MilesBuzz! - ROI on Frequent Flier Programs?

Delta (and all airlines) have surely crunched the #s and figured out what it is --- anyone have any ballpark ideas what that ROI is? Just a conversation we're having at work, I figure it has to be pretty high.

This is not a DL specific topic so I am moving it over to MilesBuzz which is the more appropriate home for it and where it will receive a larger response.

RSSrsvp - Moderator

As long as you can let the miles expire, and convince people to bank the miles for a future trip that they will never take, or will take so many miles that they will always be short of the required numbers, and have to buy additional miles, the ROI will be extremely high.

Also as long as the public thinks of the miles as money in the bank (like people thought beanie babies would continue to increase in value and they could pay for their children's college with the proceeds) the ROI will stay high. It's also like the extended warranties that are a huge profit item in retail, as they know the majority of people who buy them will not use them, even if the device breaks, especially for low cost items.

Also look at all the add-ons the airline gets on the free tickets. Luggage fees, pure profit, especially when it is on a seat that probably would go unsold. Fee for buying a ticket under 21 days, or some other time frame, fee for getting the ticket over the phone. Add on fee for a "better" seat in coach. I have been amazed how cheap you can buy the same seat when you are booking an award.

I have a feeling a good majority of the "free" tickets are booked long in advance, on some bizarre routing, in order to get the discounted ticket, so there really isn't a cost, or the cost is slight. I also think the public has a very inflated value of their miles, and think the value of a domestic coach ticket is a lot higher than it really is, given the restrictions on many of the award tickets. If you factor in people paying more, or only going to your business for airline travel in order to get the miles, you are talking some serious money and goodwill for the business.

It also is a business where the airlines hold all the cards, they can change the terms, and they control the inventory of free tickets. They also set the price that they charge for the miles to the people who buy them. They are also a monopoly, as for a domestic ticket especially they are the only provider of the "free" ticket that you have already paid for when you previously used their product.

All-in-all a pretty good business plan for an industry that is not known for really good business plans.

I think profitability is a more appropriate measure than ROI. There probably isn't much of a capital base for FF programs so the "investment" piece of the equation will be minimal.

For profitability I think you can look at the airlines financials to see what they value outstanding miles at (I'm wanting to say it is well under $0.01 per mile). Assuming they receive $0.01 per mile, it seems like the gross margin would be rather healthy. What we can't know, however, is the operating expense associated with their FF programs.

Anecdotally, the common thought seems to be that FF programs are usually the most profitable piece of most airlines.

Oddly I was having this conversation two days ago with someone from work, they asked if all the money I put into the miles and points game was more than just buying the tickets.

Answer: YES! (Though I don't keep THAT good records)

For the airlines, I'm not sure how you would calculate ROI.

ROI requires two components, "return" and "investment." I'm not sure how you'd calculate the "investment." Certainly there is money spent to establish the programs. It's not clear how much of that would be recoverable if they were terminated.

And what is the "return?" I promise you to a moral certainty that there has been at least one meeting where a senior exec has said "What if we just did away with our FF program" and someone in the room said "We might as well do away with the whole airline because no one would ever fly us again anywhere nohow even if we would fly them from North America to China in First Class for a dollar." To that person the "return" is infinite.

If you could somehow actually measure the incremental profit from an optimal FF program and compare it to the costs, you might have a basis. I wonder if or how they do that. I can tell you from 30 years in the insurance business that nobody in sales ever even tries to estimate the marginal revenue based on price position. All they will tell you is "If we are not at least 5% below the next lowest price in the market, we will never sell a single policy." I'm exaggerating a bit, but only a bit.

Now, it WOULD be interesting for an individual to calculate their own profit (I would use a different measure than ROI) on FF programs.