New Alliances Shake Up Frequent-Flier Programs

The potential value of participating in an airline’s frequent-flier program is up in the air.

Carriers are shaking up programs this fall as they settle into new coalitions. Continental (CAL) on Tuesday entered the Star Alliance, whose members include United (UAUA) and US Airways (LCC). The move means Continental will eliminate the Saturday-night stay requirement for reward travel and will allow fliers to earn elite qualification miles on discount fares, among other changes. As it finalizes the transition, the airline will introduce other adjustments through early 2010. Delta (DAL) and Northwest already merged accounts earlier this month, with all members now earning under the Delta SkyMiles program. Next year, Delta will roll out a new elite flier program for those flying 25,000 miles or more annually.

The economy is adding turbulence to the equation, with airlines looking to frequent-flier programs as a way to raise revenue amid slumps in consumer and business travel. “It’s another way for the airlines to borrow money,” says Basili Alukos, an equity analyst with Morningstar who tracks airline stocks. Late last year, American Express (AXP) bought $1 billion in SkyMiles through an extension of its credit card partnership with Delta, and promised another $1 billion through 2010. Southwest (LUV) is looking at revenue of a different kind. In a recent earnings call, CEO Gary Kelly hinted that 2010 could bring fees to a revamped version of its Rapid Rewards program.

Enticing consumers to participate in frequent-flier programs provides a way to essentially sell future capacity and gauge demand, says Alukos. Someone with a free flight or elite status within grasp is likely to stay loyal. “They’re doing whatever they can to entice those customers to fly,” he says.

Here's what to keep an eye out for in the shifting miles market:

Airlines are trying to entice consumers back in the air by making it less daunting to redeem miles, says Randy Petersen, the founder of frequent-flier site InsideFlyer.com. United announced this fall that it would eliminate its $75 to $100 fee for booking award tickets within three weeks of travel. In May, American Airlines introduced one-way award tickets, starting at 12,500 miles. United and Delta have also held redemption sales this year, offering fliers mileage discounts of up to 20% on award tickets.

Notice, however, that friendlier redemption policies don’t necessarily mean it’s easier to snag a seat, Petersen says. Airlines have been reducing capacity on flights to reflect falling consumer demand, which means fewer award seats available, too.

Redeeming miles may be somewhat easier, but you'll still need a lot more of them than in previous years, says James Brock, a professor of economics at Miami University's Farmer School of Business in Oxford, Ohio. Carriers have raised redemption levels and added tiers. “In effect, they’re raising the price of miles,” Brock says. As part of its transition to the Star Alliance, for example, Continental raised the mileage requirements for a ticket to Hawaii from 35,000 to 40,000. Last September, Delta switched from a flat 25,000-miles fee for a round-trip domestic ticket to a three-tiered system with options at 25,000, 40,000 and 60,000 miles, depending on availability.

In the current economy, airlines are focused on retaining their most valuable customers: the elite frequent fliers who buy expensive tickets and fly often. With less business travel, many of these fliers are uncertain for the first time in years if they'll fly enough for elite status, Petersen says. “If someone’s not going to qualify, they may start looking around,” he says. "Airlines don’t want that." American and United are both offering double elite miles through mid-December, putting elite status within reach of as few as 12,500 miles.

Starting in 2010, Delta will debut an unusual perk: rollover miles for elite qualification. (So someone earning 35,000 miles in one year -- enough to earn the bottom tier of elite status but not the next-higher tier -- would automatically have 10,000 qualifying miles for the following year.)

Airlines are also more willing to let consumers buy their way into elite status with co-branded credit cards. “You can buy your way into not paying baggage fees and boarding first,” Petersen says. The Continental Airlines Presidential Plus World MasterCard (MC) from Chase (JPM), for example, awards 2,000 elite miles for every $15,000 in spending on the card, in addition to the regular one mile per dollar spent. Other perks on the card (which carries a $375 annual fee) include complimentary access to the airline's lounges, priority access at check-in and security and free check-in for two bags. (Airline cards aren't a good deal for everyone, though. For more, click here.)