REQUIEM FOR A FREE SEAT.

Is the death bell tolling for frequent flier programs?

THE STORIES HAVE BECOME LEGEND. THERE'S THE PUDDING MAN, THE CALIFORNIA GUY WHO FIGured out a way to earn 100 American Airlines frequent flier miles for every 25-cent cup of pudding he purchased. He ended up with 1.2 million miles--worth 48 free domestic tickets--and 12,000 desserts. Then there are the LatinPass road warriors who zipped around the region earlier this year, cobbling together member hotel stays and flights in a quest to win a million-mile prize. Randy Petersen, editor of Inside Flyer magazine, hit the mark following three days of one flight after another and scenic views of the interiors of air terminals.

Those flying fanatics are discussed like heroes in many an airport lounge. But are the mile maniacs ever going to see free tickets for their labor? Some airline experts have their doubts.

"Frequent flier mileage will eventually be worthless because the airlines will be more interested in selling that last seat than in giving it away," Julius Maldutis, managing director of equity research at CIBC World Markets, told a conference of airline CEOs earlier this year.

Either Maldutis has gone mad or a consumer hurricane is surely brewing. Since American Airlines launched the first frequent flier program in 1981, the concept has become the most successful customer loyalty promotion in history. American's AAdvantage, which began with 750,000 members, is now the most popular frequent flier program in the world, with 40 million members. Even the slightest change to the rules brings massive class-action suits. American Airlines is offering millions of dollars in mileage credit and fare discounts to settle legal claims filed a decade ago after it altered the terms of its program. A similar lawsuit was settled against Delta Air Lines in 1998.

Talk of alterations in these promotions draws a strong denial from airline executives but, increasingly, frequent flier programs aren't serving their traditional function: to fill seats while encouraging customer loyalty. Thanks to a buoyant U.S. economy, many carriers are operating with their jets 80% full, the highest level since World War II. Airlines don't have to fight as hard to fill their planes. Instead of "giving away" seats, air carriers now sell them, slashing fares at the last minute on their official Web sites.

Can't get no satisfaction. Just as important, the very success of the mileage plans undermines their effectiveness. The more people jump on the frequent-flier bandwagon, the more compete for the coveted free seats. There are clear indications that the programs have hit a wall in terms of capacity. According to a recent study by Frequent Flyer magazine and J.D. Power and Associates of "factors showing overall satisfaction among air travelers," consumers rated frequent flier programs at the bottom of the heap, tied with airline food.

Embattled United Airlines is using miles as booby prizes to assuage angry passengers. In August, after weather and labor problems resulted in delayed and canceled flights, the airline apologized by giving its "Elite" status frequent fliers double bonus miles for the rest of 2000. But there is a move afoot among fliers to reject the miles--and send United a message of dissatisfaction.

Lucky seats. Award tickets are always available, but travelers have begun to complain they can't vacation where they want at the time they want. U.S. airlines allocate an estimated 8% of their seats for frequent flier freebies, but the carriers won't reveal precisely how the process works. The growing suspicion is that the airlines are cutting back on the award seats.

"They're still available. They've actually increased in number," says Martha Pantin, a spokeswoman for American Airlines. She could not, however, say if the number of free seats has grown at the same rate as enrollment.

"The complaints that you hear from travelers today, that there's such a limited number of seats available, may get worse," warns Stephen Roof, aviation attorney at law firm Shutts & Bowen in Miami. That's because airlines want the highest "yield" or dollar return for each seat on the plane, says Roof. With planes running nearly full, that puts pressure on the frequent flier pool.

Waning enthusiasm for free seats within frequent flier programs in the United States will be felt in Latin America. U.S. airlines move more than half of all travelers to and from Latin America and the Caribbean. Naturally, the region's airlines are joining them in global alliances [see chart] to extend their flight offerings and promote consumer loyalty. For example, Aeromexico recently joined Sky Team alliance members Air France, Delta and Korean Air in a mileage sweepstakes. The four carriers will ante up 2.6 million miles each, redeemable as freebie awards by contest entrants who answer questions at the airlines' Web sites.

The punch of such promotions and the alliances in general may suffer if frequent flier programs don't deliver free seats for brand-loyal travelers. Overall, Latin American carriers have been less aggressive, less sophisticated and less successful with their frequent flier programs.

Betting that passengers will believe mileage isn't as good as actual prizes, Colombian carrier ACES issues annual "Silla Ganadora" [Winning Seat] awards. From August to October, passengers in secret prize seats win free tickets, weekend hotel stays, cruises, prepaid phone cards, newspaper subscriptions, home appliances and Internet access.

The customer loyalty innovations, such as the multi-airline program LatinPass, have not produced Latin American business executives who are obsessive collectors of travel miles. "I don't have a single client who uses LatinPass," says Enrique Felgueres, CEO of travel Web site Viajo.com. Some use the Aeromexico pass, but the mileage frenzy is principally a U.S. phenomenon, he says.

Airline loyalty programs can be useful for some Latin American travelers, Felgueres says but, overall, passengers don't benefit. "Once you earn your awards, there's always the issue that you can't use them," he says.

Discount Web tickets. Passengers seeking ticket awards on the region's carriers may not have to fight as hard as those booking on U.S. carriers. But limited frequent flier free seats on U.S. airlines will likely undermine the programs of their Latin American partners and push travelers to consider fares first and airlines second.

The low level of Internet use for booking travel in Latin America means online activity has had less impact on seat availability than in the United States. Viajo.com estimates less than 1% of all travel arrangements in Latin America are done on the Internet, although that will change as Internet penetration grows. And as it does, the region's airlines will turn to the Web to fill empty seats.

Like other businesses, airlines are actively seeking the benefits of selling through the Internet. To that end, Aeromexico recently became the first Latin American carrier to auction tickets online for flights in Mexico and the United States. The airlines want customers to book online because it costs them $1 in administrative fees to sell an Internet ticket, compared with $5 for a ticket through the airline reservation agents or $10 through a travel agent. The immediacy also allows them to sell tickets at last moment with steep discounts. Many of those eleventh-hour seats were reserved in the past for frequent fliers.

Getting rid of the frequent flier programs, however, even if their real purpose is gone, will be no easy task. Lawsuits have surfaced each time U.S. carriers tried to simply change the rules of the programs. The U.S. Supreme Court ruled in 1995 that frequent fliers have contract rights they can enforce against airlines based on the mileage programs.

Although the airlines probably won't let mile programs go, they are looking to transform the proposition. Aerolineas Argentinas says its 500,000-member program is not just about free seats. "It's providing extra services. We want to reward loyal customers," says Marcelo Moscheni, general manager of sales for Aerolineas. "We wouldn't discontinue the program, even if our passenger load was very, very good."

Fear of flying. In the United States, the mileage-for-everything world provides a hint of where the programs are headed. Frequent flier points pile up from telephone calls, grocery shopping, the purchase of flowers or dinners, Internet service, leasing of cars--even signing a mortgage. Visa and Marriott hotels are offering 5,000 frequent flier miles to guests who stay in the hotel group's Latin American properties and put the tab on their Visa credit card. Continental Airlines earlier this year began awarding frequent flier miles to customers who used a certain brokerage company for Wall Street investments.

The partners in the airline programs--the grocery stores, car rental outfits, credit card companies--pay the airlines up to an estimated two cents for each mile. Some companies deny that the expense is passed along to the consumers, while others very clearly indicate extra charges for program points. MCI, for example, says its phone subscribers pay the same calling rates regardless of whether they get frequent flier miles or not (although some MCI users who drop the plan dispute that). Dollar Rent a Car, meanwhile, adds a clearly noted "Frequent Flier" surcharge to its bills. Either way, the mileage partnerships represent big bucks for the airlines. And that alone may be what is propelling the loyalty programs for now.

"I've heard it said that, last year alone, the U.S. airlines sold about a billion dollars in miles. They've turned it into a pretty profitable business," says Justin Shaw, vice president and general manager at Interne-t site biztravel.com, which caters to corporate travelers. "At the same time, the value of the information in their frequent flier databases--about their most loyal customers and preferences and tastes and travel patterns--is extremely valuable to marketers who wish to reach those customers."

For frequent fliers who've racked up thousands of miles but don't want to vacation in Des Moines during the winter, there are alternatives to free flights. Miles can be used for magazine subscriptions, free hotel rooms, car rental discounts and the purchase of kitchen appliances.

Would consumers go for frequent flier programs that offer anything less than the coveted prize: a free plane ticket? Probably not. Loyalty programs that earn consumers an extra tank of gas after 10 fill-ups or a free novel after a dozen bookstore purchases haven't had the same impact. Any effort to end or modify frequent flier programs in the United States is likely to spark a consumer revolt.

So the major airlines will continue the programs, shaving seat availability and trying to entice customers to use their precious points on anything but airline tickets. And the diehard frequent fliers will increasingly discover that racking up mileage points is the easy part. Finding a free seat will be the real challenge.

FREQUENT FLIER TIPS

* The most effective bang for the buck? Using frequent flier miles to upgrade economy seats to first and business class.

* Forget free seats. One of the savviest frequent flier goals is earning enough miles to qualify for preferred status. That translates into priority boarding, seat preference, better treatment of luggage and, in some programs, guaranteed seats on sold-out flights.

* Free ticket awards can be booked as far as 11 months in advance. To increase chances of getting a seat on the flight you want, on the date you want, book as early as possible.