At the moderator gathering in San Francisco I sat with Randy Petersen at dinner Saturday night. He raised some real alarm bells for me.
Up until now I haven’t made mention of the new United Choices program. United has introduced new award redemption options for Mileage Plus Visa cardholders. It’s a complex Rube Goldberg scheme where you can only redeem miles earned from the credit card for specific awards on offer through the program. It will probably, eventually, be rolled out more broadly.
United already reduced the value of its regular award chart. Now they’ve introduced new awards that have a rough value of 1 cent a mile or less, though of course not subject to capacity controls.
I hadn’t mentioned the program because, to me, it wasn’t worth mention. I have a hard time imagining a scenario where I’d recommend anyone use the new awards.
But Randy said he saw United — and the rest of the industry — moving towards fixed value awards without capacity controls as a replacement for (rather than a supplement to) their award chart. In other words, he sees award charts eventually going away.
This is a scary and disappointing proposition for me. It’s just a prognostication at this point, though certainly an informed one. I enjoy using my miles for international business and first class travel, which values each mile at 8 to 10 cents. If that possibility disappears (or requires 8 to 10 times as many miles, as under this new scheme) then the gravy train, and my relationship with miles, will be over.
At the point where a 1% rebate or 1 cent per mile value becomes the standard there will be many far more competitive rewards options out there. I’d rather use a 1.5% cash back card than a 1% mileage rebate card. The cash back value is higher, and not restricted in how I can spend it (plus I trust the Federal Reserve more than mileage programs not to devalue their currency even further).
While attractive on many levels for programs, no doubt, because it fixes their liability and eases redemption concerns, I project that it will also make them uncompetitive with other rebate and rewards offers.
Miles hold sway now not just because they offer something back. Plenty of other programs do that too. They hold sway because of the romanticism associated with free vacations and aspirational awards.
I wouldn’t even spend money to fly international first class on an Asian carrier, but I can spend miles to do it. Each time, it’s a dream come true. Domestic coach tickets sans capacity controls, or miles for merchandise, just don’t capture the imagination in the same way.
If United expands this program, replaces traditional awards, and if other airlines follow suit they’ll be killing the goose that lays the golden egg – both of loyalty feeding the airline and of the dreams of their members that fuel truly valuable and profitable loyalty programs.
Still, I’m skeptical of Randy’s (admittedly off-the-cuff) prediction of the end of award charts. They’re not just lucrative for members, they’re also lucrative for programs. Capacity controls mean that an airline — at least in theory — only makes mileage awards available for seats that would otherwise go unsold. In the roughest of terms, this means they only have to book the marginal cost of transporting a passenger as the cost to the program of that seat. If they sell 25,000 miles at 1.5 cents apiece they bring in $375. If those 25,000 miles are redeemed for a domestic coach award the program sees an expense of perhaps $25. The $350 spread is tough to walk away from.
If they redeem miles at 1 cent apiece towards the actual cost of travel, they bring in $375 but have expenses of $250. All of a sudden the $350 profit is now only $125.
Now assume that the mileage program is able to negotiate a 50% internal discount with its associated airline. The passenger spends 25,000 miles for a $250 ticket but the program pays the airline only $125. The program’s profit is still down from $350 to $250.
No, I don’t see award charts going away entirely. I expect a hybrid system to last for awhile. And with defined-value programs on the rise, capacity controls for those saver awards in the award chart may tighten up and yield management dragons may become more difficult to slay.
Perhaps the defined-value plans will replace standard awards which offer last seat availability, which is truly unfortunate. But the capacity controlled awards are, I think, going to stick around.