The Fee of Free Flying

By John Greenwald

Frequent-flyer miles have long been the closest thing American travelers have to a free lunch. But the adage about there being no such thing seems to be coming true. In the biggest overhaul of frequent-flyer programs since American Airlines launched the first one in 1981, most major U.S. carriers are boosting from 20,000 to 25,000 the miles required to earn a free domestic coach ticket. And the change, which the airlines plan to phase in by next February, is only the beginning: the cost of free flying will rise as well for many travelers to Europe and Asia. "The airlines have become victims of their own success," says Randy Petersen, editor and publisher of the monthly trade journal Inside Flyer. "Frequent-flyer programs have simply become too popular."

Such programs are both a blessing and a curse to a perpetually troubled industry that has lost more than $11 billion in the past four years alone. Just last week Delta Airlines said it would eliminate as many as 15,000 jobs, or 20% of its work force, in a move to help it compete with low-cost rivals like Southwest Airlines. And United said it lost nearly $100 million in the first quarter because of competition from the no-frills carriers. Amid such relentless bloodletting, some 10 million frequent flyers traveled free on U.S. airlines in 1993, an amount equal to 7% of all passenger traffic. While those freebies may have helped instill customer loyalty, they also cut into the airlines' bottom lines.

Partly as a result, airlines have diluted the value of frequent-flyer programs by fully 25%. But few passengers have complained much since United Airlines kicked off the retrenchments late last year. For one thing, business travelers typically fly more than enough miles to qualify for free trips under the new requirements. And vacationers can earn the needed extra points from companies that offer frequent-flyer miles on everything from hotel rooms to rental cars to long-distance telephone calls. Says David Stempler, director of the Washington-based International Airline Passengers Association: "Our members find that they are gaining miles in so many ways that the 5,000-mile difference should not be a terrible burden."

But travelers could start to howl if airlines make further cutbacks in their frequent-flyer programs, which some industry watchers see as likely. Reason: Southwest and such aggressive discounters as Continental are forcing larger rivals to cut ticket prices on their short-haul routes, which have been one of the few profitable sources of airline revenue. Such reductions are coming on top of the seasonal fare war that Northwest kicked off in April when it lowered ticket prices to Hawaii by 40%. To help recoup the income, major carriers could be easily tempted to cut or discontinue frequent-flyer miles on hops of 400 or fewer miles.

Airlines are not likely to scrap the programs, however, because they have been so successful at pulling in business. When IBM recently proposed that United and American grant it lower ticket prices instead of frequent-flyer miles, both carriers declined. And shortly before Delta Airlines announced its latest job cuts, the carrier said it had joined forces with Varig Airlines of Brazil to expand Delta's frequent-flyer program. Frequent-flyer miles "are not going away," says Tony Molinaro, a spokesman for United. "We wouldn't do it if it wasn't really worth it." Especially now that consumers will pay more to fly free.

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CREDIT: [TMFONT 1 d #666666 d {Source: Inside Flyer}]TIME Graphic by Steve Hart

CAPTION:Freebies Take Off.

With reporting by Kathryn Jackson Fallon and Jane Van Tassel/New York