Mileage Plus 2012 Change Rumors: Fallacies, Fantasies, and Fact

One Mile at a Time writes a followup post to yesterday’s rumors about the face of the new United-Continental Mileage Plus program.

United all but confirmed that the gist of what’s been leaked is correct when they issued a denial.

As we’ve said, the details are coming in the fall – specifically, we’re aiming for the end of next month. In the meantime, there will be rumors — like what’s been posted here — that unfortunately contain some inaccurate information.

“Some inaccurate information.” Indeed. Not false, incorrect, mistaken, grossly speculative even. Just some of what’s been speculated isn’t quite right, but we won’t tell you what.

So if you haven’t seen the direction that at least some of Mileage Plus’ thinking seems to be going in, it’s worth reading up.

In Ben’s follow up, he points out that it’s not final details, it’s one proposal that was floated but that’s likely somewhat different than the final version, and that his rendition was indeed incomplete (eg that segments on COPA and Aerorepublica would count towards the minimum to reach status – not just United/Continental segments).

But there are two claims that he makes that I think it’s worth taking issue with.

The next point of frustration seems to be “how dare United do this on such short notice.” Keep in mind this is the 2012 program, meaning this would be what’s required to requalify in 2012 for 2013. I think that’s plenty of time, given that we’re talking about a huge merger. To many this would be no different than an award chart devaluation, in which case 3-4 months advance notice would be considered plenty.

Though the very first point I made yesterday was about late notice for changes that they’re making, I think my point was misunderstood because it’s something that Wandering Aramean took issue with as well.

I agree that assuming announcements are made soon that it is plenty of advance notice for how folks will qualify for 2013 status based on 2012 flying.

The claim I made about too little notice is that this is not sufficient for the major changes to how the program will be run, assuming that implementation happens in the 2012 program year — not sufficient notice for reduced bonus miles for flying, prioritizing full fare over status for upgrades, etc.

I know I’m tilting at windmills here. I know airlines do this all the time. But I’ll say it and say it strong. It’s crap.

If you fly all year to earn a published set of benefits the following year, and they make changes to the benefits the coming year benefits in the back half of the year, that’s a bait and switch. United is no worse than other airlines here, of course, but it’s still an underhanded ‘standard practice.’

Ben also repeated a claim I’ve read elsewhere in the past day, such as by Wandering Aramean, that I think misunderstands what makes a customer profitable. It’s a very common misunderstanding.

If I previously took twenty $250 trips per year, I would have spent $5,000. Let’s assume those are transcon trips and United wasn’t making any money on them. I was an “unprofitable” customer.”

This confuses average and marginal analysis. Let’s take two extreme examples to illustrate.

Someone buying a full fare ticket, the last seat on a plane, may be the unprofitable one – if someone else would have come along and bought the same full fare ticket that’s now unavailable. Or at least that full fare passenger provides zero incremental dollars compared to United’s next best alternative. The economic profit on that passenger is zero. Amount of profit accruing to an activity has to be determined on an opportunity cost basis.

Someone buying an expensive ticket based on company policy to fly United on a given route, or based on a corporate contract for that route, is not generating any extra revenue as a result of the frequent flyer program, either. Awarding them miles is done at an economic loss, because doing so just adds a future cost beyond what’s necessary to attract revenue. Awarding those customers miles or upgrades is not done at a profit at all.

The customers most people think as being the most profitable may not be profitable at all. Awarding those customers perks, benefits, future award travel may well be unprofitable.

On the other hand, someone buying cheap tickets that the airline makes available in a low fare bucket on the expectation that those seats would otherwise have gone empty or that would not be sold at a higher price, those customers are indeed profitable!

The marginal cost of that extra customer is near zero. The seat going empty generates zero revenue. Nearly every dollar United takes in from such a customer is pure profit!

To be clear, these are very extreme cases used for illustrative purposes only, that’s not the median case. And I am not saying at all that an airline shouldn’t try to attract more customers who pay more for the same product, not at all!

The overall point is this: a profitable frequent flyer program is one that influences consumer behavior at the margin, to generate revenue they would not have otherwise gotten, above the marginal cost to produce what the customer is receiving.

Rewarding high spend that you’re going to get regardless of the program makes no sense at all.

Saying that a passenger flying a $250 transcon is unprofitable is to say that the airline would be better off if that customer were not flying. Which is generally absolutely false. The claim compares the passenger’s marginal contribution to the airline’s revenue with the airline’s average cost, a common mistake.

A frequent flyer program, properly run, wants to move the needle on wallet share — not to “reward high spenders.”

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. Put simply, if a seat would otherwise be empty, any revenue beyond the extra cost of fuel and handling for that extra passenger makes that passenger profitable.

    Having said that, much of UA’s strategy has been to eliminate extra capacity and this has been showing up in fewer cheap seats available. So I wonder if, in the final analysis, all that many people will be able to hit the various levels without spending the minima. My guess is that the people who will be most affected will be those who regularly fly various *A carriers but consolidate to UA for mileage. They will probably switch to AC.

  2. @NB United will get rid of a few low revenue elites, my problem is with the claim – and I think it’s important to counter this meme – that lower revenue customers aren’t profitable. It’s a huge mistake to think you should “reward high spenders” when what you want is to influence buying decisions of customers that are profitable on an opportunity cost basis.

  3. I don’t quite follow the point of “the person buying the last available seat, at full fare [might] have an economic profit of zero”. It seems to be because there is another person behind them would also buy that seat.

    Both of them are willing to pay a high rate, and if they are paying top dollar, both should be profitable customers, no? It’s the fact that earlier seats were sold at a lower price point that took the supply down to 1.

    It seems like having sold too many seats too cheaply, the airline is now transporting an ‘unprofitable’ customer rather than saving one for a ‘profitable’ customer. I just don’t see how the one, or two, guys showing up last minute and willing to pay, add nothing to profit?

  4. Spot on analysis, thank you for keeping up the good fight!

    (Alas, I think this might be one of those nobody-listens-to-economists-anymore situations).

  5. Isn’t your first scenario a moot point? Wouldn’t they just sell that guy a $1000 ticket then have a slew FT’ers fight over who gets $400 in VDB vouchers.?
    Although, I guess an important question, will voucher spend count towards the new reqt…

  6. I completely agree with you that the focus of the airline should be on what marginal gain a frequent flyer program can attract rather than simply rewarding purely high spenders.

    The fact is, even a mileage runner on an L fare is good for UA/CO because he would not have taken that trip if not for the mileage incentives. The seat would likely have remained empty and fixed costs would have remained.

    This is generalizing, but a high spend business customer would have flown regardless according to company policy and according to his schedule. Why reward this customer unduly if there is no marginal gain due to the frequent flyer mile program in effect.

  7. @AS my point is that the person buying the last full fare seat, when another person would have done so also, is not profitable *on an opportunity cost basis*. I’m not saying that their revenue is not greater than average cost. I’m not saying it isn’t better to sell the seat than not sell the seat. In that very narrow case, the customer buying the seat isn’t more profitable than the next best alternative that the airline had (selling it to someone else at the same price). My point is about a proper economic understanding of the profitability of a decision, not simple accounting.

  8. Excellent analysis!

    It’s nice to see someone with a genuine understanding of business economics making a post on the subject!

    The really interesting point I think you bring up is why does United award miles to people it has locked in to a corporate contract?

    Really they should only be awarding incentives to people who have a choice of carriers.

  9. Don’t these changes devalue the *Alliance by favoring UA flights over other members? Whereas currently flying any carrier withing the Alliance is treated equally.

  10. Another way of looking at these changes is that they devalue the program to a substantial degree for people that are flexible in their travel arrangements and have been actively choosing United. People in competitive markets where the price is kept low, leisure travelers with great flexibility who can often book on any carrier, people that go out of their way to choose (and often advocate) their product.

    Of course, United has a history of being very lucrative to these customers, with generous compensation, lax routing rules, etc. Part of this is probably the pendulum tilting the other way.

    One thing I did *not* expect to see (after Delta’s reward ticket announcement!) was Delta’s program looking better relative to UA’s than it did at the beginning of the week! Impressive devaluation by UA, with the revenue tiers seemingly deflecting much conversation from many of the reduced benefits.

  11. Of course the other big hit is people spending a lot of their airline travel dollars on Star partners who aren’t included in the revenue count. For them this could be catastrophic.

  12. Your analysis about that last ticket sold thing is kind of strange to me, Gary. Isn’t there an assumption there that yield management does not exist? The airlines have gotten very good at making those last tickets available for sale at full price, so I submit that unless they have completely oversold a flight and zeroed out inventory across the board, then there is no last available ticket. There’s always another one available. They will vdb somebody if necessary, and the yield management computer program will always make another ticket available for sale at high price if there’s even a remote possibility that they can sell it.

    What I’m wondering about the revenue model is how they will calculate that revenue. Will it include the 9/11 security fee and “taxes”? Which taxes will be included, which will be excluded? How the fuel surcharge. Why not exclude that too? (because they can, they can claim it’s not adding to their profitability if they want to. They can claim anything, they can make any change at any time.) What about use of CS Vouchers (they reduce the fare paid) or VDB vouchers (they are a form of payment)?

    Finally, if this is accurate or close to accurate, I wonder what the overall effect will be on their bottom line. A lot of people chase status, a lot of people spend money to do it (and yes, a lot of people find ways to do it on the cheap, but a lot of those are already going away .. the customer service vouchers, as they were on PMUA, are pretty much going away at least the way that PMUA used to give them out like candy. Yes, they still exist, but you don’t get $250 or $400 in a CS voucher for “anything” anymore.) Is there value to a company that sells tickets for less than CASM to fill those seats or not? If not, why do they sell them below their CASM? Is there any value in filling those transcons at $250?

    What happens to their OVERALL (including all sources) revenue when more people realize that there’s no reason to chase status anymore if they won’t meet those spending targets?

    And the big question is what is the effect on Mileage Plus’ profitability in the long term? If less people chase status and more people realize they can get what they want elsewhere, doesn’t that have an effect on the credit card miles business too? The claim has always been that MP is worth billions, and it’s hugely profitable. But they seem to be trying to screw it up any way they can. (on the surface it doesn’t look that way to their set of airline execs, but isn’t that short-sighted?)

    I guess we’re just going to have to wait and see what is real and what isn’t. at least for now. I’m not surprised they are considering this, but I would be surprised if its really all true and they implement all of this (or something close to this) all at once. I think it’s much more likely that they would implement it a bit at a time, and not all at once.

    -David

  13. @David when I referred colloquially to ‘the last seat on the plane’ I meant the last seat for sale, ie inventory shows Y1, purchase is made and goes to Y0.

  14. Wow, your column reads very differently when one is partially inebriated – all I got while skimming is “load of Crap!”

    I’ll have to read this again tomorrow…

  15. Finally a good analysis from someone who understands the economics of the system. I had to stop reading the FT thread as it was too full of…..

    For me this type of change would pretty well spell the end of UA flying for me. I’m not at a captive hub, and have several nearby airports (none are hubs) that I can choose fairly equally. I can directly access 4 (3 after merger) *A carriers, DL, AA, WN, Frontier and a couple oddball leisure public charters. Heck for a few hours’ drive I can access Virgin America, JetBlue, and just about every major international carrier.

    I’ve been mostly loyal to UA – even spending more to fly them – for the benefits and their FF program. But I’m not a “big spender” (as apparently 80% of FT’ers fancy themselves). I have no particular incentive to focus on UA now.

  16. I think the point about driving marginal business is good. But let’s consider what drives that. For most people the prime consideration is price and then perks and maybe mileage. Take for example SFO-WAS. You have your choice of nonstops to IAD on UA, Virgin, JetBlue, and connections (some of which arrive more conveniently at DCA) on other major carriers. If you are a UA elite, you’ll probably go with UA to get E+, not to mention some minor perks and free checked bags. But unless you are 1k you aren’t going to be flying F no matter if you paid $400 or $1600. Would you fly VS or B6 to save $100? What about AA? What if you have a family of 4 and need to check bags? So there are many variables that drive marginal business.

    Will the possible changes drive the 1k on the $400 fare to the competition? Will they drive more business from the $1600 customer? No doubt that will probably depend on the alternatives. Your point is that you need both types of customers. But you need as many of the full fare types as you can get.

    But as the $1600 customer, I can tell you I will be much more likely to select UA for my next international flight if I know they will take better care of me on my full fare flights than they do under the current system which favors the $400 customer. Otherwise I might as well go with another *A carrier that offers a better product. Or even go off the reservation.

  17. Interesting analysis. I especially like the point that it is the customer at the margin that they are trying to influence.

    I can see this either really help them or really hurt them.

    If they can FILL their flights with more profitable customers(like Boraxo’s $1600 customer) and drive less profitable(or loss producing) customers to other airlines or VDB them, they will make more money. They’ll have to give up “unprofitable market share” to make it work. Eliminating extra capacity as NB said is one way to do this. Doing that well is very hard. Taking that $250 transcon passenger may help revenue for that flight, but better capacity planning would eliminate that seat. Other than shifting a higher revenue passenger into it(maybe by changing the schedule), you can only get rid of it along with a bunch of others by eliminiating the flight. A granularity issue.

    If it means that profitable customers move, then they can lose out. They run into the limit of premium seats or perks. They can’t reward high revenue folks with an upgrade if they don’t have the seats for it. That means they are competing for coach seat customers on price and/or schedule.

    My girlfriend’s company travel policy prefers United, but she can fly others if she can justify it. Schedule and price on her current assignment mean Frontier is currently getting the business. Because she no longer has status on United, but does on Frontier, even if one or two flights were cheaper on United, she could probably still justify flying Frontier. Another granularity issue.

    *For frequent flyers, you don’t have to be the best choice ALL the time, just the majority of the time.*

    That applies for some infrequent fliers also. They fly you once a year and choose you so their miles don’t expire.

  18. The difficulty I’m having with your “last seat” scenario is your assumption that the economic profit is zero because there would be someone else available to purchase that ticket as the “next best alternative.” In order to remain consistent with the first seat scenario, I would think that you have to look at the alternative as being nobody buying that full fare ticket and the theoritical “last seat” going empty. Between the last seat being sold and not being sold, the best alternative would clearly be sold. I just don’t see how you can compare opportunity cost for first and last seat by making opposite assumptions as to the alternatives (ie, first seat alternative is no sale, and last seat alternative is sale to someone else). There seems to be a lack of logical consistency.

    I’m happy to hear your explanation on this.

  19. @gobluetwo you’re misunderstanding the point, it’s not that the low fare customer is more profitable and the high fare customer less profitable, i posited two completely different scenarios to show that it’s possible that the low fare customer could be profitable and a high fare customer not profitable. both are extreme cases to illustrate a point, and extreme because most people buy a mix of fares.

  20. I don’t think airlines consider programs such as MileagePlus to be frequent flyer programs per say rather as programs which help them increase their revenues and profitability. I think the 8 cents per mile at the minimal milage status breakpoints reinforce this concept and is foretaste of things to come as the airlines update their Information Systems and begin to track their members consumption of their products on a more granular level, something which wasn’t possible at theses programs inception. 

    Your point about a low cost fare always making the airline money is invalid. Hidden in your analysises is the assumption that the flight or some set of flights has reached their break-even point with regards to profitability. Once this point has been reached then you can make such arguments such as any ticket price which covers the additional fuel, can of diet coke; etc is not costing the airline any money. It does not mean that the airline will make money if every customer paid this fare. It does devalue the airline’s product in the eye of that and any other consumer aware of that fare in that when they do have to pay a higher fare they feel that they are paying too much when in fact they still may not be paying enough to make the flight profitable.

    The name of the game is getting to that break-even point so that you can have those buckets available which would be profitable at any fare price. If you don’t have enough people paying those high(er) fares then you will never have the opportunity to sell the discounted ones. If what you are arguing was true in the general case then no airline would be losing money; all airlines would be profitable. 

  21. The MileagePlus Premier status levels and how to earn them.
    Premier status levels and qualification:
    The 2012 MileagePlus® Premier® program will have four status levels:

    How to earn
    Premier 1K® 100,000 Premier qualifying miles (PQM) or 120 Premier qualifying segments (PQS)
    Premier Platinum 75,000 PQM or 90 PQS
    Premier Gold 50,000 PQM or 60 PQS
    Premier Silver 25,000 PQM or 30 PQS

    Global ServicesSM will continue as an invitation-only membership program exclusively for our top members.

    A member’s 2011 qualifying activity in both MileagePlus and OnePass® will be combined toward qualification for the 2012 Premier program, as well as toward invitations for Global Services.

    On January 1, 2012, members will start earning toward these status levels for 2013. If you reach one of the PQM/PQS milestones between January 1 and December 31, 2012, you will earn Premier status valid for the rest of 2012 as well as the 2013 membership year.

    Also beginning January 1, 2012, to qualify for any Premier level, members must fly at least four paid flights on the new United (including Continental), Copa Airlines or Copa Airlines Colombia during a calendar year.

    All the benefits associated with these status levels will take effect late in the first quarter of 2012, when we convert to a single technology system. Until then, a member’s current benefits will be extended. For example, if you earn 50,000 EQM in MileagePlus in 2011, you will be a MileagePlus Premier Executive member. You will keep those benefits until system conversion, when the 2012 Premier status levels take effect. At that point, you will become a MileagePlus Premier Gold member for the remainder of 2012.

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