Airline Consolidation Brings Turbulence to Elite Flight Status

Minyanville |

minyanville, industrials, airlines, what airline has best mileage program, best airline rewards programIt’s fair to say the airline industry has taken a battering over the past decade. Rising fuel prices, 9/11, economic crises, constant fare wars, and the emergence of discount carriers like Southwest (LUV) and JetBlue (JBLU) have all taken a toll on the profitability of airlines both domestically and internationally.

In a tough adapt-or-die environment, where airlines routinely file for bankruptcy, the industry has witnessed aggressive consolidation to cut costs and increase revenues. Delta (DAL) and Northwest merged in October 2008 to become the largest airline in the world, only to be unseated by United and Continental’s (UAL) announced merger plans in 2010. This leaves American, which filed for bankruptcy last year, and US Airways (LCC) as the only remaining legacy competitors.

The implications of airline mergers are vast: Previously competing airlines can now streamline their services, potentially increasing efficiencies. On the other hand, the reduction in competition also means that consumers might have to suffer monopolized prices and services, including a devaluation of loyalty rewards for frequent travelers. They might seem like nice but ultimately dispensable perks to you and me, but for flyers who routinely clock hundreds of thousands of miles annually, simple benefits like express line access and seat upgrades are sacrosanct.

“Anytime there is an airline merger, it always results in dilution of elite status due to the influx of new elite members. The benefit that elites treasure the most is seat upgrades. However, with a merger, there is no way around diluting that benefit because there are only so many seats on a plane,” explains Parag Raja, who runs Frequent Flyer University, a site that offers consultation services for flyer miles.

Fewer Upgrades

Indeed, it’s a simple matter of supply and demand with regards to seat upgrades. With airline consolidations, there are now fewer planes and thus fewer seats on many routes, making upgrades scarce commodities. As such, both Raja and Gary Leff, co-founder of the frequent flyer community, MilePoint.com, agree that only the very top-tier of elite flyers continue to enjoy upgrade perks. For lower-tiered elite flyers, upgrades are becoming an endangered species.

According to Raja, before United merged with Continental, “anyone with United elite status could select an automatic upgrade to Economy Plus [United’s premium economy product that offers increased legroom in the front of the economy cabin] when they booked their ticket online.” Post-merger, upgrades were rationed such that Premier class flyers, the lowest rung, who chalk up between 25,000 and 49,999 miles per year can only get Economy Plus upgrades when they check in at the airport.”

As for regular passengers with no status, the situation is worse. “Just getting through on the phone to United these days is tough if you aren’t an elite member. [The privilege of] boarding early matters just to get overhead space and not have to gate check your bags. And when you do check bags, not paying is a privilege,” elaborates Leff.

Wayne Plucker, an executive at marketing research and consulting firm Frost & Sullivan who is also a long-time Continental customer, affirms that upgrades have been harder to come by after the merger.

“For lower levels of loyalty, like Silver Elite, upgrades are now less common and a boarding time decision. In the past, Continental upgraded most frequent flyers at online check-in 24 hours in advance of the flight,” he shares.

When asked to respond, United spokesperson Rahsaan Johnson said that the United merger with Continental was actually good for frequent flyers because they now give "members more options and improved ability to earn and use their miles."

"For example, with the merger and the transition to a single reservations system and website, members have consistent access to international upgrades using Regional Upgrades, Systemwide Upgrades, or accessing mileage upgrade awards, regardless of whether they're on a pre-merger United or pre-merger Continental flight. That's an important benefit to our most-frequent flyers," Johnson said in an email interview.

Over at Delta, it is the same story for author and IT consultant Anthony Howard, who has had Platinum status with Delta for the past five years. Howard said that after Delta merged with Northwest, the company created a new elite membership tier, Diamond, which customers can attain only by clocking 125,000 miles, and all Platinum benefits were shifted to Diamond customers, leaving frequent flyers like him left stranded with nothing.

“No one will get to 125,000 miles unless they fly international often. Loyal flyers likes me who travel to see clients daily and for book signings get left behind because you will not get to 125,000 miles flying to DC, Miami, and Charlotte from Atlanta,” says Howard.

Airline mergers do not always spell doom for customers however, argued Leff, who believes they have been a mixed blessing for frequent flyer programs.

“There has been a general trend at United over the past three or four years to clear upgrades later and later rather than at the 24, 48, 72, or 100 hour windows. But it’s not obvious that’s getting worse. In fact, I’ve seen the opposite – Continental has tended to clear more upgrade seats earlier than United was, and it looks like the Continental approach is prevailing,” he asserts.

“[Also,] frequent flyer redemption has gotten better for Continental members when the airline joined Star Alliance in 2009, and it’s gotten better for United members since the merger was announced.”

Jill Schiaparelli, a senior executive at AxoGen, agreed with Leff’s more nuanced take of airline consolidation.

“I have actually seen an improvement in benefits – and more importantly, efficiencies in processing of benefits – since the merger of Delta and Northwest,” said Schiaparelli, perhaps proving Howard right since she is a Delta Diamond member who has clocked up as much as 250,000 miles in one year.

Elite Benefits for Sale

However, even with her Diamond status, Schiaparelli also bemoans another increasing trend that has occurred with airline mergers – credit cards that now come with elite benefits previously available only to loyal customers.

“I was recently offered a special Delta American Express (AXP) card that offered upgrade benefits and had to wonder how that would affect my status. It seems wrong that I could log 200,000 miles with the airline and be bumped from an upgrade because someone used a credit card,” she says.

Indeed, with their profit margins being squeezed, airlines have had to be creative in coming up with new sources of revenues, much in the same way that banks have proposed a myriad of fees to make up for lost revenue after the passage of the Volcker rule. These days, upgrades, preferred seats, and express line access can all be purchased separately by any customer, providing a new income source for the beleaguered industry.

One of the largest sources of ancillary revenue of airlines is the sale of miles to credit card companies. According to SmartTravel.com, the sales of miles can bring in as much as $1 billion for the largest of mileage programs.

Besides the Delta American Express card, another example is Chase’s (JPM) new MileagePlus Explorer card, which comes with elite benefits like free checked baggage, two United Club passes a year, and priority boarding.

“With this credit card, by paying a small annual fee, you can get many of the benefits that elite flyers get without having to ever fly. To many elite travelers who log hundreds of thousands of miles a year on a particular airline, this is a slap in the face,” said Raja.

Leff disagreed that these moves made loyalty programs less meaningful, saying that elite travelers still get priority to all benefits.

“Purchased upgrades at check-in are generally offered only after they’ve been made available free on domestic flights to elite members. Credit card holders may get boarding priority, but this generally comes after elites have boarded. And getting a free checked bag for getting a credit card takes nothing away from elite members,” he said.

“If anything, there may be a substitution effect between getting a credit card and reaching the bottom tier of elite status. But this takes away nothing from the very frequent flyer, and underscores the cash value of the benefits they receive.”

What’s Next?

With the devaluation and dilution of elite benefits, will customers have fewer incentives to stay loyal to a particular airline? Yes, said Plucker, who added that business travelers really do not get to choose which airline to fly anyway.

“For the business traveler, the company travel agent or website drives the choices. True road warriors tend to belong to everybody’s loyalty program, so it doesn’t matter which airline has the best one,” he says.

Both Leff and Raja, on the contrary, believe otherwise.

“Loyalty matters more than ever. If the travel experience has been degraded, it’s been degraded most for the non-elite, non-loyal traveler. And where it’s been degraded for the frequent flyer, it’s been degraded for the less frequent (ie. 25,000 miles vs. 100,000 miles) traveler,” Leff opined. “Sure, folks who can’t stick to one airline and fly even more miles might give up and throw in the towel. But the benefits of loyalty, and the need for those benefits, have never been greater.”

Elite travelers might grumble and complain, but they will continue to stick to particular airlines because of convenience, said Raja.

“If you are based out of Chicago and are an American or United elite member, you would never switch to Delta because O’Hare isn’t a Delta hub.”

For his part, Leff’s choice of legacy carriers in 2012 is American.

“Overall, American and United have the best programs. Which one works better for an individual traveler depends on where that traveler is flying from , where they’re going, and what they value most. If I had to give an edge to one over the other, I’d give the edge to American right now, even though my upgrade for [last] Thursday afternoon probably won’t clear. I have an exit row and they not only comp my drinks, but even my buy-on-board snack.”
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How does Gary Leff, co-founder of frequent flyer community, MilePoint.com, break down each of the legacy carrier’s frequent flyer programs?

By Sterling Wong

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
UAL United Continental Holdings 75.17 2.43 3.34 5,148,603
SOHOM Sotherly Hotels LP 7.00% Senior Notes 25.98 0.16 0.62 300
DAL Delta Air Lines Inc. 51.78 0.43 0.84 8,526,732
JPM JP Morgan Chase 85.49 0.37 0.43 14,567,202
AXP American Express Company 74.77 -0.14 -0.19 2,566,883
LUV Southwest Airlines Company 49.79 0.19 0.38 6,700,895
JBLU JetBlue Airways Corporation 21.90 0.07 0.32 8,950,074

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