3.5 Trillion Miles ... and Counting

They are the world's most powerful promotional currency -- a medium of exchange that people manage almost as carefully as cash. So what does the future hold for frequent-flier miles? Answers to seven high-flying questions.

You count them. You hoard them. You check your statement compulsively to see just how close you are to getting that flight to Hawaii. You're not the only one. There are some 67 million travelers in the United States alone who are members of a frequent-flier program, and there are 100 million total worldwide. All told, there are about 3.5 trillion miles yet to be redeemed.

Miles are the most powerful promotional currency on the face of the planet. How did they get so popular? "The mile is simply what evolved out of discussions about devising the optimum retention and customer-motivation tool," says Robert Crandall, the retired chairman of American Airlines. Along with his management team, Crandall invented the concept, which was introduced in 1981. "We thought that we could come up with an equivalent to the S&H Green Stamp -- only better. Because we automated it, customers didn't have to do anything to collect the miles except fly on American." By the end of 1981, 1 million people had signed up for the AAdvantage program. Today, it has about 43 million members.

The tipping point for the mile, however, came when companies outside the airline industry decided to give airline miles to their loyal customers. It started with hotel chains and rental-car companies, then moved to the credit-card industry and phone companies. By 1999, 40% of the miles that people earned (not counting certain bonuses for very frequent fliers) didn't come from flying at all. The airlines sold about $2 billion worth of miles to other companies to offer as incentives last year. People actually fight over miles in divorce court.

With so many miles in circulation, you can't help but wonder if a currency devaluation is imminent. Randy Petersen, who has built a business in Colorado Springs called Frequent Flyer Services around helping people maximize their miles, figures that consumers will net another 500 billion miles by the end of this year. Last year, people turned around and cashed in those points for more than 13 million airplane tickets.

The basic problem is that people are earning miles a lot faster than airlines are buying planes and adding routes to their networks. What does the future hold for frequent-flier programs? Here are answers to seven high-flying questions.

1. Today, most domestic award tickets in the United States require a minimum of 25,000 miles. Will that minimum go up?

At some point, it has to -- although not right away. After all, the last time American raised the mileage minimum, members of AAdvantage filed suit against the airline, claiming that it had not properly notified them. Richard G. Barlow, chairman and CEO of Cincinnati-based Frequency Marketing Inc., which develops loyalty programs for companies such as American Express, GE Capital, and Microsoft, thinks that the airlines would prefer to raise the prices that they charge to the credit-card companies and hotel chains, which purchase the miles to give to their own customers. If those companies give fewer miles away as a result, so be it. It's better for the airlines to disappoint Hertz's and Hilton's customers than to raise the mileage threshold for the people who actually fly in their planes.

2. Is it going to become easier to use miles to get to really popular destinations (can you say Hawaii)?

Not likely. Last year, according to InsideFlyer magazine, which is published by Petersen's company, airlines filled about 7% of their seats with people traveling on award tickets. This year, the airlines have made more of these seats available, since paying customers aren't buying as many tickets because of the economic downturn. The ratio of available free seats is already much higher on flights to places like Hawaii and Orlando, although there are not nearly enough seats to meet overall demand. Still, the airlines are unlikely to open many more spots on flights where they would be displacing paying customers. Adding more flights for frequent fliers would cost the airlines even more. So if you want to fly to Honolulu, plan your trip 18 months in advance. Find out the exact date and time that award seats will become available for the days you want to travel, and then call the airline right at that moment to make your reservation. Tickets to Hawaii are the airline equivalent of tickets to a Bruce Springsteen concert. They aren't available for long.

3. Could my company seize earned tickets for cost-cutting reasons?

It's possible, but it's highly unlikely. Runzheimer International, a consulting firm that tracks data on corporate travel and relocation policies, says that just 6% of the organizations that it surveyed last year considered free tickets earned during business travel to be the employer's property. That's down from 29% in 1986. Tracking and transferring frequent-flier-earned tickets is so complicated that most organizations (especially big ones) don't think it's worth the trouble. Those that do report 6% to 10% savings on air travel.

4. Will the IRS ever try to tax me for cashing in all of my miles?

The IRS has spent a lot of time studying this issue, but it's very hard to put a value on the miles without knowing how you earned them and what you spent them on. As more people have earned more miles, the IRS has wisely concluded that any attempt to tax the miles would cause rioting in the streets. It's just not worth the trouble.

5. Will the airlines ever customize the programs so that I can tailor-make my own award system?

Diners Club already has. If you have earned more than 100,000 points using your Diners Club card, you can suggest something that you'd like to do or buy, and then the company will respond with a price in points. One customer took a flight to the Arctic Circle, while others have paid for their kids' braces and for country-club memberships. American Airlines has also been quietly testing a customized program with its most frequent travelers where they could elect to receive more bonus miles and fewer upgrades or vice versa.

6. Will it ever get easier to redeem amounts smaller than, say, 25,000 miles?

It's already happening. In fact, one of Robert Crandall's many retirement hobbies is sitting on the board of MilePoint.com, an Internet-based service that allows users to take a small number of their miles from certain frequent-flier programs and trade them for magazine subscriptions or savings at various stores and shopping sites.

7. Will I ever be able to trade miles from one program for miles from another?

This is the holy grail for mileage fanatics, and while some hotel programs and a new site called points.com make this possible on a limited basis, don't expect it to take hold in any kind of meaningful way. Frequent-flier programs are loyalty programs that are designed to keep you flying on the same carrier, even when it's free. Ever wonder why people still fly United after the mess its labor problems caused its customers last summer? The airline threw well over a billion bonus miles at them as a salve, and most of them are still flying the "friendly" skies one year later.

Ron Lieber (rlieber@fastcompany.com) is a Fast Company senior writer based in New York. He has 350,000 unredeemed frequent-flier miles.

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