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In defense of earning elite status from credit card spend
There always seems to be a backlash from elite members of airline and hotel programs when it becomes possible to earn elite status via credit card spend. Hilton and Delta are recent examples; posters contend that this dilutes the value of being elite, for example by there being fewer upgrades available.
While I do understand such folks' feelings, I would like to present a counter-argument: There are people such as myself who direct six or seven figure annual credit card spends via our businesses. The elephant in the room in these FT discussions, is that some of the higher chargers produce more revenue to an airline or hotel program than one who actually flies or stays with them, even at the highest elite tiers. What is our incentive to have any loyalty to one particular program? Why earn, say, 1,000,000 miles with United if award availability is as restricted as if we were newbies to the program? We, too, have a choice of cards on which to place our spending. We, too, act voluntarily.
If anything, the elites who attain their status the old-fashioned way via flights or stays have diluted the value of the program for us high spenders. Case in point: Even as a DL Gold via credit card spend, it is nigh impossible to find an award seat in F at the lowest mileage level from DTW-LAX in F on a Monday. So why should I direct my credit card spend to DL's cards?
Both the travellers and the credit card spenders bring revenue to a program. Both display loyalty, albeit in different ways. It should be possible to attain the highest elite tiers from credit card spend. I applaud Hilton for being the first to make this reasonably attainable. Hopefully others will follow suit.
A $1MM spend on a CC earns less than $10K for the carrier. Most folks who make top tier spend more than that.
But, in defense of the OP, its easy enough to make top tier by spending way less, and without even spending any time on the MR forums. E.g. 16 RT LAX-NYC, at the going rate of about $300/pop, will get you top tier status for under $5k.
I think most people who, like me, earn elite status "the old fashined way" view this problem as just the next step of the overall devaluation of the loyalty programs. I would be all in favor of airlines completely eliminating any earning of points/miles/status by any means other than using their services directly.
What's been happening over the years is a continual devaluation of the miles earned by flying because the airlines sell gazillions of miles to unrelated businesses - of course to compensate they then need to increase "price" of awards making loyalty of their actual customers less and less attractive.
So, most real frequent fliers stopped long ago worrying about RDMs but they still had real benefits through elite status, which was not being devalued by everyone and their brother. But now that they have brought the value of RDMs to virtually zero they have to start canibalizing the next layer which is status. (I used airlines but same goes for hotels, of course).
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Quote:
Originally Posted by sbm12
A $1MM spend on a CC earns less than $10K for the carrier. Most folks who make top tier spend more than that.
That may be true of "most folks who make top tier," but FlyerTalkers are a breed apart -- a lot of us make top tier spending far less than $10K/year on actual flights! (And of course, get derided as "1K lites" and so on..... )
But, in defense of the OP, its easy enough to make top tier by spending way less, and without even spending any time on the MR forums. E.g. 16 RT LAX-NYC, at the going rate of about $300/pop, will get you top tier status for under $5k.
Yes, under $5k is possible with MRs... but, consider the time wasted.. what about the fare availability on certain day and certain location?
It's darn easy for anyone to book flights of 100,000miles spending even less than $4000 if one does not have to fly..
That may be true of "most folks who make top tier," but FlyerTalkers are a breed apart -- a lot of us make top tier spending far less than $10K/year on actual flights! (And of course, get derided as "1K lites" and so on..... )
Not $10K/year....
Not $1M/year... but $1M through years.... also it's lifetime....
The problem is that the current FF model, from the airlines' perpective, is a really poor metric to measure the worth of a customer. There are undoubtedly, loads of top tier elites that routinely travel on full fares from captive hubs...etc that the airlines would love to coddle. Just as certainly, there's no shortage of folks who fly frequently on deeply discounted coach tickets on competetive routes who are likely break-even customers, at best.
Contrast that with the miles the airlines sell to "unrelated businesses" (the operative word being SELL). These miles redeem for EXTREMELY capacity controled seats. If I could extend that model to my business, it would be like if I could get someone to open a lay-away account and pay me incrementally, and in advance, for the right to come in and take overstock or close-out merchandise off my shelves at some point in the future.
Credit card elites aren't going away any time soon for the simple reason that each and every one of them NETS the airline a profit.
People need to get past the notion that direct purchasers of tickets are somehow inherently more valuable to the airlines than incremental purchasers through credit cards. While some individuals flyers may be, in their totallity, they ain't.
People need to get past the notion that direct purchasers of tickets are somehow inherently more valuable to the airlines than incremental purchasers through credit cards. While some individuals flyers may be, in their totallity, they ain't.
Yes, airlines have been treating the FF programs as cash cows for years, but it is an approach that is inherently destructive for the airline (and why there was a lot of talk last year about airlines spinning the FF programs as stand alone businesses - they are actually more profitable). However, if FF truly stop being valued by the airline's core cutomers - the fliers - they will have to become even more price-competitive (and they already have the thinnest of margins). Which means that someone like me, who rarely even looks at enother airline other than AA, will simply pick the cheapest ticket every time (and trust me, AA will, in that case, get a very small portion of my business whereas now they get virtually 100%).
Will that business model work in the long run? An ever decreasing base of loyal customers, ever crappier service, ever increasing purely price-based competition, a mounting load of outstanding worthless miles and millions of "elites"? Their financial performance speaks for itself...
Will that business model work in the long run? An ever decreasing base of loyal customers, ever crappier service, ever increasing purely price-based competition, a mounting load of outstanding worthless miles and millions of "elites"? Their financial performance speaks for itself...
Point taken, but I would suggest that the airlines would welcome a decreasing base of loyal customers if they could pick which loyal customers remain and which would go away. IMHO, the legacies are all engaged in a game of devaluation chicken. They're all dipping their toes in slowly, watching the other guy's reaction. The game doesn't end until someone's all the way in the water, but still afloat.
To answer your question directly, I don't see any business model working in the long run that doesn't figure out how to tie status into profitability.
To answer your question directly, I don't see any business model working in the long run that doesn't figure out how to tie status into profitability.
I agree with that statement, but the question is where does their profitability come from (in the long run)? They are all doomed to failure unless the return to being profitable in their core business - transporting passengers - rather than selling fake loyalty (remember, if no one wants to fly with them sooner or later the CC customers will also move to get points and status in something more worthwhile). And I think that providing stronger loyalty incentives is one of the things they need to do to help pull core business out out of the pits (b/c they can then charge higher prices to compete with the low costs), and the only thing they have "intact" in that area is status.
BTW, look at the foreign carriers. They tend to be stingier w/ miles+status and concentrate more on what they are actually supposed to be doing. And I think on average they have performed better than US (now, I know, there are lots of other factors involved, but I think the argument is directionally correct).
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Quote:
Originally Posted by sbm12
A $1MM spend on a CC earns less than $10K for the carrier.
1) this is false. $1mm credit card spend means a bit over $10k in revenue for mileage sale with most programs
2) the revenue to the mileage program is much, much higher independent of the revenue to the airline
3) the cost to the carrier is much, much lower
4) with high load factors, losing one paying passenger just means incrementally less revenue than the spend of that passenger, since the airline would sell most of the seats to someone else though perhaps at a slightly lower price. whereas with mileage sale the revenue is all at the margin.
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1) this is false. $1mm credit card spend means a bit over $10k in revenue for mileage sale with most programs
You're saying here that the CC companies pay more than a penny/point to the airlines for the points, right (1,000,000 points becomes 10,000.00 dollars at a penny/point)? I don't believe that to be true at all. My understanding is that the CC companies pay a fraction of a penny per point which is why they are willing to give them away at that valuation.
I understand that the margins are much better and that there are no real carrying costs for those miles, but I'm still not convinced that it is in the airlines' best interests to give away elite status for non-flight activity.
I wouldn't say that status earning credit cards are entirely false loyalty. Occasional flyers may make an effort on their occasional flights to fly the airline they have a status earning card with, to get them closer to status or benefit from the status.
The airline's revenue is not just from the points, but also from those flights which may previously have gone to any airline.
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Quote:
Originally Posted by sbm12
A $1MM spend on a CC earns less than $10K for the carrier. Most folks who make top tier spend more than that.
Yes, but that is revenue. You need to look at profit. The $10K from the credit card company (if that is the number) is almost all profit, at least with current US airline accounting methods.
The profit from the 100K mile passenger, as others have pointed out, will vary greatly, but it may be a vary small number, or even a negative one.
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