Really depends upon what you mean by "dilute." Will there be at least one more elite at each level than there would have been if they did not do the promotion? Undoubtedly. If that's all that you mean by dilution, then you are certainly correct.
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Also, the notion of elite dilution doesn't take into account the # of people who have drastically reduced their flying b/c of the economic situation and thus will not requalify for status.
Furthermore, mileage/status runners don't represent the majority of the population. Many people (myself included) do not fly simply to get status/benefits. I fly b/c of my job and if I changed careers tomorrow and did not need to spend several days a month on an airplane, I wouldn't fly simply to maintain EXP status.