Squeezing the Profit Margins of Frequent Flyer Programs

Randy Petersen points out that airlines are booking balance sheet adjustments to increase their expected liability for their frequent flyer programs.

When an award is redeemed, frequent flyer programs recognize revenue from mileage they’ve sold and they have to pay for the awards that are claimed. A domestic saver award might entail a frequent flyer program ‘buying’ a seat from the airline for $25. A partner award is more expense, and an ‘anytime’ award (that generally requires about twice the number of miles to redeems) is more expensive still.

Frequent flyer programs are apparently seeing greater redemption of anytime and partner awards than past experience would predict, so they have to acknowledge an increased future liability.

Randy believes this phenomenon is good for members of frequent flyer programs, because it illustrates the value of partner awards. I’m not convinced.

Randy acknowledges

    It could be that there are additional destinations not served by the parent program members are redeeming to. More likely it’s members using partner airlines to get free awards that were not available on their parent program.

Airlines have printed more mileage currency without increasing the pool of available redemption seats, so there’s more competition for ‘saver’ awards and they’re more difficult to get — hence more anytime awards and partner awards redeemed than ever before.

Partner options are certainly good for members, and the existence of options is better than simply not being able to redeem awards at all. But a world in which standard awards are hard to come by doesn’t seem all that great for members.

Ultimately what the greater financial liability that programs are having to book means that there are diminishing marginal returns to selling frequent flyer miles.

If a program sells 25,000 frequent flyer miles to partners at 2.5 cents per mile, they’ve garnered $625 in revenue. If a flyer then redeems those miles for a domestic coach saver ticket and the program pays the airline $25, the program has made a $600 profit.

But when those coach saver awards run out, the program has to go out and spend money on more expensive awards. If they don’t, they’ll have frustrated members and the revenue stream will eventually start to dry up. But their margins get squeezed. I think that’s what we’re seeing.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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