The Extra Mile

Bad Times for Travel Are Good for Elite Travelers

For elite travelers, bad news means good times

July 24, 2009 - Nineteen months into the current recession, the airlines are stuck between a rock and a hard place. They've cut back flights to compensate for fallen demand, reducing their potential revenues in the process. But they've also had to cut ticket prices to keep those fewer jets flying full, further undermining their ability to operate profitably.

Under normal circumstances, the ratio of seat supply to consumer demand would be considered optimal. June load factors for the nine largest U.S. airlines averaged 84.7 percent, exceptionally high by historical standards. Yet, according to the Air Transport Association, an industry trade group representing U.S. airlines, ticket revenues plunged 26 percent in May, the latest month for which data were available, although capacity was down less than 10 percent.

While the falloff in travel overall, and the decrease in average ticket prices, are bad news for the airlines, those data points obscure an even more pernicious problem: the erosion of passengers willing and able to pay for first- and business-class seats. Reflecting an industry-wide trend, British Airways just reported that its premium traffic plummeted 14.9 percent in June, compared to just a 1.3 percent decrease in non-premium traffic.

Although such premium passengers occupy only a small percentage of an airline's seats, the pricey tickets they buy can account for as much as 50 percent of a carrier's revenue. So losing, gaining, or retaining a single high-yield customer has an outsized effect on an airline's bottom line.

That, in essence, is the economic calculation behind the airlines' current preoccupation with elite members of their frequent flyer programs. (Airlines typically award elite status to customers who fly 25,000 or more miles annually.)

Addressing a transportation conference in June, American Airlines' chairman and CEO Gerard Arpey succinctly articulated what must be on the minds of many of his fellow airline chiefs: "We are focused on doing what it takes to win a disproportionate share of the industry's premium travelers. And one of the most powerful tools at our disposal is AAdvantage, our award-winning recognition program."

No surprise, then, that it was Arpey's American that offered double elite-qualifying miles for flights completed between March 18 and June 15, a promotion that spurred similar offers from Continental, Delta, Northwest, United, and US Airways.

Even Southwest, which is making a concerted effort to attract business travelers, threw its hat into the ring, offering to award elite perks to customers who flew five round-trips between April 2 and June 15.

Such offers implicitly recognize that bestowing special status actually increases the likelihood that a customer will be loyal in future, and that such elite perks as upgrades and priority boarding are a small price to pay for the extra revenue flowing from that enhanced loyalty.

Not all overtures to airlines' elite flyers are so visible. Delta, for example, has been quietly doling out elite-qualifying miles to elite members of its SkyMiles program, as well as to members of Northwest's WorldPerks program, which will be folded into SkyMiles later this year.

One recipient of Delta's targeted largesse was Julie Nemeth, a Venice, Florida-based Silver elite who flies around 25,000 miles per year, mostly in connection with her job building water-treatment plants. She was surprised and delighted when Delta unexpectedly awarded her almost half the miles required to reach elite status again for next year. "I received an email they were giving me 10,000 elite-qualifying miles for a 'customer appreciation' bonus and sure enough, I went online and checked my SkyMiles balance and there were the 10,000 miles on my statement!"

The bonuses -- which appear to have ranged between 5,000 and 15,000 miles -- were not awarded to all Delta elites, giving rise to grousing on such online travel forums as FlyerTalk from Delta loyalists who felt unfairly neglected.

Why reward some elites and not others? A Delta spokesperson would only say "This is one of our 'under the radar' private-offer campaigns that awarded some SkyMiles and WorldPerks elite members with a certain amount of elite-qualifying miles. Not all elite members received this bonus -- based on certain internal criteria."

However the stealth bonuses fit into Delta's business strategy, they're certainly a meaningful benefit for those customers who received them, and who will now find it easier to maintain their current elite status, or reach a higher elite tier, with the extra miles.

Another recession-related reason to covet special status is what the airlines have spared their best customers. Depending on the airline, elite flyers are exempt from one or more of the many nuisance fees that most carriers have imposed to compensate for the decline in ticket revenue. One example: Elite members of the three largest programs -- those of American, Delta, and United -- enjoy waivers of most of the checked bag fees, which, according to the Department of Transportation, cost travelers $1.15 billion last year.

And of course, the central benefit of elite status gets a boost from the recessionary funk. Upgrades to first or business class should be easier than ever to come by, as the ranks of premium-class travelers have thinned, and many of those still flying have downgraded to coach.

The best of times or the worst of times -- for today's travelers, it all depends on their status.