Why Do Card Issuers Put Up With Frequent Flyer Program Devaluation?

Credit card companies are the largest buyer of miles from the big US airlines. By extension they’re the largest customer for air travel, too. They’re paying billions of dollars and they care what they’re getting in return because they need those miles to be valued by cardmembers in order to incentivize spending on their products.

So why don’t card companies raise a stink when airlines devalue their miles? After all the card companies are getting something worth less for their money. Banks aren’t usually known for being pushovers as counterparties.

What’s more, agreements between banks and airlines regularly include no devaluation clauses. Here’s language from one airline’s co-brand credit card contract, with names redacted (bolding mine).

(a) If one or more of the following (each a “ Suspension Event ”) occurs:

(i) The sum of cash, cash equivalents and short term investments (in each case unrestricted) maintained by [REDACTED] is less than [REDACTED] on average of the unrestricted cash on hand on the last day of each month during a quarter as calculated at the end of each quarter during the Term of this Agreement; or

(ii) [REDACTED] fails to maintain a frequent flyer program that is as competitive in the marketplace as the FF Program was as of [REDACTED]; provided that [REDACTED] provides written notice of such failure to maintain the competitiveness of the FF Program which will commence a forty-five (45) day period during which [REDACTED] may cure such deficiency; then [REDACTED] may, in its sole discretion, elect to either

(1) compensate [REDACTED] with Pre-Purchased Miles as set forth in Sections 14.4 and 14.5 below, or

(2) terminate this Agreement, or

(3) commence the repurchase of Pre-Purchased Miles as set forth in the next paragraph.

Neither clause (1), clause (2) nor clause (3) is exclusive and an election by [REDACTED] to compensate [REDACTED] with Pre-Purchased Miles or commence the repurchase of Pre-Purchased Miles shall not prevent a later election to terminate this Agreement so long as a breach is continuing or to exercise and other right or remedy hereunder.

For purposes of clarity, if [REDACTED] compensates [REDACTED] with Pre-Purchased Miles due to a breach of (i) or (ii) above and the breach is subsequently cured, such compensation with Pre-Purchased Miles shall cease and [REDACTED] shall resume paying [REDACTED] in cash as set forth in Section 4.2.

If [REDACTED] commences the repurchase of Pre-Purchased Miles as set forth in the next paragraph due to a breach of (i) or (ii) above and the breach is subsequently cured, then such repurchase shall cease and the number of quarterly payments in Section 14.2.1 shall be reduced by the number of quarterly payments made as a result of the breach.

In the event [REDACTED] terminates this Agreement pursuant to this Section 4.6 , [REDACTED] will promptly (i) repurchase any unused Pre-Purchased Miles as of the date of termination; and (ii) repay an amount equal to (x) the sum of the Merger Bonus Payment and Bonus Payment divided by the (y) number of months of the Term times (z) the number of whole calendar months remaining from the effective date of termination until the Expiration Date, together with interest at the Adjustable Rate (including interest on the Pre-Purchase Miles to the extent not previously paid under Section 14.2.2 and interest on the Merger Bonus Payment and the Bonus Payment from the date each was paid by [REDACTED]; provided that until such time as [REDACTED] is the sole issuer y and z shall each equal 60.

There are several reasons that clauses like these in the agreements – meant to protect banks from airlines devaluing their miles – don’t work.

  • They’re too blunt an instrument banks don’t get to veto individual changes just blow up the deal if an airline goes too far. So the airline and bank consult with each other to make sure it doesn’t get to that point.

  • Changes are generally made at the margin not enough to get a bank to walk away.

  • Bad employee incentives bank employees get rewarded for bringing in deals and delivering profits, they aren’t personally on the hook for losses and aren’t as well rewarded for avoiding losses as they are for delivering revenue. No one wants to be the one who ‘lost’ the big book of business.

  • Less competition with airline industry consolidation there are fewer marquee partners to do business with, and leverage has shifted from the banks to the airlines. Airlines are no longer dealing from a position of financial weakness, either.

Delta and American are somewhat unique. American Express lost Costco so Delta had huge leverage in negotiations. American had two co-brand issuing banks with big cardmembers bases (Citibank from legacy American, Barclays from US Airways). Their deals may not be replicable by others.

However in the same month that United announced elimination of award charts – and even reiterated they had done so in their earnings call — they said they think they can get more money for their co-brands than they get today, meaning they believe deliver more value to banks than they are getting paid for. Put another way they think they can give Chase something less value and Chase will pay more for it.

There’s even been some speculation that United puts out a request for proposals to other banks as it considers its next card deal (the most recent one was done in 2015, it’s not public whether this was a 5 or 7 year deal). However Chase is most likely to keep the business.

They have the existing card business (which can be sold, but some value is always lost in transition), they still have the deal to lease Visa’s network which incentivizes them to spend up to their full revenue driving additional spend. And big banks with the resources to compete and without a major airline co-brand have tended to be more conservative in chasing rewards customers than Chase has.

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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Comments

  1. Not much will change until consumers stop using mileage cards and go to cash back cards instead. It’s tough to justify any mileage card today over a straight 2% card but obviously enough people don’t feel that way. Alaska is the only mileage card I still use.

  2. I keep a United Card solely for United Spend and the perks the card gives me. Free bags and Priority boarding for 2 people pays for itself. It also allows me to book Basic Economy and not feel the sting. I don’t really use the card for anything else. Until the devaluation, I just used Chase Ink and converted the points to United. I literally just moved over 180k points to United a couple days ago for a summer European trip.

    With that said: I’m not sure how useful the Ink will be in the future, or what leverage Chase has over United. The airline card I’ll always keep and never use, because of the perks. (Which isn’t good for Chase) The Chase Ink, it remains to be seen. Hyatt is a fine transfer partner, but I’ve since switched to mostly Airbnb’s when able. Other then Hyatt, I’ve used my Chase points exclusively for United. If the devaluation goes too far, where I see myself unable to do my usual Business class European trips with my current spend and schedule – I’ll probably cancel.

  3. Suppose the following:
    (1) A bank made a big stink about the changes in an Airline frequent flyer program.
    (2) That airline made changes in the frequent flyer program in response to the Bank’s demands.
    (3) The airline went bankrupt.
    So who do the bankruptcy lawyers go after? (a) The bankrupt airline that has no money or (b) the huge pocketed banks that were “shadow running” the frequent flyer program. Banks are often accused of running companies that go bankrupt because banks have big pockets to line the pockets of lawyers other individuals.

    For legal reasons, banks are very leary about making demands that might be perceived at the banks running businesses.

  4. @mangar as long as chase doesn’t gut use of URs through their travel portal, you can think of the Ink card as a cash back card. United can raise the cost of a RT domestic economy ticket to as many points as they want…the portal allows you to be a free agent and go with whatever’s cheapest or most convenient, instead of which airlines chase is tied to.

  5. The FF flier programs are all almost worthless and the devaluation is born by the currency holders- you and me. I’ve got 1.5mm miles to dump and once they are gone I’m out of the game after 30 years of collecting and using Lira/Pesos.

    Banks are no saints either just look at the mandatory touch pass payment deal that Visa rolled out. Luckily the Europeans are way ahead of the game with an easy hack to disable the built in antenna.

    I’m going to the $500+ cash bonuses and spinning the crap out of bank deposit bonuses. Still nets about 4k/year without ANY devaluations

    Don’t be lemming

  6. I feel stuck on stupid because I never heard of that credit card term before. “Frequent Flyer Program Devaluation.” I have alot to learn about “Travel vocabulary” I see.

  7. It is disgusting to see that the US CC companies cause continuous devaluations of FF programs by bombarding their users with miles.
    The other 99% of people on this planet not receiving the bonuses suffer most from the devaluations.

  8. Oh, wouldn’t I love to know how that contract fell into your hands? Those contracts are extremely proprietary. One of the most closely guarded secrets on Wall Street. Not the kind of thing that shows up in annual reports. It’s fair to assume that publishing the unredacted version would get someone fired. 😉

    How soon they forget. It was just a few years ago that we referred to United as the airline being kept in business so the bank could make money off its frequent flyer program. Delta was so reliant on American Express that Amex pre purchased $1 billion of Skymiles to keep Delta liquid.

    Now people think they are gonna leave? I think these frequent flyer know-it-alls who keep predicting the big airlines are going to switch banks have radically underestimated how much of a hassle that is.

  9. Last time I cancelled my AA City and Barclay card I told the rep that the reason was the changes and devaluation in AA frequent flyer program.

  10. It is the banks themselves that cause significant devaluation of the programs. By creating more points (I.e., printing money), they cause more points to chase the same (or fewer) reward seats, measured as a percentage of total seat miles. This is a classic Econ 101 definition of inflation — more money chasing the same amount of goods or services. Think Weimar Republic Deutschmarks or Zimbabwe dollars.

  11. How does an arms’ length entity like a bank measure “competitiveness of an FF program with respect to its peers” ?

  12. Last week I called Chase to cancel the United Explorer Card. The rep used the standard lines about the benefits of the card. I simply explained that with the changes to the United award redemptions, I unfortunately no longer see the value of United miles. Her response: “You know, there’s a great blog called The Points Guy and he can give you some great tips on how to redeem miles.” After I chuckled I pointed out that I was actually quite good with redeeming miles, but sadly United’s changes just devauled all of my points. And more importantly that The Points Guy’s site was actually owned by a bank. That totally surprised her. And then we canceled the card.

  13. @Retired Lawyer. You may be entirely correct about what is happening. However, there is no business reason why the airlines should not make additional seats available for frequent flyer points, paid for by the additional revenue from selling points. Think of it as advanced sales.

    I prefer to think the airlines executives are gorging themselves on oversized margins in their frequent flyer programs, thinking no-one notices the value proposition. Other executives have the same idea. Examples are all around even in the supermarket. 1/2 gallon of ice cream is now the smaller two liters. Can of tomato sauce is 15 oz rather than 16 oz. Shake and Bake pouches are smaller. More pouches needed. Executives think they are really clever because they raised prices and nobody noticed. Then they cannot figure out why sales are lagging. Airline executive are not the only ones trying to milk the consumer, but in the end, will find the consumer is smarter than they think.

  14. @Jeff W. Thank you for sharing. They probably feed that script to the representatives. Since management listens into calls, if the representatives do not say it, they get penalized.

  15. This was a horribly written post with far too many grammatical mistakes and run-on sentences. You should be ashamed of yourself.

  16. I cancelled my UA business 2 weeks ago and last week cancelled my UA card. I hope Chase tells Scotch Kirby and DaNada Munoz that United can drop dead and go somewhere else.

  17. Mike is right. Anyone who spends a dime on an airline card is a fool. The only reason we pay AF is for the perks like the $99 companion ticket on AS.

    I expect banks will not be too excited to keep affinity relationships when they make $0 on interchange fees

  18. Also keep in mind that what;s a “devaluation: to Gary Leff is often not a devaluation to a typical airline credit cardholder — especially a PROFITABLE cardholder. The folks reading this blog forget that very few cardholders are chasing exotic premium partner redemptions. Many of these customers will BENEFIT from things like “economy web specials” using fewer miles to fly to Vegas and such. If anything, the banks could benefit from the gamers being less interested in their credit cards, since almost all gamers are unprofitable customers.

  19. @chopsticks

    We have to talk about what the word “benefit” means. Lots of these low mileage redemption options are geared to deliver < 1cpp in value. If that's the case, then the customer would have been better of with a 2% cashback card.

    These programs became what they were because of the "dream" they were selling. That dream is different for different folks — for some, it's that premium cabin award to some exotic place. To others, it's grandma's house in coach for Xmas. A few more probably want to go see Mickey Mouse.

    These programs are probably done for if they turn into a straight up rebate program. Southwest already loses money on me… I buy expensive tickets on them once a year because they are the only non-stop option in the market I need for one of the winter holidays. I do not fly WN because of the Rapid Rewards program. RR does nothing in terms of getting me on their plane. Yet, at some point, I will be able to forgo paying for an expensive ticket and fly on a freebie. And that will be $400 I would have spent on them and didn't.

    Too much of that, and these programs turn into cost centers with no marginal revenue to offset them. They're already getting close, I'm pretty sure one of the airlines disclosed in their financial statements that they weren't seeing any positive revenue gains from the changes they were making.

  20. I got rid of my co-branded United card two weeks ago. I now have Chase Reserve and a cash back card. I’m done playing the frequent flyer devaluation game.

  21. @chopsticks profitable cardholders are the ones affected the most, and I’m not just talking about dynamic redemption driving the value of miles down to a penny apiece but also award chart changes that double the cost of many awards. You’re fooling yourself if you think co-brand cardholders aren’t spending on their cards looking to get a good deal for their points, and that making points worth less isn’
    t noticed by people most invested in the product.

    Now, United will say they had their best cardmember acquisition quarter ever in Q1. Of course that’s right before the changes, also when initial bonuses were at a record for them, and comparing to times when they didn’t do inflight card sales. Saying they’re at their best BEFORE upending the program is indeed telling!

  22. Well when all the FFPs play copycat with these changes, then by definition each one will still be as competitive with their peers.

  23. @Gary: Issuers can also switch, rather than fight airline devaluations. I.e. focus on cash back cards where the value of the lure is always certain in real terms (since one side hedges the inflation risk of the other).

  24. I just got my 12 month Discover Card bonus: over 85,000 miles LESS sold by AA last year since I stopped drinking the KoolAid. I was shocked.

  25. Cashback at 2% is not equivalent to getting a signup bonus worth many hundreds, sometimes up to $1,500, for a 2 to 3 thousand dollar spend. That return can be 25-35%. The key is getting sign up bonuses on most of your spend. For a couple, with so many airlines and hotels offering points through cards, that is not hard to do. I think the better goal is to get all the points you can when you can (and continually using them) as who knows if these outsize bonuses will continue.

    With the competition from LCC and ULCC carriers, meaning lowered cash prices for airfare, hotel points make a lot of sense as they become an increasingly larger share of trip cost. I have no interest in using points for air or hotel upgrades, I want the most trips for the lowest cost. Points for air and hotels allow that.

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