After the Flood (How United and US Airways Are Recovering From Frequent Flyer Disaster)

After the Flood (How United and US Airways Are Recovering From Frequent Flyer Disaster)

It was nearly eight months ago when US Airways, a once high-flying (actually, just flying will do) East Coast-based airline with great aspirations, became a household word for airline failure.

As if frequent travelers haven’t been hammered enough this past year with waves of program changes, dwindling benefits and skyrocketing awards, now they’re confronting another potentially devastating blow — the bankruptcy of their preferred airlines.

Nearly 70 million frequent flyer program members could be directly affected by airline bankruptcies this year alone. US Airways was the first to succumb to “the realities of today’s economy” when it filed for bankruptcy on Aug. 11, 2002. The company’s demise was not only notable for the well-publicized financial damage its workers and investors suffered, but also because it was the first in a continuing line of airline bankruptcies and restructuring efforts that have rocked U.S. airlines and frequent flyer programs in the past year. Shortly after US Airways filed, United followed suit. In the past few months, others (most notably American and Northwest) have meekly proclaimed that they too will be forced into bankruptcy if conditions don’t improve, and soon.

Just as times are looking their gloomiest though, a ray of sunshine and hope has pierced the darkness.

Exceeding all expectations, US Airways is scheduled to emerge from bankruptcy on March 31, less than eight months after its Chapter 11 filing — surely a record in the airline industry. Airlines that have filed for bankruptcy in the past have typically languished there for an average of 22 months before emerging, if emerging at all. And US Airways’ rapid recovery is all the more astounding given the fact that it took place amid ongoing concerns over potential war in the Middle East.

Should US Airways’ remarkable recovery be viewed as cause for optimism, or is this the exception to the rule? We decided to take a closer look at the US Airways bankruptcy, how its executives responded and, most importantly, the role of the Dividend Miles program and the program members in breathing life back into a dying airline. We also took a peek into the ongoing United bankruptcy process to learn how they are dealing with a similar situation and to try to get a take on their relative progress.

What we found might be the beginnings of a roadmap through uncertain times — both for those who manage the programs and those who benefit from them.

The US Airways Story
When US Airways filed for Chapter 11 bankruptcy in August 2002, most airline analysts and a substantial number of Dividend Miles members thought the airline had breathed its last. A series of setbacks, including failed attempts to build alliances with British Airways and American Airlines, an inability to execute the strategy of a low-cost carrier and the failed acquisition by United Airlines contributed to the bleak outlook.

When government concerns prompted rival airline United to back out of its proposed acquisition of US Airways, panicked Dividend Miles members sent award redemption statistics skyrocketing. It is estimated that the bankruptcy filing caused nearly 84,000 additional award redemptions during the past year, accounting for over 2 billion miles burned off by alarmed members. Even worse, thousands of members stopped booking paid travel on US Airways and stopped earning Dividend Miles, preferring instead to start anew with other, ostensibly safer, frequent flyer programs. And who could blame them? Nearly every pundit covering the business travel/frequent flyer beat was advising Dividend Miles members to burn their miles, before they lost all value (we’re proud to say that this magazine was not among those punching the panic button).

Almost immediately after filing for bankruptcy, the executives at US Airways began formulating a plan to bolster loyalty through the Dividend Miles program.

“The loyalty of Dividend Miles members is one of the keys to the success of US Airways and helped offset the natural avoidance factor that is inevitable with Chapter 11 reorganizations,” said Mike Isom, Director of Marketing Programs and Services at US Airways. “From the onset, we understood that it was imperative that we maintain regular and timely communications with our Dividend Miles members. From a business perspective, however, it has been business as usual, with no disruption to any of the Dividend Miles programs, and as a result, our members continued to show their strong support.”

Isom spent much of his time during the early days of bankruptcy trying to convince Dividend Miles’ anxious members and partners that the program wouldn’t be folding anytime soon. He also had the unenviable task of crafting a viable plan for the largest frequent flyer program bankruptcy in history at the time, involving some 23 million members. Though he was able to gain the support of the airline’s upper management, his plan was in jeopardy right from the start.

“Airline economics have changed radically. One of the most difficult issues may be that our Dividend Miles members feel trapped between rules imposed on them by their companies (or the economic pressures facing their own businesses) and the rules/restrictions airlines are being forced to impose to ensure their own survival,” says Isom. “This creates anger and frustration that members frequently directed at us. Balancing economic imperatives to keep our airline alive with the legitimate concerns/frustrations of our customers has been an enormous challenge.”

The effort to utilize the Dividend Miles program as an instrumental component of the recovery process was nearly cut off at the knees when, on Aug. 27, 2002, a series of airline policy changes were announced, including a change to the Dividend Miles program stating that effective Jan. 1, 2003, miles and segments earned on most non-refundable fares would not count toward elite status.

For an airline that needed all the loyal business it could find, this was viewed as a risky gamble. The changes were immediately assailed in the press and incensed members voiced their extreme displeasure in numerous online forums, including FlyerTalk.com. Just 10 days later, on Sept. 6, 2002, Ben Baldanza, US Airways Senior Vice President of Marketing and Planning, announced that the airline would revise several of the recently announced policy changes. Most importantly, mileage earned on non-refundable fares would continue to count toward Dividend Miles tier status.

Ironically, this decision to rescind the changes to the Dividend Miles program might have actually done more to bolster sagging confidence than any planned enhancements could have ever achieved. While taking significant heat for the original decision to cut back on the benefits of Dividend Miles, Baldanza and the entire US Airways marketing group was now perceived as being “attentive” to their members. And the message sent by Dividend Miles members was crystal clear — if US Airways hoped to retain their loyalty and their business, the airline was not to make any devaluations to the frequent flyer program — period.

Putting the Plan into Action
How was Dividend Miles able to face these pressures and still retain a program favorable to members? Obviously, the program had to take chances.

“Every aspect of the airline was scrutinized to ensure that revenue and costs were in line. As part of our overall corporation cost-cutting initiatives, our Dividend Miles staff was scaled back, creating even more challenges, yet we persevered,” said US Airways Vice President of Marketing, Stephen Usery. “Ever more creative solutions had to be found to reduce costs while maintaining a great product to customers. For Dividend Miles, we are now more reliant on our main distribution channel, usairways.com, to support the program, provide service and communicate.”

John Reistrup, Manager of Program Marketing, adds, “The decision to go to paperless statements was probably the most obvious indication of change and cost effectiveness.”

So, despite a run on the proverbial frequent flyer bank, the Dividend Miles program proved to be the engine that drove the US Airways recovery, and today the program has expanded to become even more valuable to members. But, while many industry experts say US Airways has made steps in the right direction, others argue there is still much to be done before member trust will be fully restored.

The United Mileage Plus Story
For United Mileage Plus, the recovery is still in its initial phases. But so far, at least, the effort to ease back from the brink of disaster hasn’t been as smooth as that of US Airways. While Mileage Plus has rushed to leverage its relationship with its members, unsettling news continues to stream from United headquarters, placing additional pressure on the program (interestingly, United noted in its bankruptcy filing that Mileage Plus was the only profitable part of United Airlines).

Ask United’s executives and you’ll quickly learn just how important they perceive Mileage Plus to be in the airline’s recovery plan.

“We are going to continue the path we were on before, which is to give Mileage Plus more stability,” says Robert Sahadevan, Senior Vice President, Mileage Plus. “That is one of the messages we want to give. Our senior officers have been very supportive. This allows us to say, look, the biggest thing we can do with our membership base is to have the Mileage Plus program be what the people expect it to be in bankruptcy. Big changes would just create more uncertainty. That’s not useful to the program or for the airline, and it’s not what the consumers want. While there is no part of the business that’s not getting re-examined under our transformation plan, our people have been very supportive of our needs to continue the program. Nothing’s going to change, you’re still going to have those miles.”

Gloria Berndl, Director, United Mileage Plus Customer Direct Marketing, adds, “We have the … deepest relationship with our Mileage Plus customers. And that is the very center of this transformation plan. The thing we think that we know from our customers is what they want most is stability and reassurance.”

It seems United and US Airways are both in agreement that the surest way to bankruptcy recovery is through the leveraging of loyalty. And that’s not all the two companies are agreeing on these days, as they recently signed a joint marketing partnership allowing Dividend Miles and Mileage Plus members to share program benefits.

“It’s safe to say we’re pleased with how [the partnership with US Airways] is going,” says Jim Davidovich, Manager, Airline Partnerships for United Mileage Plus. “I think that the US Airways, United thing is unique because it rolls out over a long period of time — Nov. 1 for accrual, Jan. 1 miles start counting toward elite status, March 1 we launch elite recognition and April 1 we launch redemption. We’ve seen a steady growth, which is expected because of the way we are rolling it out in waves. I think that the approach with both codeshare and with the staggered launch has been good, though there have been communication challenges to make sure the customers know what there’re getting.”

“I would have to say that we’ve been cautious going into this because it is potentially such a big partnership,” said Berndl. “The early results have been very satisfying. But I don’t think we have started to see the real opportunities yet.”

Of all the adjustments being made by both US Airways and United in the wake of the present economic downturn, perhaps the biggest centers around the manner in which both communicate with their members.

“There is a heightened interest in carefully reviewing any changes we might make, and we’re looking at it in a different way then we normally would on an annual or recurring basis,” says Berndl. “The one thing that you can see is that we’re starting to share information about the plan for transformation. We intend to have businesses that will look different. We will a have low cost carrier within the airline and we will have the mainline and we’ll continue to have our alliances and we will continue to have our United Express operations. With that new view of portfolio of businesses we’re looking at the program and trying to identify what is really relevant for each of those businesses.”

The End is in Sight
While coming out of bankruptcy may be the biggest news for Dividend Miles members, Reistrup foresees even greater successes ahead for the program.

“US Airways will expand our credit card acquisition efforts with Bank of America and add more Dividend Miles partners, including other airlines,” says Reistrup. “Even greater benefit will be drawn when we apply to be a part of the Star Alliance in late 2003, with implementation planned for 2004.”

If United comes out of bankruptcy intact, Mileage Plus is almost certainly going to be in a superior position to compete with other frequent flyer programs, as it will have undergone virtually no major changes during the period of bankruptcy. Other frequent flyer programs, such as Delta SkyMiles for example, that pare benefits in conjunction with the airlines cost parings are going to have a very difficult time competing effectively, since they will be forced to make changes that will inevitably lead to member desertion.

Be Prepared
As the bankruptcy of US Airways, United and potentially American Airlines sends shock wave after shock wave through a fragile industry, the international repercussions of these airline bankruptcies are just surfacing. In fact, the case of Ansett Airlines, and the fate of its millions of members who lost all of their miles in 2002, still serves as an all-too-familiar reminder of what can happen when an airline fails to recover.

US Airways’s success notwithstanding, the condition of the airline sector continues to be grim. More so than ever before, members of frequent flyer programs are paying close attention to their miles, not wanting to be left holding an empty bag should their frequent flyer program of choice meet an untimely demise. But despite their growing vulnerability, members have had little say in bankruptcy proceedings because their individual claims are not viewed as property — a fact born out by the membership rules, which state “accrued mileage and certificates do not constitute property of the member.”

“I don’t expect the frequent flyer program to say ‘We are going under in two months,'” says longtime frequent flyer, Bert Karlson. “But it would be a slap in the face for them not to show a modicum of honesty and say, ‘You’ve been a member for a decade and there are going to be some changes.'”

So what, if anything, can members do to protect their own mileage assets should their preferred airline fail to bounce back like US Airways?

Industry experts have historically debated the relative merits of focusing your efforts in a single frequent flyer program (the idea being to garner higher elite status) vs. maintaining membership in two or more programs. But, according to William Bishop, a long-time United Mileage Plus member and corporate travel manager, times clearly favor the latter of the two arguments.

“This advice is definitely for United Mileage Plus members who have some choices to make, but also for members of US Airways, American, and for the remaining airlines,” Bishop says. “For any member of a frequent flyer program, the potential is there for gloomy times. So we tell our travelers that having a dual-carrier strategy is essential.”

The Message for Other Airlines
After studying the steps taken by both US Airways and United in their recovery efforts, we’ve come up with some specific lessons for other airlines that may be facing bankruptcy in the near future.

  1. Do not change any award schedules. Devaluation has proved disastrous in some programs, and if members feel there will be further increases in their award schedules, they can and will see that as a sign of weakness and start to book awards in advance of redemption.
  2. Frequent flyer programs’ emphasis must shift from demand to supply, with a clear focus on rational use of benefits and awards. This approach benefits members, and whether they are flying or buying there is nothing more expensive than the cost of replacing a member.
  3. No change should be put in place without full transparency, including open announcements, competitive comparisons and credible evaluation of why these changes might have been necessary.

Perhaps Ben Baldanza of US Airways summed it up best when describing why US Airways has been so successful, so fast in recovering from bankruptcy; “Focus, focus, focus. Clear vision. Honest and open communications with employee groups is also important. Our leadership team has the ability to build confidence from the ground up with employee groups. Also, we have the ability to make critical fact-based decisions quickly. And of course, our success was a result of our incredibly loyal Dividend Miles members.”

There’s no doubting the important role frequent flyer programs, and the millions of members enrolled in those programs, play in the today’s airline business. The only question remains, after bulking up for over 20 years, will these frequent flyer programs be strong enough to lift the aging and decrepit airlines out of the hole in which they find themselves?

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