Randy Petersen's Opening Remarks – January, 30 2007

Randy Petersen's Opening Remarks – January, 30 2007

OK, where do I start? A number of readers have asked why I haven’t commented much (if any) on the potential airline mergers that have invaded our daily news. Well, I’m waiting for those who have the most to say to finish with their consistent forecast of doom and gloom. I’d rather comment on three things. I want to praise Alaska Mileage Plan, American AAdvantage and United Mileage Plus. In addition, I have a little healthy criticism of American AAdvantage and US Airways. And when I’m done with those topics, I want to put in a nice plug for Ron Lieber of The Wall Street Journal.

Let’s start with the praise. As you may know, we like to do as much research as we can on topics that effect frequent flyers the most, and for many years now, have run our Award Search feature. Rather than just give lip service to the idea that no one can ever redeem their miles (we estimate that in 2006, the airlines gave away nearly 23 million free tickets), we check award availability with monthly phone calls and online requests. The purpose is simple — not all frequent flyer programs are equal and by doing this research, we can help you determine your best program choice if difficult award redemption is the thing that bugs you the most about frequent flyer programs. Also with this research, we can spot … alternatives. Okay, enough explanation. Anyway, in 2006 using the Service Center for award requests, Alaska Airlines Mileage Plan lead in award redemption success in all the programs we researched. Of all the city pairs we researched, we were able to get two coach tickets 73 percent of the time. This easily exceeds the success in most programs. American AAdvantage ranked right behind them with a success rate of 72 percent. If you ever wonder why we always advise you that “No” is not the final answer for award redemption, take a look at these numbers. In 2006, the industry averaged a success rate of 62.7 percent when using the service center to redeem awards. When using the online redemption tools, that success rate was only 38.5 percent. Yes, it does pay to quit your browser and pick up the phone when you see the word “No” when redeeming online. United Mileage Plus shares honors with Alaska Mileage Plan for their online redemption success — at the top of the chart. Okay, here comes the criticism of the program that has really failed in this respect. The US Airways Dividend Miles program Service Center award redemption success rate is less than 50 percent, absolutely terrible. Online, a miserable 15 percent success rate. Now, they tell us they are trying to get better and by altering their current mileage expiration policy, it will free up some financial liability of older miles to make more awards available. I certainly hope so. That or I might suggest they forget about trying to take over Delta and let Alaska Airlines take them over since it appears to me that Alaska Airlines knows how to manage their members’ expectations.

From one vilification to another. I praised American AAdvantage in the paragraphs above and they often are at the very top of my list for the best managed frequent flyer program. But a new change to that program simply leaves me sick.

Effective March 1, a nonrefundable co-payment of $150 will be required to claim upgrade awards with most discount coach fares when traveling between the continental U.S., Canada, Mexico or the Caribbean and Hawaii. These upgrade awards can still be claimed for 15,000 miles, but now members must also make the co-payment. Additionally, the co-payment that applies to upgrade awards between North America and Europe, India, Japan/Northern China and deep South America will increase to $300 from the current $250. These awards are 25,000 miles plus the co-payment. The co-pays apply only to discounted coach fares. Full fare coach and above fares do not incur a co-pay when using miles for an upgrade. Members have until the March 1 date to claim upgrade awards to Hawaii without the co-pay and to claim upgrade awards to Europe, India, Japan/Northern China and deep South America at the current $250 co-pay. Upgrade awards cannot be booked online — call the AAdvantage service center to claim your awards.

I can hear the defense in Dallas as to why the program must now require a co-pay for an upgrade — fares are too low and demand is too high. The reality is that Continental shares some of the blame for this and I would not be surprised if they copy AAdvantage. After all, it was the co-pay on BusinessFirst award redemption that gave the folks at AAdvantage the idea, and much like many things, AAdvantage is taking the idea one step further. I hate the idea. It takes all the aspiration out of these programs and say what they want, I really don’t think it can be justified. My counterpoint is easy — you already don’t offer upgrades in much of your fleet with the introduction of RJs (Regional Jets), and when you decided that “more room throughout coach” wasn’t the best way to benefit your frequent flyers. Is it coming to this? If this is the price of avoiding Bankruptcy Court, I’m afraid it might be too steep a price to pay.

I’m a big fan of Ron Lieber’s Green Thumb column in The Wall Street Journal as he’s one of the most well-balanced reporters I know. In his recent column, he lays out the case for writing a “Loyalty Annual Report” at this time each year. He advises to add up all of the frequent flyer miles, cash rebates and merchandise you have earned from companies in the previous year, examine program changes for alterations that may affect you and then set goals for the new year that will allow you to earn even more going forward. You can read his column, his success rate and his advice at wsj.com/free (Search for Ron Lieber).

OK, now about the Delta/US Airways merger. Since airline miles are my language, I’ll put some value to each of the points I think are important about this potential merger:

25,000 Miles: America West / US Airways has been great for consumers

The reality is that, when they combined last year, US Airways and America West proved that mergers could work in the airline industry, just as many airline analysts have hoped and predicted. Granted, it is still a work in progress and there are things I am not happy with, but the transaction produced substantial value for US Airways’ creditors and America West’s shareholders, and provided peace of mind for business travelers who measure airlines by the number of miles they have earned with the perspective frequent flyer program. This merger is being validated by the scorekeepers on Wall Street as the new US Airways has returned some 150% of value to investors since the day that merger closed. Perhaps most compelling is the notable handouts that many of us have grown tired of doling out: Since 9/11 the airline industry has lost roughly $35 billion. Speaking as a taxpayer I’m not interested in subsidizing them, again, through next downturn. That means that we have to let the markets work as they are designed to work, and this means getting out of the way as the industry evolves and matures.

50,000 Miles: Significant Synergies Won’t Harm Business or Leisure Travelers

This merger would create $1.65 billion in annual synergies, and seems to indicate that every existing U.S. destination that is currently served by either Delta or US Airways would continue to be served and enjoy competitive fares, and have the certainty that their long-term investment of earning miles on US Airways or Delta is safe. Again, the example of the US Airways/America West merger shows that it is possible to achieve significant cost synergies without raising fares, thanks to the unique opportunity the bankruptcy process presents to rationalize the cost structure in ways that simply aren’t possible at any other time. Critics often mention legacy carriers and higher fares. The reality is that there has been a 44 percent decrease in average fares since 1977, the last year prior to deregulation. Lower fares are the direct result of the efficiencies and the intense competition built into the networks and mergers that have been created over the past three decades — efficiencies and competition that would be enhanced by this transaction.

Much to the surprise of some cynics, I’m sure that I read that the US Airways/America West merger actually helped lower business fares in nearly 400 markets, with an average discount of 37 percent, and lowered leisure fares in nearly 350 markets, with an average discount of 24 percent. And while I don’t fashion myself as an analyst for the industry, I seem to recall that America West was among, if not the first major airline to start to remove the Saturday Night stay requirement to qualify for low fares. Business travelers would also benefit from the proposed merger, because it would create an expanded route network that would allow travel to more destinations than ever before, all on a single, full-service carrier. I’m all for the emergence of low-cost carriers, but to paint larger carriers as high cost, low service seems a bit unfair. If I’m not mistaken, upstarts such as JetBlue have had their share of operational challenges and in fact have lead the industry for worst on-time flight efficiency. Where are all those JetBlue apologists now? So while some try to paint a picture that only alternate carriers can offer “reliable, predictable service,” my own experience is that I have often had the best and worst of this service regardless of it being an alternate or legacy carrier.

100,000 Miles: The Airline Industry is Competitive — and Consolidation of Legacy Carriers will lead to more LCC growth

The airline industry is uniquely fragmented and highly competitive. Every legacy carrier has to deal with the rising influence of low cost carriers (LCCs), and this has kept fares low in many markets. It has also resulted in the bankruptcy of many carriers — including Delta — and made the old-line industry ripe for consolidation. Industry analysts and other experts recognize this fact. I read recently where Ray Neidl, an analyst for Calyon Securities, has said that, “the industry is fragmented and primed for consolidation.” A friend of mine, airline consultant Robert Mann noted that, “from the standpoint of having an industry that is around for the next business cycle, [a merger] is almost a necessity.” The healthy airline that would result from this merger could be better than any standalone Delta for the industry and maybe even better for US Airways shareholders, Delta creditors, employees and consumers. For the frequent flyer, I’m all for anything that will protect the hard earned miles members of both US Airways and Delta frequent flyer programs have earned. Surely one does not believe that if one of these airlines does not make it other airlines will gladly offer free flights to passengers they have never earned revenue from?

The combined company will face considerable competition across its expanded route network, including most of its hubs and all along the East Coast, where LCCs like JetBlue and AirTran have had such an impact on fares and available flights. In what I read, 81% of the combined company’s passengers would have LCC options. And surely with a travel boom continuing, we’ll see additional new carriers being funded, just like Spirit, JetBlue and AirTran. The merger would result in the combined company having about a 20% share of the domestic market, far below the threshold that should worry antitrust regulators — or the flying public.

Will it be easy? No. Will there be some problems not anticipated? Sure. Will there be some passengers that find the proposed merger less advantageous? Yes. But the industry remains fragile — just one terrorist act away from financial ruin for many of the airlines — and if this merger can do anything to preserve the future for business travelers and their miles, then I would not be one opposed. As I noted earlier on, why would any of us think we’re smart enough to stand in the way of open business markets? I say let the industry determine the outcome of this merger, not the peanut gallery of which I may be a member.

It’s obvious to any “million miler” that the potential merger of these two airlines holds great promise for the airline industry and every one of its many constituents. It is also obvious to any “million miler” that losing your mile to a folded airline is not a promise kept.

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