FEDS REVIEW AIRLINE LOYALTY PROGRAMS

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Airlines are flying into the eye of a regulatory and judicial storm that could impact the industry's frequent flier programs, advertising practices and, possibly, profits.

U.S. Transportation Secretary Federico Pena last week announced the first intensive review of frequent flier programs, as well as an initiative to scrutinize airline industry advertising, scheduling and booking practices.

Mr. Pena's initiative comes on the heels of the U.S. Supreme Court's recent decision to let a class action suit against American Airlines proceed. The suit, filed on behalf of 4 million AAdvantage frequent flier members in Illinois, claims American's 1988 changes in the program constituted a breach of contract. The airline retroactively restricted the availability of free seats on certain dates and flights.

The outcome of the case may not be decided for several years but airlines are keeping a close eye on both it and Mr. Pena.

"If there is a mandate that airlines must make a certain number of seats available on every flight for frequent fliers, it could cost them a considerable amount of money," said Jim O'Donnell, chairman of Houston-based Seabrook Marketing. "I don't think that's likely but, unlike the courts, the [Department of Transportation] can move swiftly."

Continental Airlines and USAir were both fined by DOT in 1993 for not providing enough seats eligible for advertised discount fares.

A Continental spokeswoman said the company hasn't formulated an opinion on Mr. Pena's plan.

A spokeswoman for American, said, "Over the years, we have not received a high level of complaints from members over not being able to find seats. We look forward to working with [Mr. Pena's] team."

Other airlines, including USAir, took a similar position but change seems inevitable.

"The airlines have become victims of their own success," said Randy Peterson, editor and publisher of InsideFlyer, a magazine for frequent fliers.

In the programs' dozen-plus years of existence, millions of free trips have been earned by travelers in one of the few remaining ways the industry has successfully built brand loyalty in the era of cheap fares. However, the major airlines have been moving to place more restrictions on the programs, including increasing the number of miles that must be flown to earn a free ticket.

Mr. O'Donnell said more adjustments will come to frequent flier programs and advertising.

The airlines currently spend at least half of their marketing budgets on frequent flier programs, he said. In 1994, the top five airlines spent $248.2 million through September on all measured advertising.

"It's an increasingly important figure and tends not to be cut back-unlike advertising-because they believe they can see more measurable benefits," he said.

"I suspect we'll see changes in the price publishing area and a re-emphasis on seats available for sale," he said. "But we can probably expect to see a verdict in the O.J. Simpson case before we do for American Airlines."

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