Joel G. points to a Matthew Yglesias article in Slate that makes the case shifts in frequent flyer programs are a function of the economy — fewer seats to give away with full planes.
There’s no doubt a significant element of that. Here’s what I wrote about United imposing minimum revenue requirements for elite status earned starting next year.
United has set the bar at spending a consistent 10 cents per mile minimum. That’s the same amount that Delta is using with its tiers (Delta’s top tier is earned at 125,000 miles and has set the bar for that at $12,500.)
Interestingly this is a higher amount per mile than when United was rumored to be looking at making similar changes two years ago. I wonder how much of that is based on the current ticket pricing environment, rather than looking at the value of a customer over a longer time horizon.
Roughly speaking tickets do cost that much for most people. A cross country ticket most of does run $500, for a little under 5000 miles earned. Which means — and even though most elites probably don’t really it or add it up — that I’d imagine most customers won’t be materially affected by the change. They’ll fly their miles, and by virtue of having done so they will have spent enough money with United to achieve their status.
Still, in an aviation market different than the one we’re currently in — in a pricing environment that’s more like what the airlines saw 3 and 4 years ago — ticket prices are lower and folks aren’t just hitting these minimums. So it could be a real future problem, although in that case if elite numbers drop I would expect to see “double premier qualifying dollar” promotions the same way we’ve seen double miles promotions.
There’s little question that with full planes, airlines don’t feel the need to ‘give as much away’ and indeed have less unsold inventory to give away. That may give them extra confidence in making these shifts, but it’s not the total cause of the shifts.
They’re changing the structure of elite programs, changing who they want to be incentivizing business from.
These are changes airlines could have made prior to the Great Recession, but didn’t. Although the recession imposed a capacity restraint that continues in better economic times but which didn’t exist during prior booms. The Yglesias argument — that airlines are doing better, and that this will mean more jobs and capital investment going forward — is an argument as well for airline mergers which have aided in this restraint.
Airlines retain, of course, the ability to promote lower dollar business even with the new models (“Double credit towards spending requirements between November 1 and December 31!”). In some ways this shift works regardless of the state of the economy.
The programs believe they have been rewarding the wrong people, they want benefits to go to those who provide them the most revenue. It’s a fairly economically un-nuanced position, one that’s not entirely wrong but not entirely right either.
Airlines offer the lowest fares when they don’t expect to sell seats at higher fares. If the airlines get their revenue management right, then the cheapest fares represent almost free money to the airline, incremental revenue for empty seats. That goes straight to the bottom line as profit.
In contrast, the highest fares for the last seats on the plane may well represent revenue they would have gotten from a different customer but can’t once the plane is sold out. A full fare ticket could get the airline zero dollars more than they would otherwise get.
Customers who consistently buy seats that would go empty are not unprofitable customers!
Where Yglesias is right is that in an environment with fewer of those seats, that argument doesn’t carry as much sway within the airlines.
But there’s much that Yglesias gets wrong, or at least almost wrong, in his piece.
The whole point of a business-class seat, for example, is to be very expensive. Unreasonably expensive, in fact. So expensive that it’s not clear anyone would ever really pay that much. After all, it’s called “business class” for a reason: The executives up front aren’t paying out of pocket, but flying on the company dime at shareholder expense. Or maybe the flier is a lawyer or consultant whose airfare is billed to a client, and it’s the owners of the client company’s stock that ultimately carry the cost. This dynamic means airlines can get away with very high asking prices. But high prices lead to some unsold inventory, and to keep up the charade, they can’t just discount the extra seats in an obvious way. Free upgrades to frequent fliers get the job done without lowering the official price.
This sweeping claim conflates many things. “Free upgrades” tend to be provided domestically, and not internationally where truly expensive ‘business class’ seats are offered.
Many major corporations are in fact paying discounted negotiated fares.
And leisure travelers do buy discounted premium seats — over the past few years airlines have more aggressively discounted their premium cabins with discounted first class fares domestically, with free ‘coach with instant upgrade’ fares, and with inexpensive airport buy ups.
Not to mention international Z fares that require substantial advance purchase and stay requirements.
With hotels the issue is often seasonality. You want to build enough hotel capacity to make big profits during the high season. That leaves you with extra rooms when demand is less robust. But an empty hotel room is barely any cheaper to operate than a full one, and since the cost of a hotel room is only one piece of the overall cost of a trip, it can get hard to fill rooms even with aggressive discounting.
The economics of hotel programs are generally different from airlines. Hotels don’t tend to offer ‘saver’ awards and rule-buster style awards for more points, giving away only those rooms that will go unsold at the same level.
Instead, the major hotel programs have more towards a model where any standard room can be redeemed on points and the number of points is fixed regardless of occupancy. (For premium rooms Hilton has moved to a sliding scale based on retail price, but that’s an outlier.)
Starwood and Hyatt pay hotels more for award nights when hotels are full, Marriott pays hotels more the more award rooms are redeemed at the property.
And discounting as a strategy to fill rooms shouldn’t be… discounted. The entire idea of Priceline and Hotwire is that hotels can and do fill rooms with deep reductions in price, and can do so in an opaque way so as not to undercut revenue from customers willing to pay more.
The economic point that Yglesias doesn’t make is just how important frequent flyer programs are to the bottom-lines of airlines. Just like Delta, United’s customers can exempt themselves from revenue requirements entirely by spending $25,000 in a year on a co-branded MileagePlus credit card from Chase.
It was the issuer of the co-brand card that provided both debtor-in-possession and exit financing for United’s bankruptcy, and which pre-purchased half a billion dollars of miles to provide extra liquidity. The separately incorporated mileage program remained profitable even as the airline floundered. And a majority of miles are now earned via credit cards rather than by flying.
In any case, the changes we’ve seen so far are just the beginning.