seat 2b

By Joe Brancatelli

updated 9:52 a.m. ET Aug. 6, 2008

The airline guys who invented frequent-flier programs almost 30 years ago and then turned them into wildly successful marketing vehicles eventually began calling miles "the nation's second currency." After all, they said with a warranted appreciation for what they had wrought, what else in America was so easily earned, so widely accepted and so valuable?

These days, however, frequent-flier miles are looking a lot like Zimbabwean dollars. The currency is being devalued with spirit-crushing regularity. There's less and less to buy with it now that airlines are slashing their route networks and seating capacity. And today's frequent-flier program managers have been given a mandate from their C-suite bosses: Generate fast cash by squeezing frequent fliers with a battery of fees—even though the new charges are destroying the long-term allure and profit potential of the plans.

"I understand why business travelers are disgusted," the manager of a major frequent-flier program told me a couple of weeks ago. "My bosses want revenue and they want it now. They want it from the partners who buy the miles and from the travelers who earn awards. And they don't want me to have access to the seats [for awards] that the revenue-management guys think they can sell. So what am I left with? Travelers understand that they can earn all the miles they want. But using them? Not so much."

Want a graphic example of how fast the frequent-flier programs are devolving? Consider the developments at United Airlines, which operates Mileage Plus, the nation's second-largest plan:

To shore up its cash position last month after another quarter of multibillion-dollar losses, United turned to Chase, the bank that issues Mileage Plus credit cards. Chase promptly ponied up a $600 million prepayment for miles that will be distributed to Chase customers in the form of bonuses for taking and using any of the half-dozen flavors of Visa cards emblazoned with the Mileage Plus logo.

Although the mileage deal was bundled with other cash considerations that Chase extended to United, it's not hard to figure out how many miles that $600 million bought. Big frequent-flier program partners like credit card banks usually pay around a penny a mile, so United will need to mint about 60 billion new miles for Chase. That'll expand United's current pool of 511 billion unredeemed miles by about 12 percent.

The devaluation of United's "currency" is worrisome enough. But since United's route network is shrinking—by the end of the year, the airline estimates its worldwide seating capacity will be 10 percent lower than it was at the end of 2007—Mileage Plus members are looking at double-digit inflation even as the supply of goods to "buy" with Mileage Plus miles is contracting by double digits.

United is not alone in using its mileage program as a cash cow. Continental Airlines, which operates the OnePass program, recently received a cash infusion from Chase, also the issuer of OnePass credit cards. And Delta Air Lines might not have survived its 2005 bankruptcy without a huge forward purchase of SkyMiles by American Express, which issues Delta's credit cards. And just like United, all of the big airlines are slashing their seating capacity by 10 to 15 percent this fall as they mint and sell billions of new miles.

The inevitable economic effect of too many miles chasing too few seats: Airlines are hiking, sometimes by hundreds of thousands of miles, the amounts needed to claim an award.

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