OK, but can you counter my argument: the reason they don't get rid of frequent flyer programs is inertia. If only one, or just a couple, airlines decided to get rid of them, they would be screwed because the ones that did would have a competitive advantage by offering something in addition to what the others do. But if all, or most, airlines decided to get rid of their programs, it would mean that the airlines would just compete on price.

So, in response to your question, your theory that "because the programs exist they must be worth keeping" is not necessarily or even obviously true. My theory can just as well explain the outcome we're witnessing.

EXACTLY!!!!

The last thing most sellers want to do is compete only on price, because the natural effect is that the price keeps going down, down, down. Instead, sellers of everything from cars to ketchup to airline seats try to convince consumers that their product is just a little bit better than their competitors' products, which would allow them to resist downward price pressure. Witness the billions of dollars sellers spent on advertisements. And one way airlines can do that is by using FFPs -- which essentially tell consumers that it's better for them to keep buying tickets on that airline because they will eventually get something in exchange for their loyalty. Granted, as prices continue to increase, this might be a less relevant factor, but it still is a factor -- at least the airlines (and I) believe it is.

Do you really think the airlines want to drive prices ever lower by competing only on price?

Actually, the new JD Power survey of airline quality found that only 39 percent of travelers now view price as the major determinant of what airline to fly... down from prior years. That means six out of ten customers are weighing other factors more heavily:

http://www.jdpower.com/travel/articl...Ahead%E2%80%A6

Exactly! If price is the sole factor the brand means nothing, service quality means nothing, etc. No provider of a commodity product whose inherent features are basically generic (air travel, cell phone service, vodka) wants to compete on price... because the other guy can always come in a dollar cheaper. You have to create extra, incremental perceived value with other factors, like aspirational brands and loyalty programs. Or the marketplace screws itself into the ground with predatory low-cost pricing and customers really suffer.

Not merely price, but also on schedule, service and amenties as they did prior to deregulation.

Frequent flyer programs work because the airline can use seats which would be otherwise unsold to reward loyalty. The key is that these seats are worth more, much more, to the passenger than they are to the airline. This has made the programs cost effective for the airlines and good value for their customers.

I think we are making the assumption that this has changed or will change soon. Reduced capacity will squeeze the otherwise unsold seats out of the system, and award redemptions will of necessity replace revenue seats.

This depends how well the airlines match capacity to demand at higher fares. I am sceptical that airlines have good models to project demand at sustained higher fares, because it's been too long since the industry has been able to implement major fare increases. Reducing capacity will lower the absolute number of seats, but they need to simultaneously increase load factors. If this proves difficult there may still be an ample supply of unsold seats.

Even if award redemptions do displace some revenue passengers it's not a damaging revenue loss because reward tickets are not "free" tickets. A material proportion of miles are purchased from the airlines by their marketing partners. Reward tickets are substantially discounted prepaid tickets. It would seem more sensible to raise redemption levels than to eliminate the programs.

I think we will see most carriers follow Delta's lead and introduce penny-a-mile redemptions in parallel with traditional fixed mileage redemptions. For example, a $650 domestic economy class ticket would cost 65,000 miles if there were no award-eligible seats allocated.

A certain former AA CEO gave a speach. You could enjoy reading it. I do not fully agree on it on the whole, but no mention about FFPs... so I presume he thinks the FFPs are not so bad after all.
Every person has the right to have his own ideas, but be aware of other's ones could be anyway useful.

According to our travel office in the international organization that I work for, most of our employees fly their business travel on ff programs, and actively specify which carrier they would prefer based on their ff program. Business travel tends to be the most lucrative for airlines. Yeah, ma and pa Kettle might just look at price, but that is not the type of passenger airlines are trying to attract with ff programs.

If airlines want to compete on just price, they had better look over their shoulder as RyanAir is looking at setting up a US airline and also planning to fly TATL.

RyanAir has a solid business plan, and is one of the few airline stocks worth investing in. One of my mutual funds that invests only in overseas stocks holds only one airline stock among its portfolio, RyanAir Holdings, and it beefed up its holdings there last year by over 30%.

For the passenger, however, RyanAir is not very customer focused.

Interesting.. in the firms I've worked for most employees flew based on convenience and times, not on FF programs.

Almost all of our travel is international. Was your firms' mostly domestic? Our employees also have a useful perk, in that if a trip is over a set number of hours, we are entitled to a stop over enroute, with per diem and hotel. Many of us take advantage of that when we can.

One of the places I worked was a major international consulting firm so there was quite a bit of international travel. On routes where there was lots of competition, say IAD-LHR or ORD-LHR, folks would fly based on FF programs. But I would wager that most of the time, and nearly all of the time domestically, it came down to the convenience issue. Certainly you're right though that for international travel there was more of a push to FF programs.

IME a lot of business travelers are racking up FF miles on flights they would be taking anyway. !-)

What do you think the Air New Zealand Airpoints Dollars are?

In recent years, yes. In future years, who knows? Banks are having a tough time with the credit crunch. Will they continue to pay airlines $300 to acquire new customers with 25k bonuses? I doubt it. More crucially, will customers continue to prefer 25k miles to a $300 cash bonus? That I seriously doubt.

I think we are seeing the last days of the airlines' cash cow known as affinity cards. This in turn will change FF programs from profit centers back to marketing expenses. More reason to devalue.

Herb Kelleher hated the idea and resisted it for years before finally giving in and creating one for Southwest Airlines. Would he make the same decision in 2008? In 2009? I doubt that he would have found legacy FF programs in their current devalued form very much of a threat. Therefore it's entirely possible that low-cost carriers would eliminate or eviscerate their FF programs, especially if the banks stop buying billions of miles.

Entirely correct. This is an attractive option for the airlines.

Dollars spent don't correlate as closely with profitability as does fare class purchased. Within a wide range of distances, fare class alone would be a reasonable proxy for profitability.

I know my behavior is modified by the frequent flyer program at UA.

I fly for work maybe four domestic round trips a year, but when I do it's Star Alliance or nothing. Not because I love them or anything, but because their network is convenient to ORD. I probably also make one more leisure flight on UA--with wife--than I would otherwise as well. Why? The lure of a free ticket to Hawaii or Europe.

If I were flying strictly on price or the FFP were junked, I'd fly AA out of ORD or drive another 20 miles to CHI and fly WN (not always cheaper) or drive another 40 miles to MKE (sometimes a big price difference).

But I doubt I'm far from normal. No miles, no loyalty. For me anyway.

I think that everyone here is forgetting the real advantage the airline is getting from "loyalty cards".

They get a comprehensive database of all our (frequent flyers) personal information and direct access to us in order to target their advertising most effectively.

I believe the airlines get just as much from these programs as we, the loyalty card holders, do.