Frequent flyer reward schemes have ballooned over the years and accumulating points has become as common as buying a carton of milk. Carriers now risk paying a high price for the glut.

Bennett Porter, a globe-trotting Internet marketing executive, poses a big problem for U.S. airlines.

The New York-based traveler has amassed more than 1 million frequent flyer miles with American Airlines, and still others with additional carriers. She is one of a growing band of customers who plan to redeem those miles for free flights.

Frequent flyer reward schemes have ballooned over the years and accumulating points has become as common as buying a carton of milk. Carriers now risk paying a high price for the glut.

Airlines have awarded more than 19 trillion frequent flyer miles over the past 25 years — roughly equivalent to circling the globe 760 million times — and more than 14 trillion of those miles are unredeemed. The rate of awards is increasing annually, according to frequent flyer site WebFlyer.

While many of those miles may never be swapped for trips or merchandise and they expire more quickly than before, that overhang of unredeemed miles represents a risk for airlines.

AMR  Corp., parent of American Airlines, which operates the world’s largest frequent-flyer program, carried a $1.6 billion liability on its books at the end of 2006, about $100 million more than a year earlier and up from $976 million in 2000.

Free travel awards represented 7.5 percent of American’s passengers in 2006, compared to 7.2 percent in 2005, according to company filings.

Delta Air Lines  Inc. expected to award about 8 million free trips at the end of 2006, a million more than in 2005. The No. 3 U.S. carrier increased its liability at the end of last year to $887 million from $607 million a year earlier.

Bankrupt Northwest Airlines Corp. increased its frequent flyer liability to $269 million at the end of 2006, up from $248 million in 2005 and $215 million in 2004.

With planes fuller than ever, granting free trips could displace paying passengers, while unsettled U.S. consumers may be ready to cash in those miles to save money as the economy shows signs of slowing.

"The airlines just can’t handle that level of reward redemption," said Rick Ferguson, editorial director at loyalty-program consulting firm Colloquy. "The liability’s a big problem."

Miles Glut

After the September 11, 2001, attacks sent the airline industry into a decline, carriers began awarding more and more frequent-flyer miles in order to encourage customers to fly. In addition, credit cards and other award schemes have allowed consumers to accumulate miles by buying anything from sliced bread to gasoline.

With the growing supply of frequent-flyer miles and the relative scarcity of available seats, airlines risk a devaluation of their loyalty programs.

"The risk is that these points become perceived to be less valuable," said Andrew Watterson, a director in the aviation practice of consulting firm Oliver Wyman. "They have to mitigate this."

Airlines have reacted by offering other alternatives to redeem miles by swapping points for merchandise like an iPod or trading for gift cards through sites like points.com.

But despite the liabilities and risk, the programs are a valuable part of an airline’s business.

"It’s so important for us," said Billy Sanez, a spokesman for American Airlines. "The mileage program is one of the top-three reasons why people fly with us."

"The liability is part of having a program," he said.

Even with the average consumer belonging to multiple award programs, they still have a marked effect on buying behavior.

Porter says she has been swayed by frequent-flyer schemes.

"It does make a difference in the way that I fly," said Porter, who used a chunk of miles to plan her December 2005 wedding in Belize. "I definitely think twice about booking a flight that’s not on American."

Via AOL Money

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