Think that all award points are the same? OK, sure, we know that the currency which is points can vary from program to program, but what about within a program? Yes, there are even differences there, despite the fact that the points appear identical to the end-user. The airlines are doing everything they can to shift the balance of the two types of points; it should not be surprising that they’re doing so in their own favor.
So, just what are the two types of points? In a recent presentation one program executive described them as “Program Miles (PMs)” and “Commercial Miles (CMs)” in his slides. Program Miles are those accrued through air travel and Commercial Miles are everything else (e.g. banks, etc.). The image quality here is pretty awful; sorry about that. But the point being made is very clear: Airlines should do everything they can to decrease the PMs and increase the CMs in circulation. In the case of this presentation the advice offered (both on the screen and aloud) was to
Reduce PMs to most rational level based on competitive dynamics & ROI.
If that’s not a clarion call to the programs I don’t know what is. And given the recent trends – most recently with Delta and United Airlines choosing to go revenue-based for PMs in the coming year – it seems that everyone is listening.
CMs are a revenue source for the programs; the partners are buying the points at a rate which is generally very beneficial to the airlines. PMs are a cost center, taking away from the internal accounting balances as the airlines pay themselves internally for the points being issued. The overall liability to the airline can shift dramatically as the ratio of PMs:CMs is tweaked through marketing actions. The chart above shows an example of that valuation shift. It is no wonder that the program operators want to look a lot more like column B.
The argument is also made that increasing the distribution of CMs increases the value of the program as it means reinvestment based on higher revenues within the program. When they have more money they can spend more on treating the customers better. Of course, there are plenty of customers who believe that they are the most important part of the program’s existence and that’s often based on their flying behavior, not their partner activity. In some cases they might be correct, but the programs have a very different view of the situation as shown from presentations like this one.
Are the mid-fare customers being pushed out of the loyalty market as some have claimed? Maybe they are on a straight earning for flying basis. But the plethora of partner earning options remain. And there are more cash-back options than ever. You can only lose in the game if you’re not paying attention and fail to adapt. Better to understand what is going on and why than simply be pandered to and told that you’re the most important customer and that the programs are screwing you. Especially when you’re not.
Some are choosing to see the recent changes to program earning rates as a negative. I’m looking at it as an opportunity for reevaluation and potential personal benefit. Even if that doesn’t come in the form of heavily discounted first class tickets all the time.
Related Posts:
- So, about United’s new spend-based earning rates…
- Delta ties elite status to spend
- Why spend is a good qualifier for airline status
- United Airlines adds spend to elite qualification requirements
- Are we looking at a shift towards revenue-based loyalty programs?
- Why the Delta SkyMiles changes don’t really matter
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“PMs are a cost center, taking away from the internal accounting balances as the airlines pay themselves internally for the points being issued.”
This is the most important sentence of a very good post.
Another way of saying the same thing is that these ‘PMs’ are marketing expense. And airlines don’t think they need to spend on marketing right now to fill their planes. Delta, at least, is probably right.
That situation will change, this is a very cyclical industry. I’m not suggesting that program structural changes will be undone, I don’t expect that. But overall “generosity” will swing back when the economy falters and airlines need to leverage their programs to try to fight for market share and put butts in seats.
(And they’ll continue to do this in select markets.)
Excellent post. It appears that there might be less competition among airlines but massive competition among credit card companies, for now.
This will likely reverse itself at some point, but for now this slide seems like a tacit approval of manufactured spend and it’s quieter usual-spend cousin.
Off to CVS…………..
Thank you for an excellent post. I now have a better understanding of the financial incentives. This also can explain the cap DL and UA have instituted in 2015 of 75K miles per ticket, regardless of cost.
This makes it very clear: if you don’t hold the program’s credit card or aren’t spending a ton on it, you’re going to get steamrolled by CC holders flooding the market with points.
What I find most interesting are the numbers shown. Assuming these are real numbers, am I correct that airlines are selling miles to partners for 1.5cpm, and booking a liability of only 0.6 cpm? Gotta love that arbitrage!
Maybe its not in my own best interest but when when I lose interest in the PM’s I also lose interest in the CM’s. Delta miles have been dirt to me for a while, I’m just starting to come around to think of UA miles in the same vein. I also wont be flying Lufthansa business class quite as much – thats OK.
The danger though is consumers perceive the amount they earn from program miles higher than what they actually receive.
So someone who flies twice a year doesn’t earn many miles under the current distance or the new revenue based programs.
But when they hear their earning from flying will go down dramatically there is a risk they don’t want to participate on the commercial side, even though their total earn doesn’t decrease much.
Don’t think the airlines have fully considered that second order effect on their co-brand products.
What does APM stand for in this context?
Seems to be Average Price per Mile.
Great post! Thanks! Helps to put the recent changes into perspective.
Seen in this context, you can see why DL loves someone who spends 220k on their cards
220k miles + 100k bonus miles = 4500$ pure profit to them from CM sales.
Add the annual fees (of which they get a cut) = 175+175+450+450 = 1250$ more of which they get 500$ at least so now they get 5000$ from this customer.
If he does fly a bit, very little added cost to DL for the benefits (if upgraded, he pushes out a customer below him only)
If he never flies and cashes out for gift cards at 0.1 c each = 3300$ out = still a profit of 1700$ to them for the customer
If they flew to DC more as they used to and if they restore the AF relationship to wideopen availability, I would get back to DM, but for now, meh!
That is the problem with CM from partners, the “reward” has to be attainable and “worth it”.
“CMs are a revenue source for the programs; the partners are buying the points at a rate which is generally very beneficial to the airlines. PMs are a cost center, taking away from the internal accounting balances as the airlines pay themselves internally for the points being issued.”
Good post that describes the current landscape well.
The sentences I and others quoted above is the key, and the fallacy in the airlines’ thinking. Classic bean-counter mentality: it’s easy to see the revenue associated with miles that they sell to banks. But the benefit in awarding miles to flyers is indirect, long-term, hard to quantify: namely, increased incentives to fly more, purchasing of higher fare classes to earn more miles, an increased incentive to use the credit card in the first place, loyalty to the carrier, etc. Of course the ROI is much harder to calculate.
As another poster analogized, these are like marketing expenses. By extension of the airlines’ logic, they could eliminate all marketing since it’s only a “cost center.” This type of thinking dooms many businesses (or further continues the death-spiral in which they find themselves when they have no choice but to cut direct expenses), and perfectly typifies UA management these days. Let’s hope, for the stockeholders’ sake, that their gamble is correct.
Marketing only makes sense if it is showing a RoI. Just spending more money on marketing is silly if it doesn’t actually drive purchase behavior.
And despite all the posts from people swearing by the long-term higher spending behavior I’m not so convinced that really exists at the macro level. Maybe here and there on an individual level but not broadly enough that it is a smart idea from the airlines’ perspective.