June 10 (Bloomberg) -- United Continental Holdings Inc.’s move to base frequent-flier rewards on fares instead of distance flown is poised to force American Airlines Group Inc. and foreign rivals to match.
American stands out as the last of the three major U.S. carriers with a traditional focus on flight miles after United joined Delta Air Lines Inc. today. To compete for business-class customers, American and big overseas peers will have to shift, said Jay Sorensen, president of consultant IdeaWorksCompany.
The change risks shaking up airlines in United’s Star Alliance network, whose international carriers cooperate in loyalty programs, Sorensen said. For example, on trips between Chicago and Dusseldorf, Germany, premium passengers will have an incentive to book on United to earn more miles than they could on Star partner Deutsche Lufthansa AG, Sorensen said.
“In the frequent-flier world this will create a mess, but in every mess there’s opportunity,” said Sorensen, whose firm is based in Shorewood, Wisconsin. “As airline executives learn how different this is, they’re going to have to do some real hard thinking.”
Starting March 1, Chicago-based United will grant MileagePlus members five to 11 award miles for every dollar spent on fares and surcharges. Currently, travelers earn one award mile for each mile flown, with bonuses for business- or first-class passengers. Corporate fliers are prized because they fly often and typically buy more-expensive, last-minute fares.
Under the current program, a round-trip coach passenger from Newark, New Jersey, to San Francisco July 2 to July 9 would earn 5,130 award miles. A passenger paying $574 for that trip, based on a sample fare on United’s website, would earn 2,870 miles under the new program. Someone paying $1,284 for a flexible-fare ticket would earn 6,420 miles.
“It enables us to better ensure that those customers who are flying the most and spending the most get the greatest benefits from the company, which we expect will drive further loyalty,” said Rahsaan Johnson, a United spokesman.
United rose 3 percent to $47.76 at the close in New York. The stock has gained 26 percent this year.
Delta was the first of the full-service U.S. airlines to break the longstanding link between award miles and the distance flown. The Atlanta-based carrier announced its change in February, to take effect on Jan. 1.
American probably will have to follow suit, because United and Delta are the next-largest competitors behind the world’s biggest airline, and industry practices such as bag-check charges and rebooking fees typically are copied once one carrier leads the way. Low-cost carriers such as Southwest Airlines Co. already use a fare-based system.
Casey Norton, a spokesman for Fort Worth, Texas-based American, declined to comment on whether the airline would join its U.S. peers. The company’s top priority is integrating American’s loyalty program with that of merger partner US Airways Group, Norton said.
“We are always watching the competitive environment and we’ll make sure AAdvantage is positioned as an industry-leading loyalty program fitting for the world’s greatest airline,” Norton said.
United isn’t changing its mileage redemption chart, which outlines how many miles a frequent flier must accrue. The changes also won’t affect how MileagePlus members earn premium status, which gives them such perks as seating upgrades and priority check-in, Johnson said.
Next year, United plans to introduce new ways for members to redeem their miles, including single-flight purchases of seats with extra legroom and checked-baggage privileges.
Dennis Lombardi, a food-service industry consultant who flies 60 times a year, said he understands why United and Delta would want to court their highest-paying customers. Consumers already accustomed to earning rewards points based on credit-card use probably won’t balk at the airlines’ moves, said Lombardi, an executive vice president at WD Partners in Columbus, Ohio.
What the airlines need to do, he said, is focus on frequent fliers’ real source of anxiety: difficulty in redeeming their awards. Round trips at the 25,000-mile minimum seem especially elusive, forcing travelers to cough up more of their rewards to claim a free ticket, Lombardi said.
“It feels like there’s fewer and fewer of those 25,000 round-trip seats available,” he said.
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