Do points and miles resources bear some responsibility for point devaluations?
 

The business model of blogs and seminars is to make points and miles hacking accessible to everyone. And their credit card overlords partners reward them for it.

But in doing so, are they strangling the goose that lays the golden eggs?

I am torn.

On the one hand, I see Smisek's mile devaluation as little more than an accounting trick to try to make up for his pathetic management of UNITED.

On the other, by increasing the number of points and the ease with which they are hacked by all, it seems like bloggers and their credit card sponsors have created an inflationary environment for points and miles. Especially when they are featured on mainstream media.

And in either case (or even if it's a little bit of both), as Delta and United make travel hacking less profitable for the masses, do bloggers worry that they are going to be out of business sooner rather than later? Or will the need to collect twice as many miles just cause the cc companies to double their promos?

You give us far too much credit Koko.

I don't know... I'm not convinced that most people are really maximizing their collection and redemption of miles, outside of the FT community. Granted, the numbers have probably increased over the past few years with the proliferation of blogs and such. I think there are still a lot of people redeeming their miles for a flight to Disney World or maybe Hawaii, in Y.

I've come across a few co-workers who I discovered got Chase Sapphire Preferred cards and I was excited to talk to them about what they're going to use them for...one redeemed for revenue tickets and the others just got cashback.

Just my observations, I could be wrong. Though if it is the case that all of the things you mentioned have led to this, is it ultimately bloggers, or the banks & airlines that shoulder the blame? Or all of them?

It was a bubble.... and as we know, bubbles are neither created nor popped by any one entity. This time it was the airlines, banks and bloggers all contributing to the orgy until the airlines realized that they were getting the short end of the stick. And they ultimately controlled the product.

The interesting question to me is where things go from here. The UA devaluation hasn't entirely killed the model -- such as a revenue based award chart would -- it's just made it a lot more work.

FT is a miles and points resource that makes money off of the hawking of credit cards and desire of people to travel in premium cabins, so this is definitely p/k/b here. Don't delude yourself into thinking that it's all the fault of those EEEEEVIL bloggers, and we're all so innocent that sugar couldn't melt in our mouths that are enjoying our 4 mile trips to HKG. The maximization and exploits get done here too, folks.

So, no, I don't buy it. This is a matter of airlines realizing the value of selling a fiat currency that can be inflated at will. Just like when MIT teams figured out how to make a bunch at blackjack, it was a matter of time before the loopholes get shut down. Might as well be someone who gets to fly the planes. Who is to say a blog reader is more or less "worthy" than you or I?

I agree, it was a bubble fed by lots of players.

But credit card churning and manufactured spending certainly did drive the inflationary environment. Would devaluation have happened even without those factors? I lean toward yes...but I am not entirely convinced.

In any case, I feel worst for folks that hoarded millions of miles. What a terrible, terrible investment, stocking up on a currency whose worth is 100% controlled by an entity that profits most by your not spending them.

Did UA end honoring those 4 mile trips to HKG? Serious question because I actually booked a couple but they were summarily canceled!

It's correct that many have taken advantage of the things the blogs talk about. But my hypothesis is that blogs and seminars opened up the game to the masses...including 'rubbing it in the faces' of the airlines themselves. No way in hell Smisek cares about what a bunch of nerds talk about in an IBB. But when a blogger gets quoted in USA Today or appears on Travel Channel talking about gaming the system for premium cabin travel, well, he might notice. And to reiterate, it's just a hypothesis, not an assertion.

I agree with you Koko. Getting that free vacation has gone too mainstream. Just look at all the newbies with hundreds of thousands of miles from credit card signups. They only post here when they can't figure out what to do with them.

Not only ha UA devalued, but IMHO, Hyatt will as well. I don't follow other airlines, but it appears that the bulk of miles are coming via the Chase UA cards.

I also place the blame squarely on the bloggers and their schemes to get people to the maldives for $100 ;) BTW - FT itself has a hand in the problem. There are referral links everywhere you look these days. But I said it when IB bought the place, Randy did it for love and IB is doing it for profit. In the end, it is us, the longtime members who built this place (& newbies too) who pay the price.

Right now, it doesn't affect me (much), but I'm burning my miles, and will be looking for alternatives to the places I travel most often. Too bad I'm pretty much an EWR captive (out of laziness).

I am personally not worried about “going out of business” anytime soon, as none of the weblogs which I author will be affected in the very least by these developments.

They officially only honored those booked for travel by a certain date (forget exactly, but it was around 5 or 6 days from the day the deal went viral), and of course including folks who departed before UA even noticed.

I've seen a few posts claiming to have been successful in keeping their trips even though they didn't fall into that category, for whatever reason. Mine were certainly canceled by UA right away!

VFTW has a post on the "real reason for the UA deval"...

http://boardingarea.com/viewfromthew...-explanations/

I don't think bloggers who rely on credit card referral income have any room to complain about United's devaluation. When you have the United cards, Chase Sapphire, and the Ink cards (all which have generous sign up bonuses) it was bound to happen.

It will be interesting to see if they change their opinion of which is the best credit card to sign up for.

There is certainly no denying that by far the hugest devaluation took place on ‘aspirational’-type travel: F and C on non-UA star carriers.

That aligns with lots of theories, including UA’s explanation that they are paying more for F award seats on LH, Swiss, etc. It also aligns with the theory that those promoting aspirational-type travel via cc churning and manufactured spending helped drive this devaluation.

In any case, if you want to do economy domestic, or stick to UA metal, you are annoyed but not devastated. If you are into aspiration, you are pissed.

Either way, points are worth less to MP members.

But what I would really like to see some fact/analysis about is how the devaluation in the customer direction affects the price of mile to companies like Chase that buy them and give them away as incentives. Because if that price goes down we can expect cc bonuses, etc that are much higher and it’s still game on. But if the price of a mile sold to Chase stays the same then it seems like it may be game over for churning and manufactured spending for UA, same as it is for DL’s sky pesos.

We also don't have the same level of credit card mileage earning in Europe. The fact that UA has had to make it harder to book non-US premium classes could be a reflection of the inflation in mileage earning in the US - when booking on other carriers, it's not an isolated market, and any carrier would be stupid to disadvantage its own frequent flyers because another carrier is giving miles away like confetti.

Interesting discussion here about this topic:

http://boardingarea.com/viewfromthew...-explanations/

Comment 15 by "what the" makes some good points.

on this very page there are 5(!) advertisements for credit card offers to get you a ton of miles without doing any flying at all. that’s all the evidence you need that this blog contributes to mile inflation and the subsequent devaluation. you can’t have it both ways Gary – you want to be able to get people more miles while also arguing that airlines should not devalue their miles in response to said inflation. you are contributing to the problem, not the solution.

Multiple subsequent posts make convincing arguments too.

Certainly if I were LH or whoever and I saw that UA was covering up its mismanagement on the travel provider side by selling billions of MP miles to credit card companies to give away, I would charge UA a premium for putting award travelers in my premium classes. Especially if my own customers had to earn those kinds of awards the hard way. @:-)

if we don't do it, someone else will do it

You forget to say that airlines like LX, Lh are very snobbish and those German, Swiss country club elite members do not appreciate some badly dressed schmuck in their LH FCT or their cabin.

There is a badly groomed blogger more like a backpacker who flies F and takes pictures of himself wearing flip flops and torn shorts. Probably has worms by the way he looks. :eek:

I think this commenter brings up what may really be the over-arching issue creeping up (though I don't know that I agree the UA hard product shortfalls alone are driving this latest UA decision). The mileage earning issue is just one aspect of it. The alliances are weakening.

Even though for someone like me who redeems for international Y mostly, and not J/F, this deval doesn't affect me much directly... I could see a time where UA invokes a differential rate approach to Y partner awards, too.

Don't stereotype. :confused:

I'm fairly sure the devaluation is from the singups from cc's. There's no way spending 5k to get at least $650 in value (and if you value ua at 1.5cpm or more), at least $750-1000 is sustainable for the banks.
I would say MS is a very small portion of miles generated.

Two things I'm curios about.

The banks buy the points. Instead of inflating points needed, certainly United could charge Chase more for them. Why inflate instate of charge more?

Also, my guess is United keeps a reserve or escrow account for points issued. They are essentially a currency and U would need to pay for them. If you inflate them all of a sudden you can lower your reserves and the money can come out of escrow and into U's pocket. Wouldn't this be a great way to boost earnings short term?

Cuz chase wouldn't be willing to pay more.

I think there's likely some truth to this theory, but it's hard to get a real sense for the scale. If VFTW's "monetary inflation" analysis is accurate (and it makes logical sense to me), then a group of people accumulating and redeeming huge stashes of miles is going to cause problems.

However, I don't have a good sense of whether we're talking about 1% of people causing a disproportionately high 10% of the "damage" due to playing the CC, MS, etc. game really hard vs. say a somewhat broader 10% of people doing a somewhat less disproportionately high (on a relative basis) 30-40% of the "damage". Whatever the number is, you can probably blame "those CC-whoring bloggers" for a reasonable chunk, but FT, Bank's advertising budgets, and even mainstream news coverage likely contribute in a pretty meaningful way.

It's really hard to estimate scale when we're talking about numbers this big, and I imagine all of us here have a pretty tilted view. I work in consulting, and while most everyone is mindful of points and miles and status and all that, I can't think of a single other person in my group of just under 100 that is anywhere near the level of crazy that I have (and I pale in comparison to many who I think are TRULY crazy :)). I'd say no more than 5 who are even 1/4 my level of crazy. No one is manufacturing spend, and only a small handful are churning cards (and their definition of "churning" is probably 3 cards a year). These are the anecdotes that lead me to believe that the game still just isn't that pervasive, but again, they're only anecdotes.

I woudl think anyone even getting only one of the csp/ua explorer and/or chaseinkplus/bold for the signup bonus wouldn't be quite feasible for united if even a portion of cardholders transfer points to ua.

That's very well said, I think. My anecdotal evidence is very much in line with yours, FWIW. Though as you've indicated, the fact is none of us here truly know for sure what the impacts are, to what extent, etc. Obviously the banks and airlines aren't going to tell us the whole truth...or perhaps even a sliver of it!;)

Just My Opinion
 

But I think you are all giving our group just a bit more credit than it deserves. Our blog readerships number in the thousands. UA passengers are in the millions.

Don't you all experience that 99% of the people you talk to about points and miles have their eyes glass over when you talk about credit cards and frequent flyer miles. Everybody is afraid of ruining their credit and they all know their are no seats available.

We are a tiny, tiny minority, that probably does nothing more than piss the airlines and banks off that we know how to work the system.

But the average traveler has no interest in our game.

It's all pointing fingers and who did what. Who knows, the 50k bonuses that thousands of us get might me as much or at least a significant portion of the miles that ua issue. remember, most travel hackers get their miles from credit card which is why you can go to the maldives for $148.02.

Bragging about how you are beating the system on a national level is very dumb. And now you get your just desserts bloggers! Enjoy your remaining award booking business with no space and 400 dollar credit card referrals.

Maybe you can blog about how to scam southwest. Congratulations on teaching these grifters how to fraud the system.

Many already do. Or did you miss the 30-days of WN Companion Pass posts throughout October??
Yes, as is FlyerTalk, MilePoint, DansDeals, BonusFeber, VFF, AFF and all the other online communities. When the game you play is based on winning at arbitrage it is rarely a good thing to have lots and lots of people aware of what is going on. That's a sure-fire way to draw attention to the "gaps" and engender change.

ETA: There is also the consideration that the programs have to deal with rising costs, just like other businesses, even without the "experts" who are gaming the system. Arguably the programs would be better off if they could adjust a little bit at a time rather than make huge changes every few years as customers wouldn't notice as much but that's a whole different can of worms.

This is the difference between hotel and airline schemes, though.

Hotel schemes MUST devalue, because earnings are based on room rate, and as inflation pushes up room rates, points become too easy to earn. Logically, if IHG kept an IC at 50,000 points, you'd be getting a free IC night per Holiday Inn Express paid night in 2060, assuming room rates are $5,000 per night by then.

Airline schemes are different. In theory, they should be a stable currency, because they are based on distance flown and that doesn't change. It should be inflation-free. But it isn't ....

"Loyalty" program management is responsible for devaluations as there is nothing which prohibited the program owners/managers from acquiring, holding and investing in hard currency reserves/assets by using the cash they got from customers using the "loyalty" program and being credited "miles"/"points" and doing so in order to fund the programs' sustainability with the return from those holdings/investments. In other words, the "loyalty" program could have been handled by the program operators/owners more like a well-managed insurance company and/or pension/retirement fund, and thus devaluations wouldn't necessarily be a reality for those miles/points already issued.

Some may think the "loyalty" programs are a sort of Ponzi scheme if not for the unilateral devaluations, but they don't need to be any more that than they need a devaluation -- at least if the owners/operators of these programs behaved differently.

Hopefully, the government regulators will get around to these kind of programs and at least greatly increase the disclosure requirements applicable in such situations. I'd welcome something akin to a prospectus and periodical reports of a sort that give way more details to the public about the operation and finances of these programs.

I could not disagree more. The only part which remains constant is the distance between the airports. Just about everything else on the cost side varies over time.

Put another way, the costs to me as a consumer to acquire nnn thousand points today is necessarily going to vary from the costs to acquire those last year, ten years ago or ten years in the future. The numbers are not stable at all.

Of course I think the most popular explanation is that United is greedy, but the explanation offered by VFTW has a glaring error in it:
The deferred revenue is not an asset, it is a liability. They can't sell the 'deferred revenue' to anyone for $5 billion, that number represents the portion of revenue from selling and issuing miles that they can not recognize until the miles are redeemed, which by the way leads us to one of the biggest inaccuracies I've seen repeated on Flyertalk too many times to count: Award tickets are 'non-revenue' tickets. That is false, they are revenue tickets to the airline, when you redeem an award they recognize revenue from that redemption by the conversion of deferred revenue to current revenue.
I have never believed that credit card bonuses are borne solely by the credit card companies, I believe the airlines themselves subsidize the sign-up bonuses.
Chase has prepurchased their miles anyway, so they can't charge more to Chase any time soon, but say United threatened that when Chase has burned through it's prepurchased miles, then Chase responds by saying, no problem, we'll award cardmembers .75 miles/dollar instead of 1 mile/dollar, I think United would ultimately lose revenue on such a decision.

There is no specific reserve for the liability of miles, though if you devalued them enough you could decrease your deferred revenue and recognize it as current revenue, it doesn't actually generate any cash for the airline.

Ah, NOW we are getting somewhere.

So...by increasing miles required for awards, is United decreasing that $5B deferred revenue liability? If so, is it by the same percentage as the miles required increased!?

IOW, does this change cook the books in Smisek's favor?

In six months (after they release Q1 earnings and the balance sheet reflects 3/31/14 liability for the deferred revenue) you should have a good indication of that if there's a big decrease in the deferred revenue.

In reality I think the more likely explanation is that partner awards cost UA more than the incremental cost they can use for their own metal awards, so the award chart change really just better reflects the true cost to UA of those different awards and has little affect on the liability for those awards.

The bank doesn't care what the value of the award ticket you redeem is; they only need to make sure that their cut of the swipe fees, annual fees, and other fees from the card exceed their costs to purchase and administer the miles.

The airline obviously cares what their costs for award tickets are, compared to what they earn from the miles business side of it - both for their own metal and partner redemptions.

Digging through their annual report now to see what I find, maybe this can help:

Loyalty Program. United’s MileagePlus program builds customer loyalty by offering awards and services to program participants. Members in this program earn mileage credit for flights on United, Continental, United Express, airlines in Star Alliance and certain other airlines that participate in the program. Members can also earn miles by purchasing the goods and services of our network of non-airline partners, such as credit card issuers, retail merchants, hotels and car rental companies. Members can redeem mileage credits for free, discounted or upgraded travel and non-travel awards.

Under the Company’s Consolidated Amended and Restated Co-Branded Card Marketing Services Agreement dated June 9, 2011 (the “Co-Brand Agreement”) with Chase Bank USA, N.A. (“Chase”), loyalty program members accrue frequent flyer miles for making purchases using co-branded credit cards issued by Chase. The Co-Brand Agreement provides for joint marketing of the Company’s credit card program and provides Chase with other benefits such as permission to market to the Company’s customer database.

In 2012, 4.7 million MileagePlus travel awards were used on United and Continental. These awards represented 7.4% and 6.8% of United’s and Continental’s total revenue passenger miles in 2012, respectively. Total miles redeemed for travel on United and Continental in 2012, including class-of-service upgrades, represented 83% of the total miles redeemed. In addition, excluding miles redeemed for travel on United and Continental, MileagePlus members redeemed miles for approximately 1.6 million awards in 2012 as compared to 1.8 million in 2011. These non-United and non-Continental travel awards include United Club memberships, car and hotel awards, merchandise and travel on another air carrier. The decrease in the number of non-United and non-Continental travel awards redeemed in 2012 compared to 2011 was due to a decrease in hotel, car and United Club redemptions.

NOTE 19 - ADVANCED PURCHASE OF MILES
The Company previously sold frequent flyer miles to Chase which the Company recorded as Advanced Purchase of Miles. UAL has the right, but is not required, to repurchase the pre-purchased miles from Chase during the term of the agreement. The balance of pre-purchased miles is eligible to be allocated to MileagePlus members’ account by 2017. The Co-Brand Agreement contains termination penalties that may require United and Continental to make certain payments and repurchase outstanding pre-purchased miles in cases such as the Company’s insolvency, bankruptcy or other material breaches. The Company has recorded these amounts as advanced purchase of miles in the liabilities section of the Company’s consolidated balance sheets.

Revenue in 2011 was also impacted by certain accounting changes, as described in Note 2 to the financial statements in Item 8 of this report. In conjunction with these accounting changes, the Company recorded a special adjustment in 2011 to decrease frequent flyer deferred revenue and increase revenue by $107 million in connection with a modification to The Consolidated Amended and Restated Co-Branded Card Marketing Services Agreement dated June 9, 2011 (the “Co-Brand Agreement”) with Chase Bank USA, N.A. (“Chase”).

Other operating revenue was up $226 million, or 6.8%, in 2012 as compared to 2011, which was primarily due to a change in the deferral rate related to the sales of credit card miles in conjunction with the modification of the Co-Brand Agreement in accordance with Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”), which was adopted in 2011. Other operating revenue also increased due to additional sales of aircraft fuel to a third party.

There is a thread on the Delta forum where there were multiple posts by someone who really didn't understand this concept of miles being a liability, being considered revenue when redeemed, etc.

But the dollar cost of UA to give away seats that they calculate they will not sell is close to zero, right?

Does UNITED pay cash money to Lufhansa when I fly LH F on MP miles?

There are bilateral agreements between the airlines on the cost/price of redemption for any particular bit of travel. This applies to awards just like it does to revenue tickets. And to lounge access and other benefits. And, yes, the numbers are reconciled from time to time. I don't know the frequency of such transactions but they definitely have to "true up" the accounts from time to time.

It is also worth noting that just because two airlines are partners that doesn't mean there is necessarily an agreed upon price/rate for an award redemption. Because DL SkyMiles cannot be redeemed for AF F there might not be a line-item for that option in their agreement, for example.

Got this unsolicited email today with a perspective on the OP: