A new report from the Economist highlights how the world is becoming a smaller place and suggests that in order to experience different cultures, people might have to spend time outside their comfort zone.
The “points and miles blogs” is a blog that provides the latest news, updates, opinions, and advice on frequent flyer programs. The article discusses how these programs are not as beneficial as they may seem.
The Economist Issues A Cautionary Statement Regarding Frequent Flyer Programs
on November 20, 2021 by Gary Leff
The AAdvantage frequent flyer program was generally anticipated to be devalued. It did not take place (yet, and they say not for next year). Although work was done that would have resulted in a devaluation of miles, they are now selling loyalty points to their partners who reward redeemable miles for purchases.
Flying, co-brand credit card spending, internet shopping, Rewards Network dining, and SimplyMiles all earn points in the new American AAdvantage elite program. Because the ink on additional partnerships isn’t dry yet, that’s all the partners who have been presented so far. American isn’t only picking which partners get elite status credit; they’re also selling it to them.
The assumption is that ‘loyalty points’ will not only recognize the airline’s most profitable customers in a broad sense (credit card spend and ancillary revenue have a higher margin than transportation), but will also encourage customers to earn miles through partner transactions, resulting in additional revenue for the airline. Not only will status be gained in this manner, but total loyalty points earned in the preceding 12 months will determine how upgrade lists are sorted after status level.
Devaluing the program at a time when they’re making a big bet on selling miles would have put the strategy at risk. But there’s another problem that has to be addressed. During the epidemic, Southwest, Delta, and United all discounted their miles, demonstrating that this is, at least historically, a money see, monkey do business. Delta, United, and American Airlines, on the other hand, each mortgaged their frequent flyer programs for $6 to $10 billion.
The Economist advises airlines against increasing devaluation of their frequent flyer programs now that financial companies are involved.
…In 2015, Delta Air Lines ceased revealing how its miles were valued and went on a devaluation spree, leading rivals to follow suit. Delta, Southwest, and United have all depreciated miles on significant routes by 6-20% in the last year.
…The [debt] agreements have attracted a larger number of investors than bonds backed by obsolete planes (which, unlike loyalty schemes, depreciate). The credit rating of scheme-backed debt is usually higher than that of the airline issuing it. The arrangements’ structure, which uses the schemes’ cash flows to repay debt and minimise risk if an airline goes bankrupt, is also reassuring to investors. A fintech company called Affinity Capital Exchange is collaborating with JPMorgan to securitize air miles so that they may be exchanged more readily.
In all of this, the difficulty for airlines is to strike a balance between the costs and advantages of incentives so that consumers remain engaged and carriers’ profits remain intact. Endless devaluations risk upsetting the balance and jeopardizing securitization agreements. High values aren’t guaranteed.
This is something I’ve been warning about for a long time. Only Delta has been able to get away with devaluations so far with no negative consequences. In several of its main regions, such as Atlanta, Salt Lake City, and the Upper Midwest (where executives used to joke, “it’s cold, it’s dark, no one wants to travel there, but it’s all ours”), they have such a strong brand and so little competition. Even if they want to earn SkyMiles, most individuals are unaware that they can perform better with Amex Membership Rewards cards.
How far will Delta be able to push it? It is unclear. The remainder of the carriers, however, are not Delta. When you lower the value of a currency, customers are less likely to pursue it. Reduced consumer interest is detrimental for the currency’s long-term prospects, as well as the price of financial products produced from it.
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