Free-For-all In the Skies

By Barbara Rudolph

They started seven years ago as a clever promotion, a harmless gimmick designed to boost business for airlines. But now frequent-flyer programs have triggered a dangerous dogfight in a vulnerable industry. As the major carriers scramble to offer the best giveaway plans, almost everyone who flies frequently for business or pleasure is busy trying to calculate how many miles of travel it will take to earn a free trip across the country or even around the world.

The frenzy intensified in January, when the airlines began to offer "triple mileage" -- three miles' credit for every mile flown. Suddenly flyers could look forward to earning that dream vacation to Hawaii in one-third the time. Forced to match one another to stay competitive, the airlines fret that the frequent-flyer programs have spun out of control. The number of passengers participating has surged from 4 million in 1983 to 8 million now. They hold nearly 30 million memberships in frequent-flyer plans, since many passengers sign with more than one airline.

The programs were profitable when the relatively small number of customers who had earned free tickets could be accommodated in seats that would otherwise be empty. But now the legions of frequent flyers are accumulating freebies rapidly and may already be displacing paying passengers. Julius Maldutis, an airline expert with the Salomon Brothers investment firm, estimates that honoring all those free tickets could cost the airlines $1.24 billion in lost revenue. With some carriers already losing money, the added burden could be devastating. Admits Mark Lacek, director of business-travel marketing at Northwest Airlines: "It's suicide marketing. Insanity."

The basic frequent-flyer programs are similar at most major airlines. Typically, after compiling as few as 10,000 miles, passengers can upgrade the next coach ticket they buy to first class. For 35,000 miles, they can usually earn a free round-trip coach ticket to anywhere in North America. After 50,000 miles, it's off to Hawaii or even Europe.

But that is only the beginning of the possibilities. Most airlines have worked out reciprocal frequent-flyer deals with rental-car companies. When customers rent cars, they earn mileage with the affiliated airline; when they & pile up enough miles, they get discounts on future car rentals. At Avis, customers get credit for 500 miles when they rent a car in connection with a Northwest flight. Since the carriers have similar arrangements with hotel chains, frequent flyers can put together a deluxe vacation package. Example: logging 75,000 miles on Eastern or Continental wins two round-trip tickets to Europe or South America, three free nights in a Marriott hotel and a free rental car from Hertz for three days.

Other businesses are getting in on the game as well. Some banks, including New York City's Citicorp, arrange for their Visa and MasterCard holders to receive frequent-flyer mileage every time they use their credit cards. The variations on this strategy are potentially unlimited. Members of TWA's frequent-flyer plan can chalk up mileage by buying Glad trash bags.

Yet no gimmick has shaken up the airlines so much as the new triple-mileage bonuses. Delta started this turbulence last November, when it announced that anyone charging a ticket for one of its flights with an American Express card this year would receive credits worth three times the mileage. Within a few months, nearly all the major carriers had matched or surpassed Delta's deal, some offering the triple mileage whether or not passengers used American Express.

The promotion has dramatically boosted the sign-up rate for frequent-flyer plans. For example, the number of passengers joining American's program jumped from about 3,500 a day before triple mileage was offered to 7,000 a day now. At the same time, triple mileage has sharply increased the rate at which passengers rack up miles -- and free trips. Says H.G. ("Red") MacKenzie, vice president of the American Society of Travel Agents: "Triple mileage is stupid. The airlines have given away the candy store." Agrees Dan Brock, senior vice president for marketing at Piedmont: "There's no question that the move was excessive."

Travelers are willing to follow circuitous paths simply to drop more free miles into their kitty. Reports Ardi Perry, a travel agent at Aquarius Travel Service in West Palm Beach, Fla.: "We have people who will change in Atlanta and accept a layover when they used to fuss. It's just to build up mileage." Passengers go out of their way to stay on the same carrier whenever possible. That is the main benefit that frequent-flyer clubs offer to the airlines. Says John Pincavage, an airline analyst at the Paine Webber investment firm: "The | frequent-flyer plan is the only marketing program that has ensured brand loyalty."

The drawback is that passengers with free tickets can take seats away from paying customers. Most frequent flyers are business travelers who earn their mileage points going to such relatively unpopular destinations as Boise and Buffalo. When the time comes to redeem their bonuses, they go to Hawaii, Florida or the Caribbean. Some analysts estimate that up to 33% of the seats on some airlines' popular routes are taken by passengers who are flying free.

To keep their choice flights open to more paying passengers, many carriers encourage frequent flyers to use their travel bonuses during off-peak periods. An unrestricted Eastern or Continental round-trip ticket to Hawaii normally costs 50,000 miles. During off-peak seasons in the fall and late spring, the same trip can be had for 30,000 miles. At American, travelers can fly economy class to Europe for 90,000 miles. But off-peak the same trip costs 60,000 miles.

In an effort to keep their profits from plunging, more and more airlines are beginning to restrict the terms of their frequent-flyer plans. Several carriers now "black out" certain periods, such as Christmas and Thanksgiving weeks, during which passengers cannot fly free. Last year Pan American blacked out 70 days. Several airlines limit the amount of space on a plane that is available to frequent flyers. Such restrictions are risky, though, since they could destroy the goodwill and brand loyalty that the frequent-flyer plans have inspired.

Passengers are concerned that the airlines will try to rewrite the basic rules governing the plans. When a few carriers tried last year to increase the number of miles needed to qualify for free trips, many consumers were outraged. Attorneys general in several states concluded that the airlines' action was illegal, and the carriers backed off. But travelers remain wary. Tom Nolan, a Palo Alto, Calif., attorney who has banked 150,000 miles on United, is contemplating a trip to Malaysia, Singapore and China later this year. It is earlier than he would like to travel, but, he says, "I'm very concerned that they're going to eliminate the good awards."

One sure way to compensate for expensive promotions is to raise air fares, which major carriers are now doing. United, American, Delta, Continental, Northwest and USAir last week announced fare hikes of between $5 and $20 on most flights. Says an analyst: "This is only the first in a series of fare , increases. The airlines are going to nickel and dime customers until they offset the costs of frequent-flyer programs."

Just as troublesome to travelers is the specter of the Internal Revenue Service going after frequent-flyer programs. The IRS is studying the possibility of taxing free airline tickets as income. While a ruling is not expected before next year, passengers who have stashed away substantial mileage are understandably concerned and may use their bonuses soon. The airlines, on the other hand, have a reason to welcome IRS intervention. If imposing taxes on the bonuses cuts down on their use, then the frequent-flyer plans would no longer be such a dire threat to the carriers' bottom lines.

With reporting by Scott Brown/Los Angeles and Thomas McCarroll/New York