vxmike

Southwest has done just fine with a fixed value earn and redemption system.

I think many of us suspect one if not all of the three legacy airlines left in the USA want to move to a similar system sooner or later. What's stopping them from doing it now?

There is little competition and few empty seats compared to the past. An attractive FF program is no longer required to fill loads of empty seats and boost revenue. Here are a few possible reasons I can think of why they don't just make the change now:

1) They believe that moving to a fixed value point system would actually harm their business and too many flyers would defect to the competition. Nobody wants to go first.

2) Converting banked miles to a fixed redemption value could cause a huge rush of redemptions as FFers with millions of banked miles spend them in lieu of spending cash. This could cause a huge short term cash flow disruption. I love hoarding miles knowing I can redeem them for intl F/J, but I would not hoard them if miles had a fixed value. I spend Southwest points as fast as I earn them.

3) Potential effects on Alliance partners. I'm not sure how it would work within OW/*A/ST if a major member converted to a fixed value point system. This may actually save AA/DL/UA money if they no longer have to pay for expensive partner award flights. For example I have seen threads indicating that some OneWorld flyers only use AA as a mileage "bank" and don't actually fly the airline regularly since AAdvantage is a generous program. I can't imagine that behavior is profitable to AA. This is mostly speculation on my part but food for thought.

4) Perhaps the airlines generate substantial revenue from credit card companies that would be compromised in a move to a fixed redemption value. For example if an AA mile suddenly becomes worth a fixed $.015 and correspondingly reduces cash revenue by that amount that may hurt profits. I doubt the average actual "cost" to AA/UA/DL per mile redeemed is more than a cent considering that upgrades and otherwise empty seats have an almost zero tangible cost. Partner flight redemption is the only serious cost incurred.

Thoughts?

mahasamatman

WN is a regional airline. AA, UA, and DL are global airlines.

FlyerChrisK

...until the next recession.

They're already carrying these on their books at a particular value and switching to revenue-based redemptions doesn't inherently change anything (controlling for expected breakage in both worlds).

I suspect (but am not sufficiently inclined to lookup SEC filings to verify) that the legacies carry airline miles on their books for far less than, say, 1.5cpm. Breakage is a nontrivial factor, but "status quo" miles and "revenue" miles buy two distinct products.

Today, airline miles should buy seats that would otherwise have gone unsold. The marginal cost is near zero, assuming revenue management is doing its job correctly.

In the revenue mile world, seats aren't capacity controlled (I hope), so the marginal cost can very easily be a full fare cash fare.

Yes, airlines generate substantial revenue from their partner credit cards.

kettle1

If DL's move works? It will only be a matter of time before AA and UA follow.

If the new plan does not work, DL simply reverts back to the old ways.

I personally think DL's new FF plan will work and the others will follow.

Time will tell.

DL2SXM

Gee, great reasoning mahasamatman. Care to expand on that lone sentence a bit further?

cerealmarketer

Aeroplan and Qantas are probably closest to the US programs and offer a hybrid.

They offer both fixed value and grid options.

That pleases those who like the simplicity of fixed value, while those who prefer the 'jackpot' value that distressed inventory offers in grid options still have access.

The airline can choose to display the fixed value as the primary option in results screens like Qantas does to divert uneducated consumers into lower value redemptions. And ideally greater lower value redemptions help subsidize the higher value ones from the grid for more educated members.

Delta has has a fixed value option for a while with its 'pay with cash' option but it's not very visible to the average member during the shopping process.

Often1

Carriers still get some consumer bang for the buck with "bonuses" for class of service, elite status, day of the week, color of socks worn and so on. Thus, they use tiered awards with enticing names such as "saver" to designate inventory which they cannot otherwise sell. They then have mid and high level awards which are for inventory which either can be sold at a deep discount or at close to full price.

Bottom line is that the carriers get the benefit of flexibility while consumers get choice, e.g., "I can go where I want to go (high-level award) or I can go to what's available (low-level award).

With vast international route networks and alliances, this system works and despite the end of the world mentality on FT, it's pretty fair.

diver858

BA Avios distance-based model may make more sense for international travel, more of a hybrid between the 2.

Consumers would lose out BIG TIME if a fixed value redemption model was applied to TATL and TPAC premium awards. While becoming less common, it is still possible to book TATL J (U in the case of AA) for 50k miles each way, which would be substantially more under any fixed value formula. Even with the recent UA devaluation, similar deals can still be had.

The proliferation of credit card mileage promotions where banks give it away like candy have contributed to the current situation, but there is some indication that they are starting to tighten things up.

Reisen

A couple of thoughts from someone who works in the travel industry.

First, airlines want to see you burn miles. As ChrisK writes, they're already carrying them on their books, and that adds up. One nice effect of program changes (read: devaluations) is they often spur people to burn their banked miles.

They also know that people who redeem miles are happier, more loyal & engaged customers who spend more (on average) than those who don't.

Which brings us to SouthWest. Not every airline can be SouthWest; it would be a mistake for them to all try to be SouthWest, and they know it. SouthWest has a specific business model and a specific culture. All of this is designed to promote loyal & engaged customers.

They also have a fairly vanilla FF program. Some other airlines take the opposite approach. Fairly vanilla flight experience, but offer more value in the FF program, or at least more potential value for those engaged customers willing to jump through the hoops to grab it.

SouthWest also gets the luxury of running their program in a much smaller environment. As has been pointed out, transatlantic, transpacific, and partner-redemptions would seriously complicate RR's value proposition.

The legacy carriers need a program that can work for people buying $200 domestic fares, but also for $12k international first fares. To justify charging so much for their up-front fares on long haul flights, the carriers need a way to put their loyal customers up there at a reasonable redemption cost. A fixed value FF program doesn't do that.

UA Fan

With declining competition and closer partnerships, it is just a matter of time before everyone moves to such a model. Burn while you can folks.

polarpacific

Could you please elaborate on the redemption choices you mentioned for Qantas, and how to access the higher value redemption option.

Thanks

sdsearch

First of all, even Southwest is not 100% fixed value earn. The earn at most partners (hotels, rentals cars) is still flat per stay/rental, rather than proportional to spend.

Second, how would you like it if US<->Europe redemptions were around 50,000 miles saver round trip in coach (like they are now) but 250,000 miles saver round trip in business and 500,000 miles saver round trip in first? But isn't that about the cost-in-money relationship between coach and business and first international fares?

But if you wouldn't redeem 250,000 miles for a business round trip to Europe, probably no one would. So business cabins would just go out empty. And those frequent flyers who used to redeem for int'l business/first would bail from the first airline to do this.

So doesn't it sound self-destructive?

In other words, Souhwest is an awful analogy, because it only flies single-class limited-range (can't to transatlantic) single-aiisle planes, and has no worldwide earning/redemption partners. With that simple a fleet and cabin, fixed value redemption is simple (and yet, Southwest still has 3 tiers of redemption, though I'm not sure who uses the redemption tiers other than WGA).

But none of the legacy airline you mention flies only single-class planes, none of them flies only limited-range single-aisle planes, and all of them have worldwide earning/redemption partners.

And look at what happened on the earning side at Delta:

Earning on partners is still by mileage flown, not by cost.

Earnong on packages (such as vacation packages), where the cost of the flight alone is not revealed to the customer, is still by mileage flown, not by cost. (To be by cost, they would have to reveal what the cost of the flight alone was, or else gives miles based on the cost of the whole package, not just the flight portion! But clearly they don't want to do either of those things!)

So that just goes to show you how much more complicated a cost-based FFP is to implement on a legacy airline with worldwide partners and multiple cabin classes and 15-hour flights than it is on an airline that mostly flies domestically, has no partners overseas, flies coach-only planes, and flies nothing but 737s.

dhuey

I took a look at United's most recent 10K. When UA sells a ticket, most of it goes as revenue, but the portion attributable to the miles for the itinerary is treated as deferred revenue -- cash received but not earned, so it's considered a liability. The amount of the liability per mile is set at the price UA charges its Star Alliance partners for UA miles. When miles are redeemed, the revenue is earned and the liability decreases.

Anyone have a guess on how much per mile UA charges its *A partners? Perhaps there is some way to calculate that from the financials, but it wasn't obvious to me.

mahasamatman

I don't see how a revenue-based approach can work for international flights and premium travel. WN flies short routes and all-Coach equipment, so they can get away with it.

dhuey

Does Air New Zealand have a revenue-based approach? No shortage of long-haul international flights with them. Then again, they don't have much competition.