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Southwest introduced their revenue-based frequent flyer program — Rapid Rewards 2.0 — in 2011. The gist was this:
- You earn points based on the cost of your ticket. However the number of points you earn per dollar is based on the type of fare. The more expensive fare types earn more points. And the higher the fare the more points you earn. So expensive ‘business select’ fares earn rapidly.
- You redeem points based on the cost of the ticket you want to buy with points. The number of points per dollar required depends on the type of fare. The more expensive fare types require more points. So inexpensive ‘wanna get away’ fares cost the fewest points.
This encouraged customers to earn on expensive business fares and redeem for cheap leisure fares.
Southwest has changed their redemption values today in a way that upends this model somewhat. They’ve reduced the average number of points per dollar required for business select fares by 35% and anytime fares by 22%. And they’re increasing the average points per dollar required for wanna get away fares by 6%.
You take the base fare, excluding taxes, and then multiply by the number each Southwest point is ‘worth’ towards the fare type (the ‘redemption rate’). With this change Southwest appears to be roughly equalizing the redemption rates across fare types.
- Previously Business Select fares cost ~ 120 points per dollar. That should drop to ~ 78 points per dollar.
- Previously Anytime fares cost ~ 100 points per dollar. That should drop to ~ 78 points per dollar.
- Previously Wanna Get Away fares cost 72 to 74 points dollar. A 6% increase would suggest 76 to 78 points per dollar.
Here’s an illustration of how this changes the number of points required for an award, depending on the Southwest fare type. I looked up one way flights from Austin to Los Angeles, took down the flight prices and the number of points required. Then I compared to prices for paid tickets (the same) and rewards (new points prices) .
I talked with Jonathan Clarkson who runs the Rapid Rewards program and he acknowledged that the majority of redemptions today are in the Wanna Get Away fare types. Customers try to get the most value from their points, and gravitate to the flights where redemptions are the cheapest.
He sees this as “trying to maintain [their] core value proposition” by making the “pricing on business select and anytime more competitive.” And that it “makes more sense to price it this way, if you look at prior to this change the points per dollar required for business select or anytime multiplied times the base fare netted a pretty high price compared to a mileage fare at another carrier. So we felt we wanted to make sure the pricing for our premium fares was commensurate with how we treated them on the revenue side.”
Business Select and Anytime fares will still cost more points because the fares themselves are more expensive, but with this change Southwest no longer really penalizes redemptions for these fares.
On the other hand the price of Wanna Get Away fares go up a little. I can accept this increase when they’re making all of their other seats more affordable. Wanna Get Away fares have moved incrementally several times since the new program was launched in 2011, while expensive fare types move down in one huge swoop.
It seems like the average redemption value of a Southwest point may go up, but the maximum redemption value will go down slightly.
This by the way is going to change the calculus on transfer points versus pay with points for Chase Sapphire Reserve customers. Chase lets you buy Southwest Airlines tickets (you have to call) at 1.5 cents per point, or transfer points to Southwest. Today you get more value paying with Chase points than transferring at the Anytime and Business Select levels. Going forward it’s going to be closer to a break-even value proposition paying with points versus transferring and redeeming – and paying with points earns you points (and elite status credit) across the board.
I often buy tickets close to departure, where redeeming Southwest points has made no sense at all since I’ve gotten more value banking them for future Wanna Get Away redemptions rather than spending them for Anytime fares. Now it’ll make sense for me to use my points whenever I’m traveling for leisure, close-in or booked far in advance.
That said I don’t love to see the increase in points for the cheapest fares, or the increases we’ve seen over time. If you would only ever use points for Wanna Get Away fares this isn’t an improvement for you, even if the average value of a Rapid Rewards point may go up. This change amounts to a coalescing of value around a single point regardless of fare type which is a fascinating move for Southwest to make.