Delta Bankrupt

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http://www.bankrate.com/bos/news/pf/20050915a1.asp

 

Will airline bankruptcy wipe out frequent-flier miles?

 

By Melissa M. Ezarik • Bankrate.com

 

As gas prices soar and reports on already-struggling airlines land in the media almost daily, consumers who find themselves in the air a lot may have mile-high worries.

 

Blackout dates, limited seating and higher transaction fees for cashing in on frequent-flier reward miles are the least of those fears. Delta Air Lines and Northwest Airlines are the latest names making bankruptcy headlines. What if your favorite airline spirals into bankruptcy or ceases operations? It's enough to give the most seasoned reward program members white-knuckle fever.

 

With more than 163 million members, of 92 programs worldwide, with almost 10 trillion outstanding miles in their accounts as of early 2005, according to frequent-traveler program guru Randy Petersen, that's a lot of potentially lost time in the friendly skies.

 

Should members be concerned?

 

Program profits

First things first: Airlines aren't looking to dump their reward programs. They bring in money. Lots of it.

 

"So far the economics of these programs are so attractive to airlines and so attractive to third parties. And they aren't going anywhere except upward," says Robert Mann, a Port Washington, N.Y.,-based former airline executive who's now an industry analyst and consultant.

 

How can a giveaway turn a profit? The key is nonflight activity, which accounts for more than half of miles earned, excluding promotions and other bonuses, explains Petersen, who has been chairman and president of several frequent-traveler-program related businesses, including InsideFlyer magazine, since the mid-1980s.

 

From credit-card issuers to hotels and rental car companies, program partners are paying airlines for each mile earned. And with airlines giving away available seats only, "It's a really good business," he says.

 

A case in point: "United Airlines' Mileage Plus is still out there kicking," Mann says. When United Airlines, which filed for Chapter 11 bankruptcy in 2002, announced its reorganization plan in 2005, shareholders were told the frequent-flier program was strong and profitable; it would remain unchanged.

 

"They don't want to upset people who may fly somebody else," Petersen says.

 

After all, these programs -- and the airline industry at large -- depend on customer loyalty. Program membership is "kind of the go-to list that airlines use to try to work their way out of bankruptcy," Mann says.

 

Both Delta and Northwest, since having filed Chapter 11, have assured customers their rewards programs are secure. You can read Delta's FAQ about Skymiles at Delta.com and you can read Northwest's letter to customers at NWA.com.

 

Airlines try to keep regular fliers happy during the best and worst of times. During this year's Northwest Airlines mechanics strike, for instance, the chance to earn 100,000 bonus miles and other promotions popped up for WorldPerks program customers.

 

"Northwest strives to keep our most loyal customers by keeping the program's value proposition strong," says spokesperson Tracy Carlson. That can mean replicating other airlines' offers. Northwest, for example, announced soon after the strike began that it would match a United frequent-flier promotion.

 

If history repeats ...

While the past can never fully predict the future, experts note that history has been kind to loyal customers of major airlines. Program points "actually turn out to be pretty persistent currency," Mann says. Even through bankruptcies, miles haven't been extinguished.

 

He points to Eastern Airlines, Pan Am and Trans World Airlines -- all cases in which reward miles transferred over to programs at other airlines. Still, some insiders believe those days are over.

 

"It's a different environment. I don't think any airline is strong enough to buy another airline," Petersen says. "If any expert says, 'Don't worry, another airline will honor those miles,' I'm thinking, 'Do you think they've got money to open up their airlines to flying for free?'"

 

Historically speaking, outcomes haven't been so rosy for smaller airlines. Just ask loyal customers of Legend, MGM Grand Airlines and National Airlines; frequent-flier programs dissipated when each shut down.

 

But didn't their customers have rights? As it turns out, "There are no federal rules that specifically address frequent-flier programs by the airlines," says Bill Mosley, a spokesperson for the U.S. Department of Transportation.

 

"The programs are generally covered under rules about deceptive practices by airlines."

 

So naturally, fine-print disclaimers are commonplace. In the 1980s, some major carriers' attempt to "play fast and loose with the program" terms got slapped with a class-action suit in Chicago, Mann says. A settlement taught the industry to be more careful. Now, nearly every frequent-flier program ad states that terms can be changed or that the program can be terminated altogether, typically with some notice.

 

The merger of US Airways and America West has brought announcements of a merger of their frequent-flier programs. "We're telling people to continue using their mileage just as they would in any other event. It's business as usual for us," says US Airways spokesperson Amy Kudwa.

 

The airline filed for Chapter 11 bankruptcy in 2003 and has been lining up new equity funding for the merger. Its cost-savings synergies are resulting in more destinations, such as new Hawaii service, Kudwa says.

 

Worry or not?

Here it comes: Bankruptcy, that is. With reports of airlines in financial trouble, consumers may dread the end of access to miles being banked for use at some unspecified future date.

 

"The fact is, airlines go into bankruptcy, and it's just another business plan," Mann says. "I'm sitting on hundreds of thousands of miles with various carriers. I'll redeem them when I get around to it."

 

Part of Mann's confidence spawns from the role of banks, that operate frequent-flier-associated affinity credit cards, have had in providing equity after an airline bankruptcy.

 

Experts behind the Web site FrequentFlier.com point out that "sometimes Chapter 11 is a first step toward liquidation, sometimes not."

 

Chapter 7 bankruptcy is what consumers don't want to see.

 

Petersen doesn't expect to see any airlines going out of business in the next 12 months, at least. "It's a bad time for fuel to be spiking, going into the slower winter season," but closings don't appear to be imminent.

 

Action options

Today's airline industry alliances, which allow miles to be redeemed on partner carriers, provide an easy out for consumers who are beyond worrying about a program carrier.

 

Star Alliance, for instance, is a 16-member global network with US Airways and United, as well as Air Canada, Air New Zealand and others. The nine-member SkyTeam includes Continental, Delta and Northwest, plus Aeromexico, Air France and others. The eight carriers of Oneworld alliance, meanwhile, include American Airlines, British Airways and Finnair.

 

What does all this mean when your reward miles may be at risk?

 

Say you have 300,000 miles, Petersen says. Book two business-class tickets to Europe for a trip 10 months' out, at 80,000 miles apiece, with an alliance partner carrier, and you have some protection. If your airline were to liquidate, the rewards would be out there, and you might later change the destination city or dates. If, as the trip gets closer, the situation at your own airline seems better, you might redeposit those miles back into your account.

 

Another question Petersen gets often is about racking up future points: "Should I build up more miles in a program I'm worried about?"

 

Airline alliances can help here, too. Say you have an account with Delta, and you're concerned. "Maybe just start an account with Continental, so you can continue to fly Northwest or Delta, but you're building up miles within Continental," Petersen suggests.

 

A tempting option for those not planning a trip is to trade in earned miles for gift certificates or other items from a site like Points.com.

 

"If you really wanted to give up half your miles, I suppose that might be valuable," Mann says.

 

Petersen calls it self-select devaluation. "I've heard frequent fliers accuse the airlines of devaluing their miles," he says. But with an exchange that only gets you 10 or 20 cents on the dollar, you would be choosing to devalue the miles yourself.

 

Recent enhancements to the American Express Membership Rewards program may offer another solution to frequent-flier anxieties. The rewards remain connected to the credit card account until a card member decides to redeem points by booking a trip. "You only move them over when you're going to fly," Petersen says.

 

Bottom line: Frequent fliers have more choices today. "In the past you were on your own," Petersen says. "Members did not have ways to safeguard their miles. Now there are some things you can do to get a little better sleep at night."

 

Melissa Ezarik is a freelance writer based in Connecticut.