Like most of you, I try to read news items that might have any effect on my business travel. So as I scanned a recent article in USA Today referencing Homeland Security’s test of an anti-missile device on commercial aircraft, it seemed relevant. Well, as it turns out, it was as relevant as the PFC’s that shroud my airfares.

The article pointed out that Homeland Security was spending $29 million to test this device on three American Airlines aircraft. So far, so good as the idea seems reasonable. After all, I remember up close and personal the missile scare at London Heathrow in 2003 (and it’s a pretty unsettling feeling to think someone is pointing at you with something more than their index finger). Good news to know … until I kept reading and something just was not adding up. Later in the same article, Burt Keirstead, director of commercial aircraft protection for BEA Systems (the company awarded the contract) is said to say that the systems could be installed for somewhere between $500,000 and $1 million per plane. OK, my consumer radar starts to perk up after reading that comment. Uh, with 3 test planes, the company itself says the device will cost between $1.5 million and $3 million total (use the same math as me) and yet Homeland is spending $29 million on the contract? I want to know what’s with the roughly 90% margin. Now, another comment in the article mentions that it is unclear how much it would cost to maintain the system. Maybe it’s me, but if I had to replace the entire device more than once at it’s full original cost, it’s not a product I am going to be trusting to keep a heat seeking missile off my butt. So at most, I’m in this test at $6 million. OK, we’re down to an 80% margin. Hey, I value my life as much as the next passenger, but I’m thinking we aren’t even into this test and it’s more about profiteering than security.

Furthermore, he article says “The Defense Department uses laser-jamming technology on its planes, but using the systems on commercial airliners is much more controversial because of concerns about cost and maintenance. “If this is going to break down every other month vs. every fifth year, obviously that’s a big, big difference,” says Jim Tuttle of the Homeland Security Department’s Science and Technology division.” These comments and observation brings me to another round of bright thinking. If the Defense Department already uses the technology, then why the heck shouldn’t we use that? It would seem to me that if it works, and as well, I’d think they have tested it many times to date, then isn’t it better to extend that same proven technology than to start all over because the Homeland Security is a different budget and different part of the Federal Government? Again, if the Defense Department uses the technology, should we not already know the cost and maintenance of the program? Heck, I’ve watched enough of those Top Gun movies to know that that laser-jamming stuff saves the good guys most of the time.

I just don’t know. I began to read the article to stay up on news that could effect my business travel and ended up with another lesson in what seems to be profit margins from Federal contracts, an uneasy feeling that no one seems to know if it works and how well and yes, another reminder that being safe as a traveler is a personal kind of thing.

But all the economics and other technology topics aside, what really made me chuckle was the statement that “officials emphasize that no missiles will be test-fired at the planes…” My final question, do the bad guys know this?

OK, with the title of this post, one might imagine that it’s another drag out of no free seats being available for members of frequent flyer programs. Sorry, not htis time. Rather, it’s a comment about one of the most stupid ideas I’ve read in quite some time - well since three days ago. Reading a report from Australia (The Sydney Morning Herald) that mentions in Britain that health officials have begun slashing premiums for members who go to the gym and watch their weight (good idea) BUT, since Australian legislation prohibits using premiums to discriminate, that Dr. Paul Gross, the Director of the Institure of Health Economics and Technology Assessment in Australia, recommends that bonuses such as gym memberships, vouchers for sports equipment AND FREQUENT FLYER POINTS be given out as incentives. The article mentioned that one in four Australian children and one in two adults were overweight or obese (I’m sure it’s worse here in the U.S.) which means that with a population of just over 20 million (4 million of them children) I might be sitting next to 8 million adults and 1 million children that are overweight or obese and getting the frequent flyer seats I thought I was battling for, not battling the bulge. Now, I’ll leave it to the folks on FlyerTalk.com and their threads concerning the obese passenger, but I’ve got to say, I think it a very, very bad idea to force frequent flyer points upon this part of any population for incentives. You know why? Remember, these points/miles are “carrots” for our loyalty and how do you explain a bag of peanuts to a fellow passenger who earned the miles but did not meet their weight loss goals? Put this up there with the idea of  allowing inflight telephone calls using your cell phone.

Hilton HHonors became a hotel loyalty program in 1987 and for most members, that will not be significant, until they are reminded of it. Over the last few days of 2007, Hilton HHonors surprised quite a few still active members in their program by sending them a commemorative plaque personalized with a reproduction of the members original HHonors membership card. I’m proud to say that I’m still active in that program with over 1.4 million points and here’s my salue to 20 fabulous years of that program.And it is really a true reproduction of my original membership card - I still have it and compared, including the card slogan that they were the official sponsor of the 1988 U.S. Olympic Team. I’ve received many things over the years from various programs, but i can’t think of anything more cool than this.

Maybe it’s just me, but in this Sunday’s New York Times magazine, I saw another ad run by American Airlines touting their “experience” with the new international business class service. Hey great, we as frequent flyers welcome anything new, though often as not “improved” is best left to TV dinners and other grocery items. But what get’s me is the picture they run with this ad campaign. I doubt that it’s my eyes, but does this not look like a broken down bed? Looking left to right your vision must elevate a number of degrees and I’m not sure that even the trick with the seatbelt could hold me in there upon takeoff when the nose of the plane makes this bed about 90 degrees (maybe that’s why the FAA and airlines do not allow the seat to be extended during takeoff?). I’m pretty sure that the concept of a flat bed is not that new (5 years) for American Airlines to have missed the email from the corporate office. I’ve not tried this one and only making an assessment based on the picture, but unless it is truly lie-flat, why bother anymore?

OR

As for this one, it reminds me of the chute that hangs off the back end of a cement mixer, it has that much angle to it.

When my research heard about something brewing between Frontier Airlines and AirTran i started to think of the ying and yang and come to the conclusion that it is pretty easy to say this is a huge plus to each program. While there are a few caveats, I’m all for it and here’s the advice:

- If choosing one from the other - go with Frontier Early Returns. Frontier has miles that do not expire with some sort of activity within a two-year period. AirTran on the other had has credits that expire 12 months after being posted.

- AirTran members gain tremendously because they already have the ability to redeem their awards out on any airline they choose, even if it is not AirTran. That award for a domestic ticket is currently 32 credits. By having Frontier as a new redemption partner, if you can redeem somewhere in the Frontier network out west, then the ticket is now 24 credits, a savings of 8 credits.

- Frontier members if they play their reservations right, can gain access to a two-class partner, that is upgrade to a business class seat when traveling. AirTran has one of the easiest and friendliest ways for members to move forward in the plane.

- While Frontier members can redeem on AirTran for 20,000 miles (5K more than redeeming on Frontier) it’s an easy price to pay for the extra advantage of more places to earn miles and besides, the 20K award is a better deal than the 25K award with United, Frontiers main competitor.

- While billed as the first merger/relationship of its kind for low-cost carriers, uh, I really hate to take on the spinners for this angle, but i think they are now just under one year after Southwest and ATA announced a similar relationship. But ask AVIS, being the second into these types of relationships isn’t all that bad.

- What I like about the deal is that the analysts on Wall Street were all predicting that Frontier and Spirit might make good merger partners because of the compatibility of its fleet, but as we see here, alliances for the second tier airlines can also be played out and with even better gains. Frontier may still be able to play the field for another or others partners and they gain significantly with this virtual merger.

- One caveat, so don’t blame me if you mess up after reading this. The only way this works is if you do indeed book your travel on the airline partner, either Frontier or AirTran, within the airlines Web sites. Going to Expedia, booking a ticket and then trying to get cross program credit is not going to get you anywhere. This is similar to some of the restrictions that hotel programs have in that you won’t earn credit when booking through a third party agent. So, bonus miles and credits beware.

And in closing, there is one more silver lining to this: all those dumpster divers who earned credits in the AirTran program by collecting used drink cups at Wendy’s will have somewhere else now to fly.

Bottom line: No one is harmed and everyone should be very happy with this reciprocal frequent flyer deal, i know I am.

With no intention of topping the success of J.K. Rowling (OK, maybe just a little), the book about frequent flyer programs I have just co-authored is now shipping. Because this book has an interesting history, I thought I’d try and pre-answer some of the questions coming my way:

Is this your first book?
Actually, no. In the late 80s I co-authored the first edition of The Official Frequent Flyer Guidebook with J. William Pfeiffer, a wonderful man and reader of InsideFlyer who shared a love for miles and points, and who was and is still a leading expert in team-building and the author of many books in that specialty. Bill got busy with his real business, and for the subsequent six editions, I took on the role as the editor and publisher of The Official Frequent Flyer Guidebook. We enjoyed good success with the book, having eventually sold several hundred thousand copies. It was more a reference guide – an encyclopedia of frequent flyer programs.

You’re the co-author? How did that happen?
Yes, I’m happy to share the book-writing with Tim Winship. I’ve known Tim for nearly 15 years, way back to when he was running a small North American service center for one of the Asian frequent flyer programs. Then, as now, I tried to get out to meet and talk with those that were actually operating frequent flyer programs around the world. I think he thought it was cool that I was the only person ever to actually come and visit their service center to talk miles. Later when he moved on to work for the Hilton HHonors program, I chatted with him there, and in fact, after he decided to get out of the industry and try a go on his own, I actually flew him to Colorado Springs and interviewed him for a job within my organization. If I had hired him he might not be doing what he is doing today. So, some of his frequent flyer miles were actually paid for by me!

But isn’t he a competitor?
A couple things. I’ve been doing this for nearly 20 years, so everyone is my competitor, including the publisher of the book – OAG. And if some are surprised, they apparently don’t know me well. I’d do just about anything to help frequent flyers manage and understand their miles better. Tim may be a competitor, but he also knows this industry, having worked in it. Besides, I like the guy. The idea of working with a “competitor” has never entered my mind. The idea of helping members get more out of their frequent flyer programs is always on my mind. I’d work with Tim and really anyone else over and over again.

So, how did the book come about?
It’s a long story, so pull up a chair. Actually, the idea of the book is a couple years old. Tim and I were chatting one day and he suggested getting together to do a book – actually two books, one being a consumers guide and the other a historical reference. I’ve been asked to do that before, and it’s always been difficult to carve out more time from my schedule (Insert joke here: I’m too busy moderating the Air Canada forum on the popular FlyerTalk.com Web site…). So anyway, we then decided what kind of book it might be. We both decided that the consumer book should come first, and the tone might be similar to the “Dummies Guide” book series. So we prepared a great pitch and contacted the publishers of that series, Wiley & Sons.
I have saved that rejection letter. We got an editor that didn’t understand frequent flyer programs, essentially saying that he was not aware of them and could see no consumer interest in the topic. With tails tucked between our legs (no consumer interest in frequent flyer programs?) we then looked around for other ideas. We had a number of them from self-publishing (since I had done that with my other book) to American Express , OAG, Fodor’s, and even The Wall Street Journal.
For whatever reason, we started with OAG, and they showed an immediate interest – so we hung on. OAG still seems to be a legacy company, and the hoops which we had to crawl through at times seemed like another slow death by rejection letter. But we really never heard the word “no,” and just waited for the slow ascent up the corporate ladder for approval.
But we were lucky – we had a few inside “angels.” One of them remembered me from many years ago when I used to do several things with OAG, but then was banished to “outsider status” when some new director-of-something-or-other decided that I was too competitive with them and no one was allowed to interview me or continue with any projects together. I was miffed at that since I had never met the guy that made that decision, and frankly as has been told many times over – I only got into the business when OAG told me they weren’t interested and that the topic was far too trivial for them – it had no future. But Tim and I held on with the hope of a special lady there at OAG – Lisa Davis. She kept us in the loop as best she could, and we never lost hope with her enthusiasm. For her, I hope this book is nothing less than a great success. She proved to be a great person to work with later on.

How long did the book take?
This answer is the funniest yet. I think the actual process of getting approval to do the book for OAG took nearly a year – a year! Things move slow at OAG (just kidding, OAG, really!). Once we got approval to do the book, there was a sudden realization that the holidays were approaching and it would be great to get the book out for that period. So to answer the question: one year to get approval and two months to write it. Yes, the fast track. For me, it wasn’t the topic knowledge, as I live it day in and day out. The problem was my schedule, and more importantly – I am not a writer. I’m a great talking head and really, really know the topic, but I can’t write to save my soul, and what is even more difficult is that I have no discipline.

Tell us something about the book process.
Once we got our marching orders, Tim decided on a natural process of each of us writing a chapter a week for eight straight weeks. He took odd chapters and I took even – or something like that.
Well, we got started, and by the end of week one, he’d got his done, forwarded it to me, and gotten started on his next chapter. Almost two weeks went by, and he called and asked how I was doing. I knew where this was going and reply, “Well.” I then got in to a long discussion with him about how it was probably going to be working a firm schedule with me, and tried my best to assure him that we’d make this impossible deadline. As noted before, I have no discipline. I think it was week four before I sent anything to Tim, and that was something like five chapters at once. I’m a binge writer who does extremely well under impossible deadlines but really couldn’t make any exceptions for this book.
It’s always something – travel, media interviews, FlyerTalk.com interference, or, of course, my monthly deadlines for InsideFlyer magazine. My 60-hour week just did not have room for the book, so while Tim was churning out chapters according to the schedule, Randy was being Randy, making mad dashes and all-nighter runs toward keeping up with Tim’s chapter schedule. I think – actually I know – that Lisa became worried at this point as well: the deadline, the deadline. Again I offered them my assurance that this was how I operate best in my chaotic world, and there were “no worries.”
Well, Tim and I made the deadline, and I was good to go at the eleventh hour and fifty-nine minutes. I really did scare them, and it would not surprise me if they had talks about what to do if Randy didn’t deliver. What, me worry? I just love these impossible deadlines and really never worried about it. I would come in at 3 or 4 in the morning or trade some of my all-nighters for the magazine (InsideFlyer) deadline for a chapter for the book, but really never worried that we would not make the deadline.
We made some changes in chapter ideas in real-time, and I think it all turned out well.

Anything else?
Yes. The editing process. Lisa was heading-up the editing process and hired Jane Lasky, a business travel writer whom I also had known for nearly 15 years to help her. I think it was probably because when they saw my stuff, they knew the project was in trouble. I really am not a writer, and they were just wonderful in shaping and content. Tim’s style and mine were quite different, and the goal of meshing the styles and the content was a real challenge.
This was actually the best part of the entire process. I sort of write how I talk – goofy. And because I have been doing this so long, there is a tendency to assume too much on the behalf of the reader. Lisa was absolutely wonderful, asking to clarify, fact-check and rewrite quite a few things. At first, there was a little resistance on my part, since I was certain that the average frequent flyer would know what I was talking about. But then I started to fully appreciate the value of Lisa’s POV on what the words could mean to others. I can never say enough about how crucial this period was for the book. Lisa took a good book from Tim and me and made it a great book.

OK, tell us how you really feel about the book.
All my involvement aside, I have no doubt that this is the finest collection of tips and information that has ever been offered to frequent travelers in the 24 years these programs have been in existence. I have copies of every book ever written on the subject, and know some of those who wrote them. They were all very good efforts, but this book has been carefully planned and offers a complete guide to the basics every members should know.
Is it the end-all of such books? No. That one is impossible to write, since the industry changes almost daily. That is what things like InsideFlyer and FlyerTalk.com are all about. But it does provide a very informative foundation for those needing help getting started and those needing mentoring on what to do with their miles.
Many of my readers and customers have been with me for years and know this stuff, so I won’t pretend to offer them something they don’t already know. If you’re a frequent flyer that is comfortable with where you are with your miles and points, please don’t buy the book – you will probably be disappointed, and I would hate for that to happen. The key is remembering that we started out with a book sort of like a Dummies Guide for frequent flyers. If you’ve ever bought or read one of those for any topic, then this is your book. Keeping that point in mind will help anyone in a purchasing decision.

So, that’s the background of the book. Please let me know if there’s anything else I can answer for you. I just can’t thank Tim and Lisa enough for putting up with my eccentricities. I am still very sorry to scare both of them with my last-minute submissions…I really love working under extreme deadlines and this was one of them. Thanks for the experience.

If you want to order the book:
To Order Mileage Pro

And we even have a Web site for the book where we will be adding updates and other info:

Mileage Pro Book Web Site

Thanks.

One More Question. What’s this about an RV in your book efforts?
Funny you should ask because there’s a great group of guys that I neglected to thank. When i took on the book task, i already knew my time was fully taken up - as in 60 plus hours a week fully devoted to my existing employees and the various projects they are involved in as well. But there are a group of guys on FlyerTalk.com that lovingly create an arrest of my time and if i was to get the book done, i just did not have the time to devote to the role of moderating the OMNI forum on FlyerTalk. so I created a virtual RV and invited a number of my “closest” friends in that forum to take the summer off. They could have been nasty to me but they were good about it. They (I think) understood that I was asking for their help and all the jokes aside, I did not have to spend hardly any time moderating OMNI during this period. Truthfully, if not for the (virtual) RV trip, i would have surely missed my deadlines as that forum on occasion does take up some moderation devotion. So, for the guys in the RV - this one is for you.

Frequent flyer programs could be on track to becoming public companies. Here’s a look at what value these programs have as hidden airline assets, and what going public might mean to members.

Over the years, I’ve written extensively about the value that frequent flyer programs have in building customer loyalty, and on a monthly basis we at InsideFlyer trump the bonuses and promotional offerings that continue to make these programs as popular as ever. During the dot.com craze, I even ventured to propose that several programs were poised to take advantage of the red-hot public market for anything — including frequent flyer programs. When that red-hot market fizzled, so did the loyalty programs’ ability to capitalize on the hidden assets that they have become for their sponsors — airlines, hotels and credit cards alike. And with the airline industry still in search of funding for its future, I believe that these programs can provide one of several keys to survival. We take a look at the interest in and the possible result of frequent flyer miles as public companies.

First of all, frequent flyer programs are highly profitable and operate at a relatively low cost. To date, they have all provided a more than ample cushion to airlines seeking every bit of positive revenue. And arguably, they haven’t damaged their relationship with their members in the process. Sure, there’s continued grousing about award availability — but that existed when airlines were making money as well, and changes that have occurred over the past four years have been primarily based on the fact that these programs have become victims of their own success. Frankly, we all want our particular frequent flyer program to be what we want it to be without sacrifice or change.

Over the last few years, I have speculated that Air Canada would be the first, and would spin off its Aeroplan division (which has for some time operated independently from Air Canada itself) into a financial gain. With the Aeroplan Income Trust now being touted on the market at an estimated $10 a share, could you soon be a member who has shares in the miles you have earned?

And what value might we be talking about? We estimate that the Aeroplan program will land at a valuation of nearly $1.2 billion, and that a program such as American’s (which we pick along with Mileage Plus as the logical first candidates for the stock market among U.S.-based programs) could fetch a valuation greater than $2.5 billion.

Frankly, I’m surprised that this topic has not been mentioned by the airlines, as they continue to seek ways to raise capital. Granted, the trend seems to be in cutting costs, and I think the industry might be a little too narrow-minded for such consideration. I called several airline industry analysts and were even more surprised that the topic hasn’t even been considered by the likes of JP Morgan and others. American and United have for some time treated their frequent flyer programs as separate business units, so to spin them off would be no major concession and would undoubtably lead to a better prospects of raising even more capital.

Money Makers
Some of you might wonder how can this be — that a frequent flyer program would provide such value to the stock market, let alone the airline sponsoring the program. Beyond being one of the most recognizable assets of an airline in terms of driving passenger choice, as well as operating as a weapon used against low-cost carriers and new entrants into various markets, they serve as cash cows. The incremental revenue brought in from the growing stable of partners has changed these programs from solely being about the “frequent flyer” to being more about the “frequent buyer.” Take for instance the new partner for AAdvantage and SkyMiles: LoanToLearn.com.

Investor interest started to sprout just as the dot.com frenzy was dying out, no doubt because of the implementation of the SEC staff accounting bulletin No. 101 in December 1999. This new accounting standard required airlines to recognize frequent flyer program revenues on an accrual basis rather than as cash. This resulted in an increase in reported passenger revenue while lowering other types of revenue, since on an accrual basis, this partner revenue is recognized over a period of time. For instance, in the prospectus for the Aeroplan Income Trust, it is noted that there is a 30-month average lag time between Aeroplan selling its miles to partners and members redeeming those miles for awards. Since airlines and other loyalty programs are paid for partner participation, the pennies per mile add up in significant amounts. InsideFlyer has estimated in the past that more than $3 billion of miles are sold annually by programs in North America to their partners. The miles bought by partners are really a form of advertising and incentives to their customers.

I asked Fadi Chamoun, airline analyst, UBS Securities Canada about the Income Trust (a tax-efficient offer) for Aeroplan, and he noted “It is somewhat unique to Air Canada and Aeroplan. The main reason is that over the years, Aeroplan has become less reliant on Air Canada for its revenues then you would see in other propriety loyalty programs.” He went on to say that the interest is in high-yielding income and that “Aeroplan does provide a more sustainable and less risky business model than the airline.” At this time, not many would argue that point.

Would it be such a jump? As it is, many airlines already have collective bargaining agreements for employees of their frequent flyer programs. In the case of United, those CBA’s were represented by the International Association of Machinists and Aerospace Workers and any new contract would have to be ratified as all other types of contracts.

Standing Alone, Standing Tall
To get a glimpse of what United’s Mileage Plus program might be worth, I took a look at the first quarter of 2002, when United made changes to its corporate structure and marketing programs. The changes were designed to increase the overall value of United’s loyalty businesses and to allow the airline to focus on enhancing the range of products and services for Mileage Plus members and its partners. Unfortunately, all has not gone as smoothly as planned, with the hiring and departure of several marketing executives and the challenge of convincing potential partners that the Mileage Plus mile as a marketing currency was stable. Nonetheless, United “sold” all of its stock in Mileage Plus, Inc. and Mileage Plus Holdings, Inc., to the new subsidiary, UAL Loyalty Services (ULS) for a $900 million unsecured promissory note payable over 12 years and bearing an interest rate of seven percent, plus the assumption of approximately $500 million of outstanding liability on miles previously sold. That $1.4 billion transaction was three years ago, before the IPO market started to heat up again, and in a time when everything was still reeling from the effects of 9/11. But the value at that time properly represented the value of net future cash flows.

Worth it? In 2003, ULS accounted for 5 percent of UAL’s 2003 revenues. In 2004, United recognized more than $400 million in revenues related to ULS, which would not reflect the entire business revenue of ULS for that year. In 2000, revenue for third-party mileage sales reached $220 million during the first six months alone.

But American AAdvantage is clearly the king of frequent flyer programs, with annual revenue related to third-party sales of miles exceeding $1 billion annually.

How might it work? A stand-alone public company would retain the gross proceeds and liability from selling miles. As members of a particular frequent flyer program use the miles earned through means other than air travel, then redeem a travel award on the airline or its partners, the stand-alone company would be obligated to compensate the airline for the value of this award travel. Likewise, the airline would be obligated to pay the stand-alone company for miles earned through air travel if they are redeemed for any non-air travel award. The price of a mile sold between the two entities as a result of these arrangements would always be expected to be contractually mandated and fixed. Terms would be updated on market factors and conditions such as alliances. The spin-off benefits from the so-called margin or spread between how much it charges to sell miles to the program partners and how much it costs to purchase a product or service from those partners, whether it be airline travel or merchandise.

The strength of such a public spin-off would be that it would make miles safer for program members, since with the huge cash reserves for liability, it could easily arrange to purchase free air travel from other surviving airlines or new entrants should the airline become a victim of a bad economy. This sense of security would go a long way toward soothing some of the highs and lows of members’ emotions regarding the safety of their miles, if an airline is in bankruptcy.

But even that might be secondary to the amount of cash that could be raised to help airlines today. For instance, Air Canada is selling off just 18 percent of Aeroplan, but that is likely to put more than $200 million in the coffers of Air Canada, which just recently came out of bankruptcy. Since these programs could become stand-alones, it’s conceivable they would turn their attention to acquisitions and actually running loyalty programs for many other industries and businesses — something most would assume that frequent flyer programs are good at anyway.

Partners Pay Off
But the concept is not for every airlines’ program. One needs innovative, entrepreneurial and accounting-minded top management without direct ties to the airline itself to make this work. Much like United, of course, it would still require airline personnel to actually run the airlines’ frequent flyer bonuses, elite levels and benefits. We’re just talking about the revenue engine. Growth in mileage sales used to be in the 18-percent annual average, and has slowed down quite a bit following 9/11, but recently we’ve seen an uptick in the types of partners coming into the programs, as well as the promotional efforts of key partners such as credit cards. It is interesting to note in the Aeroplan prospectus that financial services account for nearly 63 percent of the annual revenue the program produces, with Air Canada at 27 percent, other travel services 8 percent and consumer product partners contributing 2 percent. That’s more than $340 million from financial partners. The U.S. market is even more robust with credit card and other financial partners. This is witnessed by the advance of $500 million to Delta SkyMiles from American Express, and the recent pledge of $350 million to the new America West/US Airways entity from their frequent flyer credit card sponsors.

Among international programs, Lufthansa Miles & More, Cathay Pacific Asia Miles and Qantas Frequent Flyer would make excellent candidates for a public float.

Currently, partner revenue is growing at a rate of around 14 percent, which is respectable as the economy continues to rebound. Some programs have even seen years where partner revenue has grown by nearly 30 percent, but that is usually the smaller programs just adding an array of partners for the first time. These are very respectable numbers, coming eleven years after the introduction of American AAdvantage Incentive Miles and United Mileage Plus Reward Miles; programs which ushered in the idea of adding partners that were not inherent to the airline business itself. Hotels and car rental partners are natural, but car loans and realtors?

The plus to all this is the fact that partner miles now outnumber miles earned by flying, and the percentage has been growing every year. In fact, last year I noted that the total of miles earned by credit card spending was greater than miles earned by flight activity (bonuses not included). The average award being redeemed these days measures 31,113 miles — a blend of business/first class awards as well as the popularity of international awards with airline alliances accounting for much of the growth. Assuming that 54 percent of the miles for this award will come from partner activity and the industry might be averaging 1.33 cents per mile (remember, financial partners buy the most but pay the least), the business model for this might show a gross revenue of $223.45. Good for the airline, the spin-off, the investor and if these programs can make better use of revenue management; better for members. You might say that these spin-off programs could become a modern-day version of a ticket consolidator who can purchase inventory at a discount based on volume. In 2004, several of the larger programs redeemed two million free award seats (this does not include partner airline redemption). Imagine the buying power of two million seats!

I don’t believe that members of frequent flyer programs will be harmed if the industry follows through with public spin-offs. As noted, the best policy would be to spin off a portion of the business to raise much needed cash, and then take more out of it as the stock rises (as would be expected in a rebounding economy with the acquisitions of additional partners and leveraging the expertise these programs have in managing customer loyalty). We accept that if adopted by the industry, some will not perform, but that would likely be due to stewardship rather than the business model itself. Given how airline stocks have been languishing for some time, this could benefit the airline in two ways: provide instant cash infusion to convince employees and others that the airline is indeed doing all it can to maximize its potential to weather the current crisis, and bolster the actual stock price of the airline for equity and borrowing purposes. While the long term might be a full spin-off. Taking Aeroplan’s lead of around a 20 percent float would do well for airlines right now. While one could argue that this is risky given that these programs are a core value to most major airlines, the move to capitalize this asset would not interfere with the airlines’ current mode of operating the program for their own passengers.

And finally, while all this may be interesting speculation, let’s also look at what an investment in AAdvantage or Mileage Plus might bring to a prospective shareholder. Seems likely that IPO costs would be driven far down, in that the membership base of these programs is the market maker; no boiler rooms touting the stock to unsuspecting investors. Various analysts in Canada have pegged the yield of the Aeroplan Income Trust to be nearly 8.75 percent. Healthy by most regards.

Speculation, Advice and PanicThere’s a buzz in the cities of Phoenix and Arlington, Va. We are referring, of course, to the possible merger, of America West and US Airways, either via a codeshare or actual merger to create over time, a single airline and single frequent flyer program. Here’s what we think:In some variation, this will happen and is likely to be news near the time you read this. We suspect that the two programs, Dividend Miles and FlightFund, will announce a reciprocal agreement between the two programs shortly. This will be similar to the current reciprocal relationship that members of United Mileage Plus and US Airways Dividend Miles currently enjoy, but better. As you may know, the relationship between United and US Airways is alliance-orientated, not partner-orientated. This means that members of US Airways Preferred elite status do not enjoy similar elite benefits when flying United. However, we believe that if and when America West and US Airways announce any relationship, it will likely mirror that which members of FlightFund enjoyed through the brief relationship they had with Continental OnePass, and that would include reciprocal elite benefits such as space-available upgrades, etc.We also think that such an announcement won’t mean a seamless relationship overnight, and any integration of the two airlines will likely take nearly two years to complete, though we suspect that the integration of the two frequent flyer programs will be accelerated, and we’ll see a single frequent flyer program within one year’s time. The problem is that with the loss of many marketing executives at US Airways, and lean staffs overall at both airlines, there’s not many chiefs left to make this happen. Right now our money is on the marketing staff at America West FlightFund to lead the integration, and frankly, with what we’ve seen coming from this program in recent times, it’s all good for members on both sides.<br>We foresee several other things happening that can and will benefit the members of both programs. That mileage balances in both programs will merge together over time with no loss, and that means members really don’t have to worry about what will happen to their miles. We highly recommend that members of both sides get in as many partner and promotional bonuses as they can over the next 6 months to enjoy enhanced account balances, because over time there will be a single set of partners and some may be gone.<br>We also suspect that the synergies of the two airlines will mean a relaunch of service to Hawaii for the benefit of leisure traffic westward, as well as enhancing the overall appeal of a low-cost, but major player in frequent flyer programs. Many years ago, America West had service to Hawaii on their own, and the management of America West at that time admitted the sole reason was for the benefit of their frequent flyer program. It’s a no-brainer for them, given the popularity and expanse of America West Vacations.<br>And finally, we’ll speculate on the surviving name. The airline itself will likely be called US Airways to remove the regionality of the America West brand (remember, US Airways has several important international routes). And we don’t think they have the horsepower or money to launch a new frequent flyer program. Also, we don’t see FlightMiles or DividendFund. While we think that the America West marketing staff will be key in the merger, we believe that the Dividend Miles would be the better choice for program survival. For one, it has more current members and would require far less expense to rebrand. It is also not tied into the ideas of miles related to air fare paid, as is the history of the name FlightFund. In addition, today’s loyalty programs are less driven by “flights” than in years past. But what do we know?<br>All in all, this is one of the best news stories to emerge from frequent flyer programs in the past two years … ever since US Airways announced a partnership with United Mileage Plus. And yes, we fully expect this new entity to remain a proud Star Alliance partner.End of panic.

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.

In the February issue of InsideFlyer magazine, I mention a few thoughts on what I think will be the next big thing for frequent flyer programs - the capitalization of them. Capitalization as in market value, as in public offerings.

In the capital markets, we’ve seen some revitalization of the IPO market, though it’s not nearly as rampant as it was during the dot.com “free money” days. This should come as great news to the likes of airlines still struggling along financially. Case in point: Before the dot.com crash of a few years back, I commented that I felt the positioning of the UAL Loyalty Services was perfect for a public offering of that part of UAL and would be worth hundrds of millions of dollars. Well, those hopes died with the market crash and perhaps also of the in-fighting that would likely have occured as the e-commerce guys became ‘darlings’ in most companies.

But the day is different now, and seriously, I think the time would be right for UAL to consider calls to Wall Street for a valuation of UAL Loyalty Services, or really just the Mileage Plus part. It would allow UAL to truly be an airline again and yet capitalize a few of their assets at a much-needed time.

Granted, I may be entirely off-base here, but let’s take a look at what makes this idea work: Early in 2004, they brought on board an experienced leader as president, Arnold Lewis, in the hope that he could run a public company should the need arise. His entrepreneurial experience as well as his years at financial giant American Express surely hold more promise than most other executives considering the same. They would likely be able to give Bank One/Chase a piece of the action to thank them for the financial support they have given in the past and likely will need into the future. As well, they could even re-spin off MyPoints.com to add even more power to this punch.

As for a value of Mileage Plus, well, how about $2.4 to $2.7 billion to UAL’s gain? It is estimated that Air Canada’s Aeroplan program might bring $800 to $900 million (USD) in market value should they be the first to do so. With the other assets that UAL Loyalty Services has, and frankly just the multiple that Mileage Plus has in comparison to Aeroplan, there could be easy support for this idea.

And like the industry’s initial investment in Priceline - they stand to profit even more as the spinoff returns value to the shareholders. In some respects, I don’t like the scenario I’ve just written about, since it may make decisions on member benefits and award redemption more in tune to a ROI. However, having said that. the public outcry of any dilution of the program and exposure of “Johhny can never redeem his miles…” might mean that the executives would pour even more into making the members count first.

Any of you want to call Glen Tilton and tell him what I think he needs to do with United? I haven’t bothered him for the past two years, but maybe now is the right time.