Originally Posted by
basejump
It seems to me that a number of FF programs (you know who you are) are on a slippery slope and are playing a dangerous game of selling points/miles cheaply to generate cash flow.
As I posted over in the Lifemiles forum, by selling miles cheaply, you can get a lot of cash quickly and more cheaply than you could borrow it. Yes you do get a contingent liability on the balance sheet
When an airline sells miles they don't just generate cash flow, they generate an instant profit. As you point out, they recognize a liability (deferred revenue) for the sale of miles, but the amount of the amount of that liability is less than the amount they sold the miles for. So, to use a crude example, an airline may sell you 50,000 miles for $750.00. When they make that transaction they collect $750, they recognize a deferred revenue for when the miles are eventually redeemed, say $250, and a current revenue, in our example $500. They will also incur some expense for that revenue, say $100 (e.g., credit card fees, overhead, a cut for Points.com in some cases, etc.). So, they'll receive $750 in cash flow, incur some immediate expenses associated with that ($100 in this example), recognize $500 of revenue immediately (of which $400 is income, i.e., profit), and then have $250 of deferred revenue.
Originally Posted by
basejump
you run the risk of upsetting those customers who are truly frequent flyers...........thoughts?
Originally Posted by
redtop43
Remember too that marketing partnerships benefit both parties. Selling miles creates customers. "Non-paying" customers to some extent, but it still reinforces their brand selection.
This is one of the biggest fallacies I've seen repeated on FT so many times it can't be counted, that frequent flyers are an airlines 'best customers' and that those buying miles (either straight-up buying them or through credit card spend) are 'non-paying' customers or not 'real' customers for an airline.
An airline's most profitable customer is someone who accrues miles on the airline without ever flying that airline and who has not redeemed those miles ...