Dr. StrangeJeff: or How I Learned to Stop Worrying About SkyPesos Becoming Revenue-Based

Airlines like to move in lockstep with each other. Their frequent flyer programs are for the most part pretty conservative, which is why I’ve been surprised at the seeming willingness of some of them to potentially scrap their business model — which is currently very profitable — in favor of a new, more speculative one in the form of a revenue-based frequent flyer program.

Programs keep up with what their competition is doing, American launched their frequent flyer program and days later United introduced theirs. One introduces bonus miles on a route and another follows. Same for double elite qualifying miles at least when programs making such an offer compete head-to-head.

They blame each other as well: when one program raises their award chart prices the will often point to the changes made by their competitors as the reason (“the remain competitive” we’ve enhanced the program by charging more miles for your award).

Years ago Northwest Airlines was ready to pull the trigger on requiring Saturday night stays on saver awards. They held off and let United make the first move. There was a massive customer backlash, United backed off of the changes. But during the firestorm, Northwest quietly rolled out its own changes which stuck.

No program wants to be perceived as less valuable than their peer programs, though at the same time programs aren’t especially transparent and consumers don’t generally understand the differences — decisions are made based on airline schedules, happenstance, mood affiliation, and recommendations from poorly-informed friends and colleagues.

To review, there are two pieces to any revenue-based program: earning and redemption. Aligning earning with revenue means tying points earned with ticket cost rather than miles flown. Aligning redemption with revenue means pricing in real-time the cost of an award with the price of a paid ticket on a given flight; each point is worth a fixed value of airfare and the number of points a ticket cost simply varies with current airfare.

The truest revenue-based programs currently are Southwest, JetBlue, and Virgin America. Both accrual and redemption are for the most part based on ticket revenue and ticket price. The so-called low cost carriers have always had a bit of an uncomfortable relationship with their frequent flyer programs, my sense has always been that JetBlue didn’t even really want one but felt like they had to offer it. And JetBlue was eventually even dragged, kicking and screaming, into offering an elite program.

The legacy carriers on the other hand have been making money hand-over-first with their frequent flyer programs — selling miles at a higher cost than those miles cost to redeem, and many of the miles never even get redeemed because customers don’t earn enough points for an award or let those points expire. Selling miles is a billion dollar business for each of the large legacy airlines. They’ve remained profitable even when the airlines themselves have struggled. But they also worry about the sustainability of the model when flights are full and customers have (or think they have) a hard time using their points.

Some programs may align further along revenue-based earning, United last year began awarding many more miles on premium fares. Some programs may align further their award charts with the cost of tickets, that’s a step Delta took four years ago in introducing three-tiered pricing of awards. Alaska and US Airways also stratified their award charts to align redemption on their own aircraft with ticket price. But these changes co-existed alongside the traditional award charts.

An airline can take steps towards being revenue-based, or implement it fully. They can offer redemption options in parallel — spend points as money as United and Delta allow for co-branded credit card holders or as American allows for its elites as well allowing redemption via tradition award charts. That’s the easiest thing to do with partner awards, since only saver awards are made available by partners in most cases. Or they can offer only revenue-based redemptions like Southwest does (but Southwest has no international partners offering premium cabin awards, so again much simpler).

It sure looks like more revenue-based programs are coming, the final form of which hasn’t yet been determined. The programs we’ve heard talked about most are Delta, US Airways, and Alaska. It’s not yet clear which ones will go there, Delta is most likely, and we’ll have to wait to see how they implement it if they do.

I see it as bad for the airline and bad for (most) consumers.

But a reader question yesterday really set me straight. In response to “Are Delta, US Airways, and Alaska Airlines the Most Likely to Switch to a Revenue-Based Program and What About Our Current Mileage Balances?”, beachfan asked:

Makes Starwood card more attractive to me since I love Starwood and have status.

What’s your take on how Chase UR will fare? Will it just defaut to a Capital One type card?

And I realized that Chase Ultimate Rewards points become worth more, not less. Starwood points become worth more, not less. And American Express Membership Rewards become worth more, not less.

I’ve decided I don’t actually care though if US programs all go revenue-based, although I don’t think they all will.

The devil is in the details of how they do it. And I won’t mind if they introduce revenue-based earning, and revenue-based redemption options alongside traditional award charts. I’ll even probably personally benefit. True revenue-based redemption would push me completely away from the programs though. Taking a point as worth a penny apiece an international first class award ticket might cost 2 million points. Not even Singapore has dared charge that for long haul flights in its suites class, so I don’t quite expect that extreme. But if the world moved there, I would stop playing the game with programs that adopted the model.

And I could simply stop playing the game, because even when US programs move in lockstep it is a very competitive environment — and a global one.

If United and US Airways went revenue-based, AviacaTaca’s LifeMIles become the best program in the Star Alliance. One-way awards off of a reasonable award chart with no fuel surcharges and cash and points awards, I could still get the aspirational premium cabin awards that I want.

I’ll focus more on a program like LAN’s if American were to go revenue-based. Cathay and Iberia and British Airways are American Express partners. LAN gets 1:2 transfers from Starwood. Chase partners with BA. These flexible points all give me the option of earning points in the US and moving them to international programs.

With Skyteam I’ve already made a personal redemption by transferring Chase points to Korean Airlines. I have access to first class awards, whereas Delta already offers only business class.

I’ve learned that many of my readers don’t see things that way at all, no matter how good a deal I post with a non-US frequent flyer program it doesn’t generate nearly the excitement that lesser deals from US programs do. Things that seem unfamiliar are harder for people to grasp, they don’t invest the time.

But that would have to change. To date much of the value in frequent flyer programs has been disproportionately located in North America, with occasional exceptions like the bmi Diamond Club program (may she rest in peace) and British Airways prior to November 2011.

When programs change, we have to change with them. It’s always been the case that the best deals are short-lived, anything providing outsized value will only do so for a limited time. We can expect those things to disappear, and other things to take their place. So my job is not simply to lament the losses, but to identify the gains, and help to take advantage of them.

And so while I will certainly report on changes to the programs, I will not lose sleep over any that might be coming. And you shouldn’t either.

I do plan to follow the advice I’ve been giving for a long time which is that miles will never be worth more in the future than they are today, so it’s always best to redeem in the same period as you earn. But if you can bank miles cheaply enough — I have no problem accumulating points at under a penny apiece because in a worst case of revenue-based redempions we can expect those points to still be worth at least a penny. We won’t lose out from our participation in these programs now, and we’ll still be able to gain quite a lot.

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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  1. […] Even though I think that frequent flyer programs moving to a ‘revenue-based’ model (where the number of miles you earn is based on how much you spend for your tickets rather than how far you fly, and where the number of miles an award ticket costs depends on the price of the ticket rather than where you are flying from and to) could go a long way towards undermining the exceptional value of the programs we enjoy, I’ve decided not to worry about it — for one simple reason. […]

Comments

  1. I dont know. I would be disappointed if they all went revenue based. Having to get 250-300k miles for each Biz Class ticket would be a killer. Unless they didnt something to boost earning power.

  2. I have to imagine that even in a revenue-based system there would be some bright spots — improved redemption rates for elites, occasional redemption “sales” and so on. And for those of us who are equally into economy redemptions, the news might not be so bad (although, even there, my 280,000 point redemption for 4 SE Asia tickets this summer would “list” at around 800,000 points at a penny a point).

    As Gary points out, for those of us who earn mainly through credit card spend, the foreign programs that are transfer partners of the credit card companies will still provide a means to redeem off a points-based chart as well. If all the US airlines (pioneers in the frequent flier program space) go revenue-based then it probably means the rest of the world will follow — but hopefully that will take many years.

  3. Very cogent analysis.

    And I do not think they can all afford to go purely revenue based – it would devalue the miles issued through non-flight sources too much. With various credit cards offering 1 to 2% back, either in cash of some form of a cash equivalent (paid airfare, gift cards, etc.), customers would drop miles issuing cards like rocks. At least I would. And topcashback, mrrebates, ebates, etc., would become the better option to miles-issuing portals. The only thing currently that distinguishes frequency program points from cash is that frequency program points provide cool, alluring, possibilities. They would truly kill the goose that lays the golden egg if they made their programs, in substance, no more than rebates.

  4. If that happens i will likely just go back to using regular cash back cards, instead of airline cards. That way i wouldn’t “have to” send it on miles. The whole point of putting spend on an airline card is that you “can” get better value out of airline cards with some effort.

  5. In my world the value I receive from the AA miles program is what keeps me loyal to the airline. I have often paid more for an AA ticket just to get the miles or help with elite status.

    Would I drop them entirely if they devalued the program or made changes on how miles are earned? Not as long as the value of elite doesn’t drastically change.

    However, I can envision myself opting for the cheaper ticket vs a higher priced AA ticket if what I view as the value of the program diminishes. I’d simply think, “Why bother?” It also makes the cash back cards more appealing which can’t be good for any airline’s loyalty program.

  6. There are so many great viewpoints expressed here
    Gary. I wish your platform for others to view was even bigger than it is.With 50,000 per miles roundtrip to redeem a coach ticket most the time from LAX to San Diego does United really still really need a revenue based system?With excpetion of perhaps premium cabins where the disparity is bigger.I’d venuture to say they are doing better than a revenue based model.
    They seem to be doing fine just the way they are with little or no no saver seats available.In Mileage plus the revenue based model seems to have already been in place for sometime under the guise of standard awards 😉 And only gotten worse since the Continental folks stepped in !How much worse could it get is in the back of my mind?

  7. Well, if AA goes completely revenue based, hopefully they will drag their feet so I can find some time to burn the 400k in my account.

    But honestly, I think the odds are infinitesimal that we will see any airline (other than Delta) switch to a pure revenue-based program without any sort of grandfather clause. The banks *are* heavily invested in these programs, and changing the value proposition over night has to piss them off royally. Driving customers away and creating a lot of ill will is no way to run a business. Piss me off like that, and I am *long* gone. This would make Avios look like child’s play.

    But, if they do move toward a revenue option, there is some precedent to suggest that we might see better than 1 cpp in redemption value, at least at some level — Southwest gives 1.67 cpp towards “Wanna Get Away” fares. A 50,000 Chase WN credit card signup gives over $800 in credit at the cheapest fare bucket. That’s not that bad. If I got $8,000 in AA scrip for my 400k miles, well, I can still go to Europe and South America, just probably in coach.

    I don’t see the elimination of the region based mileage award charts. International premium cabin redemptions aren’t the problem, as Gary points out. Some airlines already have a “pay with points” option that gives 1 cpp in value. If they were to beef it up and do something similar to WN, where different fare buckets cost different amounts of cpp to redeem, I see that as a true value-add to the program. If AA lets the cheapest (and most heavily controlled) fare buckets out at say 2.5 cpp (or even 2.0 cpp) they’ll actually generate lots of good will. That plus the traditional award chart would make for a very compelling program, keeping existing members happy, yet doing their balance sheet a favor.

    Note that AA has precedent with their old mileage program. That program was before my time, but there was a set of miles that truly never expired, and could be redeemed at very favorable levels. It was only recently where they put true expiration dates on that program.

    There will be change, just hopefully it won’t be 180 degrees overnight. Heck, while North Americans likely hate the new Avios program (and I’d consider that a drastic change) it actually does have its benefits.

  8. Dan – Southwest’s “exchange rate” is even better than advertised. A $100 fare actually costs about 5500 points, not 6000 (because the $100 includes some taxes; the points are only charged on the base fare). So the true “exchange rate” is between 1.8 and 1.9 cents per mile.

  9. @Gary, I generally agree with what you have to say on this issue. But has what you’ve heard explcitly focused on turning the RDM side of the mileage programs revenue-based? To my mind, it would make more sense for the EQM side of the business to go revenue-based (at least according to the logic that some of the programs seem to employ; inducing marginal trips aside). Basically, why wouldn’t the major carriers’ programs decouple the elite and redeemable sides of the businesses before jumping headlong into the obvious morass of fixed-value awards?

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