July 31, 2008 -- Airlines searching for extra cash to survive their deepening financial crisis are finding out just how valuable their frequent-flier programs really are.
United (UAUA) and Continental (CAL) airlines already have cut deals this summer bringing them $600 million and $235 million in cash, respectively, for miles to be awarded in the future to users of their bank-issued affinity credit cards. JPMorgan Chase issues both carriers' cards.
Travelers, however, could see the value of their frequent-flier miles eroded by such deals, especially since all those extra miles will be hitting the market as airlines begin shrinking capacity dramatically.
Forward sales of frequent-flier miles to credit card issuers aren't new. Delta (DAL), United and US Airways (LCC) have all done it before. But the pace is quickening now as near-record fuel prices and a weak economy threaten to drain airlines' cash reserves, perhaps to critical levels. Several other big U.S. airlines, including Delta, US Airways and American (AMR), have indicated varying degrees of interest in doing similar deals.
Richard Anderson, Delta's new CEO, says he's "pretty excited about the opportunity" to do another forward sale of miles to generate cash. He wants to wait until Delta's merger with Northwest is completed, presumably late this year.
"There is a very substantial opportunity there," Anderson told analysts and reporters in a mid-July conference call. "When you think about the size of what this (combined) frequent-flier program will be," Delta's program should have a "substantially larger" value in a cash-out deal than Continental's OnePass program.
Delta's affinity card is issued by American Express; Northwest's by U.S. Bank. They and other banks are likely to bid to issue the affinity card of what would be the world's largest airline because it would give them access to many big spenders.
"The average spend of a normal customer with a Visa or MasterCard is around $4,000 to $6,000 a year," says Randy Petersen, publisher of Inside Flyer magazine and several related websites. "But the average spend for a customer using an airline affinity card is around $37,000 to $39,000."
Petersen says that once a credit card issuer makes a big investment in a carrier's frequent-flier miles, it has a strong incentive to quickly put those miles to work by offering mileage bonuses.
That puts more miles into the accounts of more travelers who, in theory, will be able to claim more awards — mostly free trips — faster. Yet airlines are sharply reducing capacity.
"No doubt consumers will see a plethora of offers for bonus miles," says analyst Henry Harteveldt at Forrester Research. "The question is, will they be able to cash in miles when they want, for flights where they want?"