Allow me to offer you this bit of practical advice: Cash your frequent-flyer miles. Cash them as soon as you can. Cash them today, because tomorrow they are guaranteed to be worth less.
Understand that I’ve never been a fan of “banking” miles or saving them for a rainy day. After all, why trust the Big Six airlines to be your bank? They do a lousy job being airlines, so why do you think they’d be reliable bankers? And then there is the reality that, despite the common wisdom, miles are not currency. They don’t have a pre-set, legally guaranteed value, they don’t accrue interest when they sit in your frequent-flyer account and, in fact, they have no value at all unless you spend them.
But my concern about the value of your miles–I say your miles because I practice what I preach and I don’t bank mine–is more urgent than usual. I’m not worried that you’ll be wiped out if, say, United or US Airways goes belly up, but I am concerned that the business cycle of the Big Six is eroding the practical value of your miles as each day passes.
Why are your miles worth less now that they were when you started reading this column? Consider these factors:
The Big Six Are Shrinking
Although exact numbers are difficult to come by, the Big Six carriers, who sponsor the nation’s primary frequent-flyer programs, are about 20 percent smaller than they were on 9/11. They offer fewer flights and fewer seats to fewer places than ever before. And if they don’t fly ’em, you can’t claim them.
Redemptions Have Skyrocketed
Although the Big Six carriers are shrinking, the number of free tickets they are issuing continues to rise. Randy Petersen, the Grand Vizier of InsiderFlyer.com, says his analysis of airline figures published in their most recent 10-K reports reveals that award redemptions rose 16 percent last year.
The Supply of New Seats Is Drying Up
Although the Big Six are shrinking and award redemptions are booming, the airlines continue to mint miles like they are going out of style. In the past, the Big Six have been able to relieve the pressure on their own seat inventory by allowing travelers to claim awards on an ever-widening circle of partner carriers. But that gimmick won’t fly too much longer. Five of the Big Six are now in alliances with each other and there are few remaining international carriers of any size that aren’t already in a Big Six frequent-flyer program. Bottom line: There is no new source of seats on the horizon that can be used to absorb the newly minted miles and the increasing demand for award seats.
There’s No ‘Free’ Seat Anyway
As free seats get more difficult to claim, they aren’t actually free anymore anyway. The Big Six continue to slap a parade of fees and surcharges on award redemptions. Moreover, they are shifting a greater and greater percentage of travel taxes and user fees onto anyone who flies “free.” In fact, Air Canada has eliminated the free ticket entirely. All awards claimed through the Aeroplan program now carry some sort of airline-imposed service fee. This cascade of charges on once-free awards is now so common that Alaska Airlines executives have been publicly ruminating this week on how much they could charge even their most frequent travelers for the privilege of upgrading to first-class seats.
“People are becoming aware that the programs are worth less,” says Tim Winship, a former airline executive who currently runs the FrequentFlier.com Web site. “For the past six months or so, I’ve started to cash out myself. It’s not a concern about bankruptcies. I just believe the miles will be worth less next week, next month and next year.”
Frequent-flyer plans “are victims of their own success,” suggests Petersen. “People perceive them to be pots of gold and they’ve been that for 20 years. But the future of the programs is less about redemption and more about revenue generation” for the sponsoring carriers.
So where does that leave loyal frequent travelers who’ve gladly given the Big Six ceaseless loyalty in exchange for free tickets and free upgrades?
Well, for one thing, it leaves you with miles that are declining in value while they sit in your frequent-flyer accounts. That’s why you really should start cashing out.
Claim your awards as fast as you earn them. More importantly, stop obsessing about claiming only the cheaper, restricted awards and then bitching when the airlines won’t give you a seat. All of the Big Six offer unrestricted awards at about twice the price of a restricted seat. Whenever you can’t get an award at the restricted level, claim the higher priced award. You’re better off using more miles now than watching their value shrivel while you wait for a chance to claim a restricted award.
Second, stop giving airlines your loyalty based on the chance of winning increasingly less valuable awards. Concentrate on flying the carriers that you think give you the best service and the best prices.
Lastly, be prepared for major changes in the program. Petersen thinks that the value of a mile will decline by about 25 percent over the next ten years. I think the decline could be more dramatic, especially if one of the Big Six realigns its award chart and substantially raises the price of claiming awards. It’s been 15 years since the last major upward restructuring of award levels. Given the ballooning number of earned miles and the shrinking pool of available seats, I think a gigantic increase in the price of awards may not be that far off.
And Steve Grosvald, who helped create the United Mileage Plus and the Continental OnePass programs and has consulted on many others, thinks the time is ripe for a dramatic rethinking of the entire idea of airline frequent-travel programs.
“A new and different model is needed,” Grosvald says. “I’m not saying I know the answers. But I am saying that if we had the conditions in 1981 that we have today, we wouldn’t see programs that look and act as they do today. Two decades later, there have been major changes in the travel market. But the program models haven’t changed.”
Regardless of what’s coming, though, I think you can take this to the bank: Whenever and however the programs change, your miles will be worth less than they are worth today. So cash out while the cashing is relatively good.