to points and then back to miles with a more financially sound carrier. This option is available in two non-airline programs: Diners Club's Club Rewards and Hilton's HHonors Rewards Exchange.
Ten airlines, including American and Hawaiian, participate in the HHonors Rewards exchange, allowing the points-to-miles-to-points conversion among all 10. However, these exchanges come at a price. For the most part, 5,000 miles earn 10,000 HHonors points. (Kilometers from Lan Chile and miles from Virgin Atlantic are exchanged at a 1-to-1 ratio.) Converting the points back to miles erodes the value considerably. For all but Lan Chile, you get 1,500 miles for every 10,000 HHonors points. Essentially, you've traded 5,000 miles for 1,500 miles. (In Lan Chile's case, you get 6,500 kilometers for every 25,000 HHonors points.)
Only two airlines allow you to convert their miles into Diners Club Rewards points.
"Consumers can convert miles with United and American at a 1-to-1 ratio into Club Rewards points," says Ashley Miller, the program's North America director.
The points can be converted back into miles with the program's 24 other partner airlines, but at a 2-to-1 ratio so that 10,000 Club Reward points become 5,000 miles. There's also a handling fee for converting points to miles. Miles in those other 24 partner programs can't be converted to Club Rewards points.
Because of the value lost, Perkins slaps a big "L" for loser on the miles-to-points-to-miles strategy. When you can't burn the miles with the original carrier, he says, it makes more sense to convert to the points in any loyalty program that allows it and get the full value of the points, if not the miles. For instance, Miller says her Club Reward points can be used to purchase more than 800 items, from gift certificates to brand-name merchandise.
Add MilePoint.com to the mix, as well. This online membership site allows you to trade miles from seven participating airlines, including Delta and Hawaiian, "for savings on leisure-related purchases -- specifically cruises, resort and condo stays, experiential vacations (spa, golf, adventure trips, etc.) and magazine subscriptions," says Peter Brennan, MilePoint's chief marketing officer.
Using your miles in this fashion, Perkins says, "historically, you get about half the value."
The do-nothing option
Petersen and Perkins agree that history shows that frequent-flier miles don't disappear as a rule. But the risk of losing miles if an airline fails is real. So doing nothing is a viable option with an unknown risk.
"There is real risk out there," Petersen says, pointing to the cases of Ansett, an Australian carrier that could find no one to buy or bail out its business and so ceased operations in September 2001, and National, a small carrier out of Las Vegas that was ordered into liquidation on April 14 after spending two of its 3 years of existence in Chapter 11. All the frequent-flier miles were lost. But neither was a major U.S. carrier.
Petersen's AirGuard was set up to respond to the collapse of the original Midway Airlines in 1991 when 700,000 frequent fliers lost all their miles. So there is a risk in doing nothing, but Petersen still advocates holding onto miles rather than trying to burn them just to use them up before a carrier goes belly up. He is so sure of this advice he admits that despite holding thousands of miles of his own, he's not even a member of AirGuard.
That's because most carriers such as America West and US Airways, which recently emerged from Chapter 11, continued their miles programs without a hitch through their respective bankruptcies. United and Hawaiian mileage programs are still in place, as well.
"Even when airlines have gone out of business completely, there are comparatively few cases where people flat-out lost their frequent-flier miles," Perkins says.
In most of those cases, pieces of the extinct carrier were acquired by other airlines, which honored frequent-flier miles to win over these customers, he says.
Petersen points out that in some circumstances, the carrier's failure can be your gain. TWA, which was unable to emerge from bankruptcy, was bought by American. The stronger airline folded TWA Aviator miles into its AAdvantage program.
"Those miles got more valuable because TWA was a shell of an airline," Petersen says, and miles in the AAdvantage program qualify for international routes and a host of other options unavailable from TWA.
However, the opposite is also true. "They're talking now that United . . . may face liquidation," Perkins says. "Looking at it through a cloudy crystal ball, even if United is forced into liquidation, (through acquisition) there will continue to be some entity called United Airlines . . . and to retain as much customer goodwill as possible, such an operation will continue to honor United frequent-flier miles."
However, he expects that such an operation would be considerably smaller and thus devalue the current United miles.
"I would be hard-pressed to say that history is a reliable guide (of what to do with imperiled miles)," Perkins says. "It may have something to teach us, and that's that frequent fliers are a valued asset . . . but the fundamental answer is that nobody knows."
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