Why Skymiles and MileagePlus are Getting Out of the Airline Business and Why Partner Earning Matters More in 2015

One way to read the move towards revenue-based mileage earnings, as announced by United and Delta, is as a move away from frequent flyer programs as having anything to do with rewarding flying.

It’s a move away from programs’ roots, rather than a return to them. MileagePlus and Skymiles are getting out of the airline business, even if they don’t admit it. Here’s why.

The mantra of the revenue-based frequent flyer person is ‘rewarding the right travelers’ but I’ve debunked this myth extensively.

  • They aren’t ‘rewarding the right travelers’ at all. They are giving more points for high fares than for low fares. But that doesn’t mean they are getting any more business, or making any more money. Expensive tickets aren’t always more profitable tickets, and customers buying those tickets may do so independently of receiving miles at all (making the awarding of miles a marketing expense with zero upside).

  • And they aren’t really even rewarding business travelers more than they did before. They’re just rewarding everyone less for flying.

We know they will be giving out fewer miles, because the break-even for mileage-earning is a ticket price of 20 cents per mile flown. But airline revenue per seat is far less than 20 cents per mile (even after adjusting for load factors).

And we know that the break-even price is set very high when revenue-based elite status requires 10 cents a mile in fares but just breaking even in mileage earning requires 20 cents a mile in fares. That’s what a business traveler has to average just to come out the same. That means many tickets will need to be much more expensive than that.

Leisure flyers lose, but many business travelers lose too.

This makes sense for an airline that’s full anyway, why incentivize more passengers when you have no seats left to sell? But airlines that aren’t full or that have to dump inventory cheap to fill their planes, it’s dangerous.

You can make the arguable case that Delta is in a place to cut back its marketing spend. I think it’s a much more dangerous position for United to take.

These changes go beyond United and Delta just not wanting to incentivize flying anymore through frequent flyer mile redemption programs, it also means that it’s only third party mileage sales that matter going forward.

The President of Avianca’s Lifemiles gave a presentation about 6 weeks ago where he explained miles earned from flying were cost centers and miles earned from sales to third parties were much more profitable. (See Wandering Aramean on this as well) United’s director of partnerships David Oppenheimer explained at the same conference that customers providing the airline with ancillary revenue, and earning miles through United’s partnerships, were in many ways more profitable than flyers for the airline. It doesn’t cost United much to redeem miles sold to third parties (on average), but miles for a ticket are an expensive proposition.

One way to understand revenue-based mileage earning, at least the way United and Delta have done it, is that miles are no longer about flying at all. An airline not looking to use its frequent flyer progam to put butts into airline seats will want a revenue-based program that cuts down on mileage awarded for flying.

These programs aren’t cutting down on credit card earning, or on earning through other partners (although Delta has in recent years cut down on bonus offers, including with partners, as they’ve planned their transition).

That makes credit card earning, and other third party partner transactions, relatively more valuable than flying in terms of earning miles.

The same $25,000 in credit card spend earns 25,000 miles (or more with category bonuses) than before. But it will take 2 or 3 times as much spending on tickets to earn the same amount of miles. That makes partner earning more important than it was before, compared to flying as a way to earn miles.


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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Comments

  1. Airlines are not in the airline business any more. They are profitable points systems that just happen to fly some planes. The sooner we realize that, both for business and regulation, the better.

  2. Aeroplan was divested from Air Canada few years ago… and the value of Aeroplan is now more than all of AC holdings (jets, ramps, slots, etc) together!!!

    miles programs are companies in themselves.

  3. amen

    amen

    amen

    These are no longer, and for some time have not been, frequent flyer programs. They are affinity programs. And I know you disagree, they are generally like S&H Greenstamps with some outsized, aspirational awards which may be provided at little additional cost because they are wasting assets. Nor am I certain that is a good thing. I just am pleased that earning is sufficiently difficult that ample aspirational awards remain for me.

  4. The thing that cracks me up most with “rewarding our best customers” is that those rewards are capped. If you’re truly trying to do that, why on god’s green earth would you cap the amount of miles you can earn on an expensive ticket?

    But I figured this game out long ago. I probably average $500/yr in paid airline travel, $1000 if I’m particularly itchy to go places.

    Once a year I take my miles and travel somewhere overseas in J/F. Whatever happens with the programs happens, and I just gotta roll with the punches because I have nothing invested in an exclusive relationship with a particular airline. Heck, I barely spend any money on any of them.

    I’m going to miss the golden years, but I’m capitalizing on them while I can. Last fall was a month in Europe, this spring was three weeks in Northern Asia, and next spring is a month in Australia.

    RIP.

  5. It seems like AA should have listened to those Icelandic investors and spun-off AAdvantage. Maybe they would have bought US instead of the other way around.

  6. @Gary,

    you are off base on this
    25000 $ spent on UA will get you
    20 cpm for a general flyer or 125000 miles worth 1250$ min 5% cash back
    or
    9 cpm for a 1k or GS or about 270k miles for a 1k worth min 2500$

    Assuming a 1k spent about 10 cp flown mile, they are getting a 10% rebate cash back.

    I have not bought any tickets for personal travel in years.
    My business travel is paid by company spend.
    My cash back is with a UA club Card at 1.5% cash back min
    Previously I got for getting to 1k with premium intl travel got me 200k UA miles.
    Now I get 300k miles and less competition for upgrades.

    UA is finally realizing that the flyer to reward is a high margin flyer and high volume spender. What is not to like?

  7. I will agree with you that Partner Earnings matter more
    Loyalty is more than just flying an airline on your company dime
    or doing mileage runs
    Spending on cards matters for the bottom line and free cash for the company
    The airmiles sales are early aht redemptions are later

    I could always get to Plat on DL with Spend on Amex for years
    I could do that on UA once CO and UA merged with CO PPlus
    AA has lifetime status already
    I see myself spending more on Chase in future and less on Amex for DL

    But I understand UA.
    More miles earned are from partner sales.
    More seats on partners are now less expensive by increasing price on partners for redemptions
    Now they have limited their risk from flyer rebates from 10% to 5% for most, unless you are loyal, in which case you get 11% cash back

    I expect AA to follow in 2016 for sure.
    So enjoy all your EXP travel for now.
    You will not remain EXP on AA for long either.

    Even with worst case, using LH F to Asia for 280k miles (horrible, but still I would spend 2800$ on LH to go there in F.
    I would never spend 2800$ to go in F on UA
    so I am happy with 80k in F class on UA to EU and 110k on LH to EU

  8. Gary,
    Could you explain what you mean by ” Expensive tickets aren’t always more profitable tickets”?

    If I pay $150 for a ticket and a seatmate pays $175 I’d say the higher priced ticket is “more profitable”

  9. @phil so i’ve written on this extensively.

    We’re not usually talking about two passengers on the same aircraft, if they are different planes your $150 might have gone to an empty seat but someone else bought the last seat on the plane which was then sold out when someone else would have come along and paid for the same seat.. in the former case it’s almost pure profit (almost no marginal cost to transport you), in the latter case it’s zero economic profit, the airline was no better off selling that seat to the person that sat in it than selling it to the other person who would have paid the same.

    but let’s take your same-plane example. You may have paid $150, and your seatmate $175. But you may have paid checked bag fees, bought an upgrade to economy plus, and paid for your ticket with the united explorer card and made your booking on united’s website rather than at expedia…

    but let’s say you bought (or didn’t buy) the same things, and made the purchase in the same place.

    you made the flight decision yourself, the other person was part of a corporate contract and didn’t make the carrier choice.

    whose decision-making do you want to try to influence?

  10. Could we please stop calling this new currency “miles?” That’s a misleading term. They are chits, or kickback points, or employer-fleecing credits perhaps, but not miles.

  11. @ phil and Gary,

    Gary has explained in the past, but pricing/profit is highly dynamic. If UA perceives at any given moment that pricing at $175 will fill the plane at a nice profit, $175 is lovely. But if thay have already committed the aircraft, and perceive “distressed inventory” (empty seats, or in another industry, speckled brown bananas) $150 may well be completely unanticipated cash for a good that would have been squandered. The rub is in making sure that UA is not ultimately filling $150 seats with pax who would have been willing to pay $175, or, for that matter, $500. But that is where the art/science of yield management kicks in.

  12. It still seems dumb to lose me as a customer. I’m a discretionary flyer. I fly mostly when the price is right, almost entirely on planes with loads of empty seats (including empty E+) or flights only full because they were heavily discounted. I fly United exclusively because the mileage rewarded makes it worth me flying about 1000-1500% more than I otherwise would. I use my miles on E+ tickets to take friends and family with me on otherwise empty flights, essentially costing the airline a marginal fuel cost for the extra weight.

    As Gary points out, my money spent on United is nearly all unexpected profit. As a loyal flyer I’m a dollar sign in a seat and a hedge against unprofitable flights which occur even on some of the most lucrative routes. I provide a windfall for United to the tune of about $15k a year. The new RDM benefits give me little incentive to fly at all. And when I do, even the 1K bonus is probably not enough of a discount to match flying other carriers like JetBlue (frankly a much better airline) who often have a cheaper price.

    Yeah, you can say there aren’t enough of me. But maybe they need a more customizable system of rewards to unfairly reward some flyers more than others. Next year’s United profit will be 15k less.

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