FlyerTalk Forums - View Single Post - Emirates Islamic Bank cuts Skywards miles by half
Old May 16, 2016, 10:39 pm
  #10  
eternaltransit
 
Join Date: Nov 2013
Posts: 5,447
Originally Posted by chinatraderjmr
Your right, I meant to say airlines (although the banks make a nice profit too....but for the airlines its quick cash with the banks picking up most of the costs like marketing, etc....the problem is they didn't look ahead and see the monster they would end up creating. That goes for the airlines that sell miles cheap as well, not just CC earnings. A round trip tkt from JFK-DXB on Lufthansa in F runs $10-15,000 USD. Forget what its worth, thats what it costs and people do pay it. You can buy 75,000 miles from UA for $1500 and assumed you use you CC for $45,000 in purchases.......thats a free F tkt right there, no flying involved, the 45K on your card you would spend anyway, and $1500 to purchase miles. So anyone who has the time to use the system in a way it was not originally intended flys F for $1500. Not what the airlines had intended, and the fact you don't have to even fly to earn those miles makes it worse

My stepfather has a Citi Bank / American Airlines card which he has had for years, before they put maximum caps on the munt of miles you can earn ac month. He is grandfathered in so he has no limit. Before he retired he was a regular Concorde passenger. Now he has no reason to fly for business but earns enough miles just using his CC to go with my mother twice a year to Europe in F on BA and twice a year to Hong Kong on CX in F.........just off his Citi Bank / AA Card. Granted he spends a fortune von it but if he didn't earn any miles he would still spend the same money on that or another card..............the airlines and baks have created a monster and they are finally realizing it but they can't ( or won't) just cancel the program and piss off so many customers so what can they do? Lower the amount of miles you get per dollar or Durham or whatever
Definitely - although you have to take into account the initial aims of loyalty programs and how that's morphed into its own business.

After all, mileage seats are intended to get incremental revenue out of unsold inventory - the problem comes when you have so much issuance of loyalty units that in order to reduce breakage (to make your program more attractive), you need to up the amount of availability of rewards.

If you look at passenger trends where the number of people who buy full F tickets are dropping, then you have a decision to make if you're at an airline: you know there's demand for your product, but not enough at say, 10-15k USD (say, for a TATL) to make the product viable entirely on its own. You could remove F entirely, but that has consequences for your brand positioning. Or you can open it up to redemptions and shift revenue to the loyalty programme - if F pax are dwindling already then the cost of alienating them with massive amounts of redemptions is an acceptable price to pay.

That's an extremely successful strategy: loyalty margins are in the 20-25%, compared to the 5-15% in aircraft operations. Just take a look at AS, QF, IAG etc. to name a few carriers with very profitable schemes. Now you can spin off the loyalty program to raise a lot of capital quickly (AC and Aimia for instance).

The problem now as you say, is the monster created - the brand expectations etc. If you have an airline, such as say, EK, where you have quite solid cash F demand, then clearly you are going to have breakage issues in the FFP - but for them, that's fine. In fact, one of the reasons I would suggest that Skywards is such a poor earn/burn airline, is because there's revenue demand for the product - there's not much need for unsold inventory to be sold off cheaply via miles.

However, if you have a lot of loyalty unit issuance and not much redemption power - then people start to turn off your product. But now airlines are addicted to the easy money card co-brands represent: interchange rebates, free mileage revenue with associated breakage profit, the marketing bonanza of having your brand in someone's pocket and the lock-in that represents - what to do? Devalue - can't do that too much otherwise it alienates too many people. So there's only one other option: restrict issuance - which in the case of partners is done through price increases.

A lender now has margin eaten up by increased cost of rewards. Carriers don't want to pay as much for brand positioning in the wallet (i.e. commissions on sign ups). Borrowers don't carry balances. What to do - cap costs by limiting issuance, institute annual fees which are pure profit, halve bonuses, etc.

I guess the merchants should be happy
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