MilesBuzz! - Infrequent Flyer Programs: are they worth it?

Many moons ago (well actually March 2007 to be precise) my wife and one offspring paid to fly from LHR to AKL in business class on NZ. We thoroughly enjoyed the experience, and were happy to pay the premium price over Economy or Economy+. We had not been frequent overseas travellers, excepting a burst about 20 years ago when I was subsidised to fly to the USA a few times for academic reasons, once even sampling Club World on BA. The odd European flight for holiday or family reasons, or to visit obscure Scottish islands, was our modus operandi.

Since then, the world has changed. I discovered FT.

The only flights I have actually paid for since New Zealand are a smattering of UK domestic flights. But we have flown or booked as award flights the following long-haul intercontinental segments:

1 x UA F
6 x LH F
2 x TG F
2 x LX F
3 x BA F
15 x BA C
2 x NZ C
1 x BD C
======
18 C flights
14 F flights

... all redemption seats booked through "frequent" flyer programs, but actually funded by a mixture of bonuses, credit card spend, shopping and other deals inspired by FT.

So to my question: "Infrequent Flyer Programs: are they worth it?" .... for the airlines? Does this make commercial sense, or have they lost the plot?

If you wouldn't have been motivated by the travel experience from that one long-haul flight in a very long time to have gone out in the last 16 months and spend serious cash on more air travel;
then, your activity doesn't represent a marginal loss of revenue to the airlines. Whereas the suppliers who are awarding you the million+ miles required for such redemptions are paying the airlines' frequent flier programs for those miles, thus representing a marginal gain of revenue.

The magic is yield management -- airlines letting you redeem miles for seats that they don't think they're going to be able to get more revenue for, either from people willing to purchase such seats outright or from upgraders.

(And that's a good reason why the airlines who have unrestricted availability awards for roughly double the number of miles are scratching their heads about whether to keep such awards. Yield management can't prevent people whose spending patterns allow them to earn millions of miles to spend those miles for unrestricted awards, people who might otherwise be willing to actually pay cash for business class or first class seats.)

Whereas the suppliers who are awarding you the million+ miles required for such redemptions are paying the airlines' frequent flier programs for those miles, thus representing a marginal gain of revenue.

I do not doubt that the airlines get a tiny profit from each award seat they "sell", but I suspect that a single ordinary C or F fare would counterbalance the sale of many many such redemption seats.

By diversifying the ways and means that miles can be gained, the airlines have moved away from the original purpose of such programs, which was to encourage brand loyalty amongst their most valuable customers.

I suspect that if they went back to the original system, their frequent flyers would be much happier as there would be a larger redemption inventory for them to choose from. The airlines would be left with a larger pool of unsold
premium seats, but they now have a tool available to them which was not around when these programs were invented: the internet. Occasional "fire sales" of these spare seats to the general public for cash would work well (no status or miles earned on these seats). I suspect that there is a big gap in the price and profit of the cheapest inflexible C and F fares, and the true cost/profit of a redemption seat; positioning the fire-sale seats into this gap would earn the airlines more than their current programs. Maybe.

Isn't an F transcontinental flight at least 100,000 miles? So you figure the airline is getting paid 1-2c per mile, or $1000-2000. I doubt it's a loss to sell an F seat at that price.

you figure the airline is getting paid 1-2c per mile
I think it''s closer to ¼¢-½¢ per mile to entities like credit card companies.

I think it''s closer to ¼¢-½¢ per mile to entities like credit card companies.

Really? That's the first time I've seen a number that low. If true, it would explain how banks can afford to offer 25k miles for getting a credit card. Do you have any data on this, or maybe a quote from Randy or another source?

I think it''s closer to ¼¢-½¢ per mile to entities like credit card companies.

I don't think it's that low. I would imagine it is between .5¢-1¢/mile. I believe DL's SkyTeam partners pay a minimum of .54¢/mile to DL.
http://flyertalk.com/forum/showpost.php?p=9239382&postcount=123

By diversifying the ways and means that miles can be gained, the airlines have moved away from the original purpose of such programs, which was to encourage brand loyalty amongst their most valuable customers.It sounds to me like you are defining "most valuable customers" as those customers who fly an airline the most. From a profit standpoint, this is not necessarilly true. The absolute most profitable customers for an airline are those members of their frequent flyer program who earn miles through partners and never fly the airline.

I think it''s closer to ¼¢-½¢ per mile to entities like credit card companies.I doubt it. Delta Airlines carries a liability of $.0054 per mile on their balance sheet, if they sold miles for anything less than that they'd lose money on ever mile they sold. I don't think Delta is losing money on every mile they sell to AMEX.

If true, it would explain how banks can afford to offer 25k miles for getting a credit card. Do you have any data on this, or maybe a quote from Randy or another source?I'm not sure we have any way to know that the credit card companies bear the full cost of sign-up bonuses on their own. In general, it is not uncommon for bonuses to be jointly funded by the airline and the partner, I don't see any reason to believe that does not occur with credit card bonuses too.

I'm not sure we have any way to know that the credit card companies bear the full cost of sign-up bonuses on their own. In general, it is not uncommon for bonuses to be jointly funded by the airline and the partner, I don't see any reason to believe that does not occur with credit card bonuses too.

I never thought of that. It makes sense for the airline to subsidize the bonus, because receiving that chunk of miles gives the customer a good reason to choose that airline for any paid travel.

Really? That's the first time I've seen a number that low. If true, it would explain how banks can afford to offer 25k miles for getting a credit card. Do you have any data on this, or maybe a quote from Randy or another source?In my experience, they generally only have that good a bonus on cards with an annual fee. Even if they waive the first year, they never pay out the bonus again, so that's an income stream to compensate too.

Yes, the smart thing is to cancel, but I think credit cards goal as an industry is to make money off of people not doing the smart thing.

As far as subsidizing, you can see this in the Amtrak credit card for instance. It's clearly spelled out that Chase posts 2500 pts and Amtrak posts the other 2500.

Credit card companies can afford to pay out huge bounties when you apply to get a FFP-branded credit card for a number of reasons. First, it's a big marketing "hook" -- and credit card companies spend a ton of money on advertising in order to acquire new customers. Second, some of the articles about recent transactions wherein some airline FFP's have sold their partner banks a huge chunk of miles upfront in order to improve the airline's liquidity situation have asserted that the average spend on a FFP-branded credit card is much higher than the average credit card. In which case, such customers are well-worth acquiring, since they generate profits for the credit card issuer both through fees paid by the merchants and through fees/interest paid by the percentage of customers who don't pay off their balances every month.

Therefore, I wouldn't consider the sign-up bonus miles that some credit cards are offering as evidence that the banks are able to buy miles at significantly less than a penny a mile.

Over the past 10 years, I have dabbled in many "miscellaneous" frequent flyer programs and have actually earned awards out of some.

One of the oddest ones for me was Grupo Taca. I once had a website with referral links that earned me miles with them. Well, I eventually earned enough for a free trip to Panama. ^

I also participated in AirTran's program simply to take advantage of the Wendy's promo two years ago and earned a free trip to Las Vegas.

I recently signed up for an account with BMI when they topped off the account with 9,000 miles; enough for a Zone 1 aware. I have not used it yet (+ 2 other family member accounts) but I haven't forgotten about it either!