Programs issue too many miles. There aren’t enough award seats, especially with planes flying full. They need to either increase the number of award seats or increase the cost of each seat, otherwise you just have frustrated members who can’t redeem.
At the same time programs don’t need to spend as much marketing to fill planes when planes are already full. But that’s an argument for reduced earning, not for changing redemption prices.
Programs with set award prices (award charts) usually devalue in a predictable way.
Twelve years ago on Flyertalk I outlined a simple model of why we can expect frequent flyer programs to devalue over time.
I explained that frequent flyer miles are a currency, but they are printed by a single company and there’s no independent central bank or other body whose job it is to defend the value of that currency.
When programs ‘print miles’ but the number of redemptions available doesn’t increase proportionally, prices will have to rise.
Milton Friedman…showed the world that inflation is a monetary phenomenon — increase the supply of money in the economy, and the general price level will rise.
The famous and deceptively simple formulation of this is: mv = pq
m = quantity of money
v = the speed at which money circulates in the economy
p = general price level
q = quantity of goods
Friedman argued that the speed at which money circulates is, generally speaking, constant. Folks plan over time for their spending needs. On the whole, if people get paid on Friday they don’t spend all their money on Saturday but spread the spending out until their next payday. (Obviously this isn’t universally true, but on a macro level it winds up being true.)
The upshot of this famous formulation is that when m goes up, p or q needs to go up. If the quantity of goods remains constant (q), that means that p (price) must rise and you have inflation.
I think that this simple formulation is helpful in thinking about loyalty programs.
If m = miles, v = the speed at which folks redeem awards, p = the price of awards, and q = the supply of available award seats, then…
Sometimes the speed at which awards are redeemed goes up. For instance, when loyalty program members are uncertain about the future of their points. There is a common belief that when United declared bankruptcy, there was a ‘run on awards’ — people believing that they needed to cash in now while the airline and the loyalty program was still around.
But on the whole, the fact that 8% or so of seats go to award redemption (over time and across programs) suggests that v is usually stable.
That means that if m — the quantity of miles or points — goes up, then one of two things has to happen:
Either the quantity of award seats have to become more available, or the price of awards has to go up. Otherwise there will be a shortage.
…And since it’s so much easier to accumulate miles than at any time in the past — as programs sell miles to all comers, and miles have become such a popular phenomenon and useful marketing tool — the quantity of miles is ever increasing. It’s profitable to the airlines to sell miles.
That means one of two things happens:
* The quantity of award seats goes up
* The price of awards goes up
I said that means we’re going to see devaluations. And we have, in fairly predictable patterns.
They don’t really happen during recessions (to a large extent only Hilton devalued during the Great Recessions), and not just because you don’t want to anger customers when few people are buying your product. Seats and rooms are empty so there’s not a ton of pressure on your inventory. Prices of that inventory are down. But when the economy comes back nd seats and rooms fill up, inflationary pressures return.
Here’s the most common reasons that programs find themselves devaluing:
- Sometimes a new program starts, and the people who designed it didn’t know what they were doing, didn’t understand how the program would work in practice. They may have been too generous from the start, or they got the rules wrong so members drove up costs in ways they didn’t predict.
- Other times programs have simply been badly managed. They short-sightedly printed too many miles, got themselves in trouble because they printed currency the program just couldn’t cash. (“Too many miles chasing too few seats.”)
- Travel providers also get in trouble, airlines went through bankruptcies, and they turned to their frequent flyer programs to generate business. They printed loads of miles, and predictably devalued. Classic pump and dump scheme. They convince members to buy tickets to earn miles based on a value proposition, and then change the value proposition.
- Other times programs just see everyone else doing it, and they think they can get away with it too. (“Everybody is doing it so why can’t we?”) Put another way, a program executive thinks that their program doesn’t have to be very good, it only has to be a little good and that’s relative to what others are doing.
At first glance you wouldn’t ever expect a revenue-based program to devalue. As fares rise, you earn more points but redemptions cost more points too. It should have built-in balance.
But there are different kinds of revenue-based programs, and even those that shouldn’t devalue do.
- Revenue-based earning and revenue-based redemption should not ever require a devaluation. Those should be continually in balance. And yet Southwest devalues anyway. And devalues again.
- Revenue-based earning and award charts for redemption will require devaluations. Inflation alone will push up airfares, and thus points earned. It’s untenable for the points cost to redeem for flights to remain constant.
We can expect that more outstanding miles without corresponding increase in capacity will mean award inflation. We can expect price inflation to raise the price of awards in a pure revenue-based program.
What we haven’t seen very much of throughout the history of frequent flyer programs is deflation.
That means you’re unlikely to see your miles worth more in the future than they are today. You should burn your miles now, and then earn more. The key not getting hurt by inflation is to earn and burn in the same period.