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Is it time to cash in your frequent flier miles?

Extra fees, the economy and gas prices threaten programs

By Emily Starbuck Gerson

It's no secret that Americans love frequent flier programs. In early 2008, Delta's SkyMiles program had 41 million members, United's Mileage Plus program had 52 million members and American Airlines' AAdvantage Program has 60 million members, according to Web Flyer -- and those are just the big guys.

Is it time to cash in your frequent flier miles?However, the troubled airline industry recently has saddled loyalty programs with fees just to stay afloat. As a result, the days of "free" award travel are essentially gone. Do airline loyalty programs and their accompanying credit cards have any value left? Depending on your situation, it may be best to cash in your miles and get a gas card, travel industry experts say. (See: Airline frequent flier fees and rules chart.)

Types of airline cards
There are two different types of airline credit cards. The first is airline-specific, meaning it is co-branded with one airline. The user earns points that can be redeemed for flights only with that airline and its partners. These cards include the Chase Continental MasterCard, Northwest Airlines Visa, and Virgin Atlantic American Express cards. 

The second type of airline credit card is not partnered with a specific airline and accrues points that can be redeemed for flights with any carrier. These include the Capital One No Hassle Miles MasterCard, Blue Sky from American Express and Miles by Discover. 

Too many miles, too little seats
It's a common perception that it's nearly impossible to cash in your air miles for a reward ticket, but that's just not so, says Randy Petersen, editor of InsideFlyer magazine, founder of flyertalk.com, a frequent flier online community, and several other travel businesses and sites, including WebFlyer.com.

"The industry gives away 22 to 25 million free tickets a year and it always surprises people," Petersen says. "If you were to believe some of the pundits, you'd believe nobody could ever use their rewards." In fact, an average of 82 percent of all rewards earned will be redeemed, according to his site, WebFlyer. 

Frequent flier advice from the experts:
  • If the plane ticket costs less than $200, pay cash. If it costs more, use your miles.
  • If you discover that the airline with which you have frequent flier miles is planning to cut back or serve fewer cities (especially your city!) soon, it may be time to cash in your miles.
  • If your airline miles are nearing expiration, cash in your miles regardless of the ticket price.
  • Frequent flier credit cards are usually not a good idea for the casual flier due to the higher annual APR, especially if a balance is carried.
  • Rebate cards do not come with sign-up bonuses, but airline credit cards do -- sometimes to the tune of 20,000-25,000, which is often enough to get a free ticket even before using the card.

But Joe Brancatelli, editor of JoeSentMe.com, a noncommercial website for business travelers, warns that award travel will be increasingly difficult to book as the airline business atrophies and available seats become limited. He points to a recent deal in which Chase prepurchased $600 million in air miles from United. "According to United, they have 511 billion miles outstanding, meaning that's how many miles they have already given out to customers. We believe that $600 million purchase from Chase probably represents another 60 billion miles, with the value of each mile at one cent" Brancatelli says. United also recently announced it will be 20 percent smaller by the end of the year. "If it's that much smaller, it means there are 20 percent fewer seats to give out, but they have just increased mileage from one partner alone by 15 percent."

When free isn't free
"When frequent flier programs were younger, a free ticket meant just that," Brancatelli says -- but then the charges started pilling on. By its own admission, United Airways says, "Award tickets are not free. Award travelers are responsible for taxes, facility surcharges and security fees, as well as any fees assessed by the airline in conjunction with award travel." Elite-level fliers are exempt from some fees, but that's no consolation to regular travelers.

Why the rising fees? According to United Airways, "We estimate that the airline industry will lose over $7 billion in 2008. With fuel costs higher than they've ever been, we've had to look at ways to offset our increased operating costs." They say alternatives such as raising fares is impractical "due to the highly competitive nature of the airline industry" and increasing the number of miles required for a reward would make award travel impossible for many frequent flier program members.

Petersen says he is not a big fan of all the fees, "but that's more a function of the airlines trying to survive a hard period than painting with a broad brush the state of frequent flier miles," he says. "One doesn't have to look too far -- seven airlines have gone out of business in the last year, and most had frequent flier programs. Every single member lost every point they had and it's not a pretty situation. I don't like the fees more than anybody else. But at the end of the day, do I really want to pretend the industry is not going through some big problems and demand I fly for free?" he asks.

Should you cash in now?
So far in 2008, award redemption is up 14 to 15 percent, Petersen says, and he believes it's not because the airlines are being generous. Rather, most Americans are experiencing financial uncertainty in an unstable economy and would rather use the miles and save money. Petersen says this behavior is common during economic downturns, and it happened in late 2000 at the end of the dot-com crash.  

You're flat out of luck if the airline folds

You may want to cash in your frequent flier miles if they are with a small airline carrier that is not doing well financially. A Chicago Tribune travel columnist recently received a letter from a distraught consumer; she and her husband planned a vacation to Hawaii and used 71,000 Capital One "no hassle miles" to get the plane tickets. All was well until the airline, ATA, went bankrupt and shut down operations before the flight. The cardholder contacted the travel agency and Capital One repeatedly, but was consistently told the miles were gone.

The travel writer examined Capital One's fine print and did not see a policy about this situation, so he contacted the issuer on behalf of the traveler. The company said the refund troubles "were just a series of misunderstandings" and that they will be refunding affected customers.

If you were in the same situation, would you get your miles back? Not likely, says Randy Petersen, an expert on frequent flier programs and editor of InsideFlyer magazine: "Frankly, you could have replaced Capital One with anyone else, even an airline card, and once the airline is gone, those unsecured debts are gone." He says every once in a while a consumer reporter will get someone to make an exception because the company doesn't want to look bad in public, but the chances of that happening are slim. "If you think that's the way it's going to be for you, you will have a rude awakening," Petersen says. "You're flat out of luck if the airline folds."

That risk is always there, he says, especially given the current financial state of the economy, but if your miles are with one of the larger carriers, you should be fine. The smaller carriers are the riskiest, but "nobody has been burned on rewards by a carrier going out of business when it comes to the top 10 airlines," Petersen says. 

With most airline-specific credit cards, once you hit a certain amount of miles, you can get any ticket, regardless of the price. If you are looking at a flight that costs $750 and you have enough airline miles to cover it, that's an easy decision, but what if the flight costs much less -- enough that you could pay with cash and potentially save the miles for a costlier trip? Petersen says his rule of thumb is $200 -- if the ticket costs less than that, pay cash; if it costs more, use the miles. "That's better for the middle market; $300 is a little more on the edge, especially in a semi-soft economy."

If you have an airline credit card with a specific carrier, you may want to do some research and find out if the airline will be cutting back in the near future. "In the United States for sure, the airlines are under tremendous pressure," says Stevan Grosvald, an independent marketing consultant who helped forge the deal for the first airline credit card in the late 1980s and has spent the past two decades developing frequent flier programs and their credit card counterparts. (See: The evolution of frequent flier credit cards and programs.) "They have to cut out nonprofitable flying and utilize the equipment in more profitable routes or ground the airlines, and you're seeing a lot of the latter. When people ask me what is the best frequent flier program, I say no single answer. It depends where you live and where you fly to.  But if an airline stops flying to your city and you have tons of miles in your frequent flier account, that makes it tough to use," Grosvald says. If you discover that the airline is planning to cut back or serve fewer cities, especially if it's yours, it may be time to cash in.

If the airline miles in your program have an expiration date and are nearing that time, cash in regardless of the ticket price so they don't go to waste. Take note that while the air miles in some programs "do not expire," most have a condition that the miles will expire if there is no account activity at least once every 18 months to two years. Some carriers, such as United, allow consumers to reactive their miles if the account has been inactive less than 36 months, but the fee to do so is hefty.

If you are a Delta customer, the airline began charging a fee starting Aug. 15 merely for redeeming award travel. If you don't want to pay another $25-$50 just to cash in, now may be the best time to use your miles. U.S. Airways just began charging a similar fee on Aug. 6, which also ranges from $25-$50.

What's the verdict?
With increasing fees and less available seats, are both types of frequent flier credit cards still worth having? Not according to Brancatelli. "These programs are clearly losers. I've told my readers to stop feeding the beast," he says.  "Frequent flier cards give the least payoff of virtually any other card I've seen. They are simply not good deals for the casual flier, especially if you're earning your miles through a credit card. If you are carrying a balance, the minute you start rolling over, you're dead because the credit card frequent flier interest rates are through the roof." Brancatelli says cash back and gas cards offer much more payout for consumers.

For frequent fliers, the decision to eschew the credit cards may be harder, as they are often generating so many miles by flying and working toward elite level qualification, which Brancatelli admits is important to the business traveler. "But that said, there's no value in pouring still more miles into your program, because elite status does not come based on the number of miles you aggregately accrue," he says. Elite fliers generally earn their status from the amount of miles flown -- not by those earned from a credit card. "Having the airlines frequent flier card doesn't in most cases affect your elite status," Brancatelli says. "Go get a gas card."  If you feel strongly about continuing to use a frequent flier credit card, Brancatelli recommends shifting from an airline-specific card to a general airline card,  "which lets you put the miles where it makes the most good for you at the moment."

If your airline stops flying to your city and you have tons of miles in your account, that makes them tough to use.

-- Stevan Grosvald
Frequent flier program consultant

Petersen disagrees -- with general airline cards, you only earn points by spending money -- not by flying. With airline-specific cards, spending on the card is only part of earning rewards, he says. Additionally, some general airline cards also have strict requirements about ticket redemption, such as limits to how much the ticket can cost, requiring Saturday-night stays and not permitting the miles to be used for an upgrade.

Petersen admits rebate cards can be healthy for consumers, though he prefers to use them as an auxiliary card rather than a primary card. This is because most rebate cards have a cap, after which a certain amount of spending no longer generates rebates. "This is the thing most people mess up with rebate cards," Petersen says. "Most people don't manage their rewards, so they hit the cap but don't realize it, and keep spending but aren't earning anymore." Another reason he favors airline cards over rebate cards is that almost all airline cards now give you a large bonus when you sign up. "Most have 20,000 or 25,000 point bonuses just for acquiring the card, and at 25,000 miles you're at a free ticket before even using your card," he says.

While airline cards are increasingly complex and costly, they will probably always be popular, says the man who forged the first one. "The reason airline programs have been so successful is that free travel is still the most desired award," says Grosvald. "It's becoming more of a hassle these days but presuming you can get an award seat on the route you want, it's still the best value for redeemed miles or points. As I've often said, 'If "free" is the single most powerful word in advertising, then "fly free" are the two most powerful words!'"

See related: Airline frequent flier fees and rules, The evolution of frequent flier cards, A CreditCards.com survey of airline blackout dates, Frequent flier miles: earn them quickly with these strategies, Do airline reward programs trump cash reward programs?, Bump up frequent flier miles with sign-up bonuses

Published: August 12, 2008


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