I saw something interesting in the recent fourth quarter 2004 financial releases of Continental, Northwest and United Airlines. My guess is that other major carriers will show similar unusual items. The unusual item? Increases in the financial liability of their frequent flyer programs. What’s interesting is the story that is told by these items. Continental reported a $24 million adjustment for future frequent flyer liability, Northwest reported a $77 million increase and United noted a $47 million increase. These liability increases are actually good news for members of these and other airlines. Let me explain. Financial liability for frequent flyer programs essentially evolves around assumptions of breakage, redemption on partner airlines (for which the airline actually does pay) and the use of “anytime” awards. Breakage is an internal financial system and mostly connected to expiring miles and trends indicating the potential use of total liability toward redemption. Anytime award liability is a little trickier, since a frequent flyer program typically has to pay the revenue side of the airline a pre-determined amount based on the award being redeemed. A financial transaction is not based on a single mile-per-award basis. Rather, it is different for a saver award than for an anytime award. Frankly, it is usually more expensive for the frequent flyer program, since in the eyes of the revenue police, you are taking something they can sell. Saver awards are generally viewed as seats that may go unused under normal circumstances. If there is any increase in the percentage in which members redeem anytime awards vs. saver awards, then it “costs” the frequent flyer program more from its internal financial structure.

But that’s not the important part of these liability increases. The single item that I see is important is that we are now seeing how these frequent flyer program alliances are starting to pay dividends for members. These increases are the result of more and more members of these programs using partners to redeem their awards. It could be that there are additional destinations not served by the parent program members are redeeming to. More likely it’s members using partner airlines to get free awards that were not available on their parent program. It’s more expensive for the program, since they are paying out money to their partners to carry members of their program, but the news seems to indicate that these alliances are becoming more and more beneficial to all members. But we can’t compare apples to apples, even with just these three airlines. Each airline has a different method and price per settlement of their frequent flyer liability with partners, so United is not necessarily redeeming twice as many partner awards as Continental.