Is This Whole Revenue-Based Thing Much Ado About Nothing?

MJ on Travel calls programs going revenue-based “a big ol’ bag of nadda.”

He wants suggests it really doesn’t matter. He makes three points:

  1. “[T]ravelers that are buying last minute high (or highish) fares should rejoice at these changes” He says he will be better off next year with Delta’s new revenue-based earning.
  2. Revenue-based earning doesn’t change credit card rewards, and other opportunities.
  3. Southwest carries the most domestic passengers, because they don’t suck, even though their frequent flyer program has revenue-based earning and redemption.

I’m glad MJ is happy, and thinks his frequent flyer future is so bright he’s gotta wear shades.

I also think there are several arguments here that don’t take him as far as he wants them to go. Most importantly, downplaying the significance of the changes misses the opportunity to help flyers make the most of their situation.

Most People Won’t Break Even

  • The idea that business travelers are better off. It’s a misnomer to talk about ‘business travelers’ and ‘leisure travelers’. Business travelers are also leisure travelers.

  • You can look at full fare tickets and think you’re going to come out ahead, but you have to look at your average fare per mile (and remember to back out taxes!). The break even is set at 20 cents a mile with both Delta and United.

  • If you buy some last minute full fare tickets, but pay a mix of fares, there is a very strong chance that your AVERAGE fare is less than 20 cents a mile.

  • And indeed overall the average fare is much lower than break-even for mileage. Take United ~ 12 cent RASM, adjust for load factor, and the average United fare is ~ 15 cents a mile. It would have to be a full one-third higher just to break even.

That means most people will earn fewer miles.

It Isn’t Just the Earn

  • United devalued its award chart, too. So even if you break even or come out a little ahead based on the fares you’re paying, you still lose — because those incrementally more miles are worth less than they were at the start of the year.

  • Delta devalued twice too and has a new redemption chart coming. We don’t know what the availability distribution will be across five tiers of availability at Delta, so we have no idea what Delta’s miles will be worth next year.

  • And we increasingly know that Delta members do not have access to the same partner award availability that other Skyteam members have. Just compare what Alaska members can book on Air France to what Delta members can. Delta won’t pay the going rate for seats. For all intents and purposes, even though Delta blames partners for not giving them seats (at a lower price than other partner airlines pay), they’ve brought back the equivalent of Starnet blocking.

Credit cards are still good

  • Agreed, it’s true. But it’s cold comfort for folks used to flying 100,000 miles butt in seat a year, where their employer is buying them discounted tickets. It doesn’t help them when their company has a great deal, or the deal is so great that it’s a bulk fare and United’s system can’t register the fare at all (because it’s “bulk”).

  • Airlines value their third party mileage sales more than miles as a reward for flying.

  • Planes are full. They think they don’t need as much marketing spend to put butts in seats. That’s probably true for Delta, probably not true for United. Delta could be fine under this model, United is less likely to be.

This does show that non-flight activity is more important than flight activity, that these are marketing programs not flying programs, and that airlines don’t think they need to spend on the flying part in the current climate.

But when planes aren’t as full, they’ll need to leverage their mileage programs to put people in seats. They may not re-up the structure of the program again but we’ll certainly see bonus points-earning (“100% bonus on all points earned based on fare”). Just as we’ll see bonus qualfying dollars if elite ranks fall in a recession.

Southwest is the Bee’s Knees

  • Southwest’s marketing engine isn’t its frequent flyer program, MJ essentially makes that point and he’s right.
  • They’ve historically not wanted to spend on traditional distribution outlets for their tickets, they certainly haven’t wanted to invest in the kind of frequent flyer program that the majors have.
  • They did become about the biggest liquor distributor in the State of Texas in 1977 though as they gave away alcohol to reward high fares.
  • Southwest’s frequent flyer program also doesn’t have the market value that the spun off programs have, or that the United, Delta, and American have.

You can spend you marketing dollars in lots of ways to fill planes. By not spending them on their frequent flyer program except as a rebate for more Southwest travel (valued more highly for seats that are going to go empty anyway), they’ve done all they needed to do on the airline marketing side but haven’t built a valuable loyalty company.

That’s fine, jetBlue didn’t even really want a program but ultimately found they needed something and ‘something’ is what they gave us.

The Way Forward

People shouldn’t assume that a revenue model has only one look just become United lacks creativity and follows Delta exactly.

Remember, their business — and need for marketing — is different than Delta, it’s not obvious that they should be setting earn rates the same.

Delta makes the dubious claim that they’ll award as many points under the new scheme as they do only. But if that’s remotely close to true then United certainly won’t award the same number of miles from flying since their revenue per passenger seat mile is lower.

And since there doesn’t have to be just one model, whatever we see out of American — and not any time ‘soon’ given the US Airways integration — could well be quite different.

But The Upshot Here Is..

Regardless the best advice certainly isn’t “shut up and take it.” The best advice is to understand what kind of flyer you are, how you’ll do in the changes to your airline’s program, and whether or not another program will reward you better — like American, or like a frequent flyer program based outside the U.S.


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. […] Gary says he’s glad my frequent flyer future is so bright that I have to wear shades. Admittedly, I’ve thought for a long time that change was coming to the frequent flyer landscape, it has just taken longer than I imagined. In a true “Forest Gump” moment almost 10 years ago (gasp…time flies), I was privy to a conversation between some airline people, a few with names many of you would likely recognize. The gist of the conversation – the things that the coming “revenue based” emphasis profess to fix needed to be addressed…..nearly 10 years ago. What took the airlines so long? Fear, I think. Fear of the backlash, fear of the unknown. That, and bigger fish to fry like rethinking their business models, turning the act of selling transportation between points on a map into a profitable endeavor, and buying each other. They also like selling miles, but that’s a blog post all its own. […]

  2. […] Gary says he’s glad my frequent flyer future is so bright that I have to wear shades. Admittedly, I’ve thought for a long time that change was coming to the frequent flyer landscape, it has just taken longer than I imagined. In a true “Forest Gump” moment almost 10 years ago (gasp…time flies), I was privy to a conversation between some airline people, a few with names many of you would likely recognize. The gist of the conversation – the things that the coming “revenue based” emphasis profess to fix needed to be addressed…..nearly 10 years ago. What took the airlines so long? Fear, I think. Fear of the backlash, fear of the unknown. That, and bigger fish to fry like rethinking their business models, turning the act of selling transportation between points on a map into a profitable endeavor, and buying each other. They also like selling miles, but that’s a blog post all its own. […]

Comments

  1. I suspect that I am going to come out ahead. I’m a Premier Gold with United, and I tend to fly a lot of shorter flights (LAX-SFO, BUR-SFO, LAX-LAS, and LAX-TUS being my most common routes). I rarely buy a ticket on these routes more than a few days in advance. Right now, those routes each get me 1500 miles R/T (or 2000 miles when I book in P, which is fairly often). If the base fare is around $400, I’m going to end up with 3200 miles. Even when I do buy a coach fare in advance, it is still around $200 base fare. That will yield me 1600 miles – slightly more than the 1500 I’d get now.

    I think that there is a whole lot of pontificating going on here. Most of us who are interested enough to actually read travel blogs (like me) are frequent flyers. We won’t be getting 5 miles to a dollar. We’ll be getting at least 8.

    And since you have to spend $0.10 per mile to retain elite status, if you work towards elite status, you’re going to have to break even or do better under the new calculations.

  2. Southwest’s revenue=based REDEMPTION policy is very favorable to people who don’t have the time to learn to game a complex system. You get 1.4 cents in value per point, period. No effort required, other than avoiding the confiscatory redemption rates for Anytime and Business Select fares.

    Southwest thinks this will please 95% of its customers even it displeases the 1% who game FF programs to redeem high-value awards. THEY ARE CORRECT!

    Bloggers have yet to fully digest this fact. Revenue-based redemption and cash reward credit cards are the future. Chart-based redemption will fade away.

  3. @nsx

    But WN’s route network and business model doesn’t even make sense for a chart based redemption. Besides, they kinda sorta had one back in the day. All they can really have is a flat rate North America rewards chart, or perhaps zone it ala BA. So revenue makes sense for them.

    Revenue redemption isn’t quite so obvious for alliance carriers. Let’s face it, for the consumer, the single biggest benefit of alliance membership is the ability to book awards to just about anywhere in the world on any alliance carrier with my “home” airline miles.

    All that other code sharing mumbo jumbo is confusing and doesn’t require an alliance. Heck, code sharing in and of itself is pointless for the consumer.

    My $0.02: Legacy carriers will gravitate toward revenue redemption if and only if they pull back from alliance membership. As long as alliance membership is a strong part of their business model, revenue based redemption ala WN makes no sense.

    P.S. Chart based redemption isn’t complex; what’s complex is inventory availability requirements and the fact that the airlines generally make it difficult to find partner inventory online.

  4. I’m mostly with MJ on this one, at least for my travel. Though Gary you make some good points as well.

    For me, I don’t fly hardly at all, and so I don’t earn airline miles from actually flying. As such, these changes don’t affect me (As much).

  5. @nsx at Flyertalk wrote “You get 1.4 cents in value per point, period. ”

    No, you don’t.

    There’s a sliding scale of value depending on the fare type you’re booking, the more expensive fare types also have lower per-point values.

  6. @Gary, I’m not following your math. At 5 miles = $1 for a non-elite, you need 20 cents a mile to break even. As a gold elite, it is 8 miles = $1, so doesn’t it follow that you only need 12.5 cents a mile to break even?

    How can the math for a non-elite and an elite be the same, when as a Premier Gold, I’ll be getting 60% more miles per dollar than a non-elite flyer?

  7. @neal Today a gold flies 50k miles earns 75K miles. Under the new system, to earn 75k miles he has to spend? Almost $10000. $10,000 to fly 50000 miles is about 20c per mile – to break even.

  8. I’m also with MJ. It’s much ado about nothing. And really only affects the 1% who game the system – the guys who were buying cheap/mistake fares and doing mileage runs. The 20% who are biz flyers are likely to be winners – and they surely are the most profitable customers and it makes sense. Those companies buying bulk tickets don’t deserve the same benefits.. The rest are Average Joe’s who never cared/never understood the FF game anyway. Most people I know fall into that 80%. They have some miles but don’t know if they are worth anything, other than perhaps redeeming for a toaster. The changes may hurt them but they likely don’t care or even more likely, have no idea there have been any changes as the FF programs are difficult to decipher.

    As such, the hand wringing on the blogs is something I roll my eyes at – with so many ways to earn miles when not flying, these changes barely make any difference. And if you’re such a big flyer and need status so desperately, then it’s time to pay for the bennies. I suspect we’ll see a slew of bloggers saying status is overrated anyway (which it is for the vast majority).

  9. I have to take my hat off to MJ, for the first time in years he actually didn’t censor my comment to the original article.

  10. For me, it is NOT much ado about nothing. My home airport has 3 airlines — Alaska, which flies to SEA, United, to DEN, and Delta, to MSP and SLC. That’s it. I know how to get lots of miles for cheap. I use those miles to fly musicians to my airport. I fly revenue to get double or 1.25 the miles. United already doesn’t give full mileage on partners like Turkish and Swiss, so I’ve already lost out there on earning a pile of miles (and elite status) on a few trips to Europe. Now that both Delta and United are going to revenue-based mileage, my goose is cooked — no miles, no tenors or theorbos. Last gasp strategy, I’m going for the big mileage bonus credit cards, but that’s a LOT of MS to crank out out here in the mountains…. sigh.

  11. I can’t WAIT for AA to become revenue-based earning. My monthly transpac C ticket costs $6K. I’ll earn 60-70k miles per trip, which is much higher than the current earning rate.

  12. Frankly I’m suspicious of any of the bloggers who have credit card affiliate links who are saying this is no big deal and to just get an extra credit card to compensate–of course using their link

  13. Gary, I disagree with you strongly vis-a-vis Southwest Airlines. They have always beat to the drum of a different tune and do what they do very well.
    Just like there are no change fees when re booking a flight, the same applies with booking an award and then cancelling. You get all points refunded. If the fare goes down, so do the points. Thus, you can easily cancel and re book an award ticket at a lower rate. It takes less than three minutes via their web site.
    Also Southwest is extremely generous on partner credits. I earn more Rapid Reward points with car rentals than on an actual ticket. 2400 points for a 4 day rental on Southwest R R vs. 200 miles on a legacy carrier. And their generosity regarding available award seats beats everyone and its not even close.
    They have built up a great loyalty, especially budget travelers like myself who fly domestically. Oh yes, they also send you a birthday card every year with four free drink tickets.

  14. @Gary post 6:
    True, but nobody who can do math would choose to redeem points for Anytime or Business Select fares. That’s why I called those rates confiscatory and to be avoided. Redeem 7 days ahead and you can avoid them in virtually every case. (For less than 7 days ahead use Avios.)

  15. I agree that Southwest service doesn’t suck but I used to fly them a ton a few years ago. The minute they went to revenue based earnings I quit them as much as possible. Why because it wasn’t as good as before.
    I’m not a big United flyer and tend to have more One World routes that I fly so I’m lucky so far. I agree that this wouldn’t be that big of a deal but the devalue on top of the change is the killer.

  16. @Neal no because you’re forgoing the elite bonus you get under the current model. Remember that a Gold elite gets a 50% bonus now, a 60% bonus under the new model. So the shift doesn’t change much.

  17. Gary, one can see that you are desperate about losango the discussion because you are using arguments that have nothing to do with the topic at present.
    You say that the miles are worth less because of the earlier devaluation…. OF COURSE THEY DO!!!!! Nobody is disagreeing about that, but it has nothing to do with revenue based earning!

  18. I agree it is no big deal. Especially for the folks who get their travel reimbursed by their employer. Their CPM is precisely *ZERO*, i.e. $0.00, nada, zilch, zip.

    And if someone gets points on a CC via purchase of the tickets for those that do not have a corporate CC, even more bonus.

    My employer looks at it this way: You travel for company business at our whim. We know it disrupts your life. So we make it worthwhile to you to do it. We pay for International Business Class. You use your own CC (and can collect points) and we reimburse you within a week if all your paperwork is good (we do everything electronically so it is all e-mail of pdf receipts and expense reports. Hell, if you are out of the country for more than a week, you can file weekly and have the cash almost immediately.

    Bottom line is that those of us who do long haul travel have a choice, and we generally have a few rules to play by. Aim for lowest Business fares, but use non-stops if more than 1 connection. Use non-refundable tickets (pay the penalty which we will reimburse) to keep costs relatively low.

    We use our FF miles for leisure travel, and as gifts to family/friends.

    I personally cannot wait for 2015 when DL’s new structure goes into place. My 8 trips per year will net somewhere near 600K points.

  19. Obviously, the airlines are cutting the total rewards that they are giving. In almost all cases you will earn less for flying. It would seem logical that if the focus becomes more on money than on flying, the airline will start rewarding differently. If they start rewarding the payer rather than the flyer maybe companies stop reimbursing and just pay for your ticket. Its all about the money.

  20. @Denis the devaluation has to do with the total value proposition of MileagePlus, even if a high fare passenger is earning more miles than a low fare one they shouldn’t get too excited because they’re just working to claw their way back to where they were in January. Thanks a whole heck of a lot, MileagePlus!

  21. Completely agree-my commments on MJ’s article echo this post exactly. Another nice analysis. Thanks Gary.

    Question- why are US Airlines not focusing more on the threat from international cariers in the long run, especially if those carriers get more approval for 5th freedom routes like MXP-JFK.

  22. With a few minor exceptions, one should never redeem WN points for a BS/AT ticket at 120 or 100 points to the dollar, respectively. Instead, convert the points @ a rate of 1 cent into a WN gift card, and use that to buy the ticket.

    That way you get points for the flight.

  23. The Southwest argument is totally off base for one simple reason. Southwest is an (almost) exclusively domestic airline with no premium class. People who earn on Southwest do so with the limited expectation that they can redeem for essentially the same type of flying that they earned on (domestic coach). With the legacy carriers, frequent flyer programs have always offered the promise of taking that dream vacation that you otherwise couldn’t afford (think Asia or Australia in business class).

  24. I’m definitely part of the 1% who love to game the system on the legacies, but I also love Southwest’s program. The fact that points bookings are fully refundable, but WGA revenue bookings are not, makes points a more valuable currency than dollars if my plans are subject to change. (For me, the only downside of flying WN domestically is that “same day changes” are unreasonably expensive.)

  25. As a domestic segment flyer that buys the cheapest ticket available 2-4 weeks in advance in economy. I will come out significantly ahead and would love if status went this way also. When I am a leisure flyer I am using my points each and every time and not looking for the best redemption rates each and every time(I average 1.5-1.8 cents) Burn and churn the miles and no worries about devaluation either then. I for one agree with MJ completely.

  26. #Deltasegmentflyer Really? I’m a Delta MSP – SFO flyer, buy my tickets 2 – 4 weeks ahead, and I will come out significantly worse from this. As a PM I am making ~6400 miles on a <$400 ticket (not in summer, but the rest of the year). Even with the 9x PM bonus I'm coming out way behind. and that's on a direct flight. If I come back on a connecting flight via OAK the prices is generally lower, and the miles are higher.

    But I think a lot of people have missed the main point: FF programs are a marketing tool. Are the high dollar flyers going to switch to Delta over some extra FF miles? Are the low dollar flyers going to go elsewhere because of the change? Deltas planes are full, now. Will this change that? We'll see.

  27. @Neal and @Gary — I think Neal’s math is sound for 1Ks, even if it isn’t sound for Golds. As a 1K I earned around 209k RDMs last year. If I divide by 11, I would have had to have spent around $19k to get there under the new rules. But 209k miles for $19k is just under 10 cents per mile (less than half of 20 cents).

    I also went back and just counted my major flights and costs for last year (our corporate travel department fortunately keeps track of this). For my actual flying last year, I would have received over 500k redeemable UA miles. Which definitely makes up for the chart devaluation, and then some.

    I am annoyed they didn’t announce at the same time. I’ve switched to AA full time this year, because I didn’t like UA’s new award chart. But this announcement is enough to make me think about switching back.

  28. Nope, scratch that! I calculated based on the redeemables not based on the ticket price (~100k in BIS). I stand corrected.

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