[jimworcs]

So Peter, you make some reasonable points, but lets examine this in more detail. (Incidently, I acknowledge that in the example given, the passenger made poor choices about his purchase of the seat, but it nevertheless illustrates the point that the "free" or "lower cost" flight can be illusory).

In a genuinely competitive market, frequent flyer schemes could potentially be a market tool which supports greater customer loyalty without significantly damaging the consumer overall. That is not how the schemes operate in the US. The US air market is dominated by US Airways, AA, United, Delta and Southwest. These five have grown into huge monsters, gobbling up airlines along the way such as AmericaWest, TWA, Continental and NW Airlines to name just a few.

Four of the big 5 operate the hub model, and SWA operate a hybrid hub and point to point model. The hub model requires huge numbers of transferring passengers to work, as the point to point traffic would not sustain the size of the hub. (For example, Charlotte, NC has a huge US Airways hub, but could not sustain the size of the operation on pure point to point).

These hubs form huge local monopolies, in which one or at most two majors dominate the market. Business travellers are forced to use the dominant carrier in their hub. The airlines then use the incentive schemes to try and block out any new entrant or competitor. A business traveller based in Charlotte, would enrol on US Airways because this would allow them to rack up the most points. For that individual, this may be a rational decision, but the effect of this is market distorting and anti-competitive and against the interests of the consumer overall.

It changes consumer behaviour in a way which seriously undermines the market. Instead of purchasing on price or even convenience, the consumer makes purchasing decisions based on "perks", which have predominatly been purchased using someone else's money (their employer). This is designed to dampen the desire of consumers to get "the best deal" or decisions based on service or quality.

The result is 4 huge local monopoly operators. They dominate and control whole markets (Delta at Altanta, AA in Dallas, United at Newark, US Airways at Charlotte for example). This increases fares and reduces the quality of service to all passengers and is ultimately against the interests of ALL passengers.

The US air market is dysfunctional. The major carriers repeatedly receive "exemption" from normal market rules. They require anti-trust immunity to take over their competitors, they enter Chapter 11 repeatedly to renege on their obligations and employee contracts, they have special protection from foreign competition and ownership rules are controlled to "protect" management. It is not as if this system is even effective. Four of the top five carriers have been bankrupt in recent years.

The impact is there for all to see. In the 1970s before de-regulation and the wide-spread market abuse now prevalent, US airlines enjoyed the highest of reputations for quality and service. Today, none of the major carriers appear in the 5 Star category of Skytrax, which is the largest passenger quality survey in the world. The standards of service are far below those of Asian, Middle Eastern and even European carriers. Perhaps you could argue that prices are lower. In fact not, the cost per passenger mile in the US is up to 40% higher than in other regions and overall pricing is 22% higher than in Europe, which is a comparable market in terms of size and development. Maybe the market works well in terms of profitability. In fact not, shareholder value has been seriously devalued at all five of the majors and 4 of those five have been bankrupt at least once and some even more often.

Not all of these problems are related to frequent flyer schemes. US airlines suffer from chronic poor management, which pays little attention to shareholder or customer needs. They can only do this because they know the market doesn't function...customers cannot "flee" the airlines, they are in hubs which are dominated by them. The frequent claims by passengers that they "will never fly Delta again" have little or no meaning in Atlanta or Salt Lake City etc, as they know, they have little choice and even smaller lower tier markets depend on the hubs for their connectivity so have little choice. The managers know the airlines are "too big to fail". Delta and AA entered bankruptcy safe in the knowledge they would be allowed to re-emerge intact and with largely the same management. There is no incentive for the managers to change their behaviour.

Some of the problems are related to the distribution costs of tickets, but even here, the US airlines have badly managed this. In other markets, airlines are the major distributors of their own ticketing due to good marketing and effective management. In the US, the airline management sold off their ticketing via Sabre or Gallileo etc for short term profit and are now trapped in a system of their own making which skims off huge amounts of their margin. Those poor management decisions made for short term gain in the 1980s and 1990s, generating huge bonuses for the managers, are now costing US airlines and their consumers huge sums in fares and ancilliary fees.

The airline industry in the US is broken. it needs a radical overhaul. I would start with the following:

1. Give airlines a 10 year plan which requires no airlines in a top tier airports to have more than 25% of the overall landing and take off slots in a particular airport.

2. Drop foreign ownership restrictions and operate open markets on a bi-lateral basis for all international routes.

3. Ban frequent flyer schemes for domestic travel for 10 years and then re-evaluate if they are market distorting.

4. Remove anti-trust immunity from airlines and give the DOT re-regulating authority, particularly in relation to consumer protection and rules which are unfair and one sided.

5. Re-evaluate Chapter 11 rules and instead allow for active management of an airline which fails. This should include the DOT having the power to hand over assets such as aircraft, landing slots and airport space to other carriers to maintain service. (Similar powers to protect the consumer are present in banking, so the legislative framework already exists for this principle).