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.
Thirteen 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.
Eccles Federal Reserve Building By AgnosticPreachersKid, used under CC BY-SA 3.0 via Wikimedia
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 and seats and rooms fill up, inflationary pressures return.
How have mileage programs actually performed, and are devaluations not as bad as they seem?
- Economy awards haven’t devalued much at all.
- Price increases for first class awards are more or less nuts.
- But I wonder if, like Goldilocks, pricing of business class awards after devaluations are just right?
In some ways even Delta’s changes aren’t as bad as they might seem, Delta SkyMiles just makes themselves so hard to trust.
What I thought I’d do is look at how award pricing has changed over the past decade, and compare it to a reasonable rate of inflation. (in other words, if mileage programs operated on a sort of inflation targeting). I decided to look at Europe and Australia business class awards.
These are somewhat stylized numbers. United had a 90,000 mile business class award between the US and Australia for a long time, and actually raised that price in October 2006. Delta (and Northwest) at the time charged 150,000 miles for that same award (United’s rulebuster-style standard award was 150,000 miles back then). So starting at 90,000 miles in 2006 may be too low — but that will only reinforce my point.
Let’s see how standard pricing in 2006 with 4% annual inflation compares to current (and known future) pricing:
The reason that devaluations seem so dramatic is that programs devalue award charts all at once, rather than making annual minor adjustments.
Of course some business class award pricing is absurd. What used to be known as ‘double miles awards’ or rulebuster awards have gone up a lot more than saver awards have. And Delta does things like this.
But in the limit we see some fairly standardized price increases, albeit in a dramatic step-up rather than gradual way.
Is that fair? No, not really. Unlike cash, members can’t earn a rate of return on their miles. Miles aren’t like money. You can’t use them for whatever you wish, such as flights on competitors or to pay your mortgage (though Aeroplan lets you use miles to pay off student debt). And you can’t invest your miles in stocks or mutual funds.
That’s why the advice I gave in 2003 remains true today:
I’m not saying that we should all burn our miles with abandon. But I am saying that the best way to enjoy these programs and capitalize on their superior value propositions is to redeem miles as you earn miles. Waiting simply means that past earnings will buy less in the future.
Nonetheless, devaluations may at least be predictable.