Hate this method! Savvy frequent flyers get top status on fares that are 1-2 cents per EQM!!!!

There are many reasons from the (legacy) airline's perspective.

First, it makes it simpler. Look at how convoluted Southwest's new program is (you earn different rates per dollar depending on the kind of fare you buy, and you redeem different points per dollar cost of fare dpeending on the kond of fare you're redeeming for)! That makes most award charts look trivially easy for comparison!

But beyond the simplicity of the reality, even more important is the simplicity of the pitch: Ads for legacy credit cards tout "get 25,000 bonus miles, enough for a round trip award". Southwest used to be even simpler: "Fly 8 round trips, get one round trip." Now it's going to more cmplicated, at best: "Fly 10 round trips, get one round trip of the exact same type." (But of course, most people don't want the exact same type of reward trip as paid trip!)

Now, there's one way that it could be made simple and still be dollar based: Earn one point for every dollar spent, and redeem 100 points for a dollar of fare. Except:

1. It would beomce taxable, because miles would suddenly have an exact determinable vlaue. The inablity of anyone to asses the constant value of a mile is all that's kept them from bieng taxable!!!!

2. It woud be no better than using a cashback credit card. So all the marketing advantage would be lost.

3. Airlines don't want to give away seats they could sell for real money at any cost. They want to give away seats that would likely go unsold. Nebulous currencies like miles, combined with capacity controls, let them do that. Money-based earning and burning would not let them do that. So it would acually cost them more!

Which is why even when it goes to a convoluted sort of money-based scheme like Virgin America, Jet Blue, and in the very near future Southwest, it's still only somewhat money-based.

And notice that the only airlines which have ever gone to this somewhat-money-based scheme are ones which have only single-class planes. Because money-based schemes (on the redemption side0 are completely untenable for a multi-class airline (no one who ever flew economy would ever be albe to redeem for a business/first award again, and it's business/first class seats that more often go unsold and so are relatively "free" for the airline to "give away"). In the legacy world, it's common to have business (first domestically int he US) class cost only 2x to 3x the miles, even as it costs 5x or 10x the dollars. That difference couldn't be maintained with a "simple" cash-based scheme. But Virgin America, Jet Blue, and Southwest have no such thing as business or first, so they don't have this factor to worry about. I find it no coincidence that only all-coach airlines have been going to this somewhat-money-based scheme...

superb analysis, sdsearch, IMO, and most timely. Right up there with iahphx's in the Southwest board's thread about their throwing down the gauntlet. ^

Great post, sdsearch!
One minor correction: VX, Virgin America, is not a one class airline. They sell a very nice premium cabin (nicer seats than the legacies offer on most domestic aircraft but not as nice as UA/AA premium transcontinental F). Also, Air New Zealand has a primarily spend based FF program, and they are a multi-class premium international airline. The VX and NZ FF programs are a terrible value for those of us seeking to buy cheap economy tickets and redeem for expensive business class tickets.

While as a very savvy FTer, I am not typical, I get a 100% return on my flying by earning on cheap economy tickets between cheap city pairs and redeeming for expensive business class tickets between expensive city pairs. If legacy FF programs were cash based, I could not do so. However, those expensive seats I redeem on LX on AF in business class would not be otherwise purchased from me on those airlines at the $8000 business class fares if FF did not exist. So LX and AF are not loosing much $ by giving me those seats that would otherwise fly empty. What they are giving me is worth far more to me than it cost them to give it. That is the key to successful legacy FF programs that the likes of WN miss.

I'm gonna pile on and say ^^^ to sdsearch and equal enthusiasm for wannaflyforless. You two digested these subjects quite well and deserve Post(s) of The Week.

"Nebulous currencies"... I love it! That's THE perfect term for legacy FF programs.

Can you imagine the uproar (not just on FT) if the IRS were to start taxing $-based FF perks?! It would give a whole new meaning to "The Southwest Effect". LOL (through tears of anxiety)

I gotta confess, I have no cash-back credit cards. Is this cash reported back to the cardholder as taxable misc or interest income?

Just as with savings accounts, it's definitely not reported if it's a small enough amount per year. I have had a Discover card forever, and I've never got a tax thing for the cash-back, but my cash-back has always been below the several-hundred dollars which I seem to recall being the trigger for interest income being reported.

Someone who gets huge amounts of cash-back annually on a card would therefore have to report whether they get a tax thing for their large cash-back.

^

This is one of the best posts I have read on this recurring topic ^.

I will add one idea: Other People's Money. Frequent flyer programs were designed to encourage employees to spend their employer's money on airline AA rather than airline ZZ. Rewarding employees for choosing higher fares (within the same class of service) would make corporate travel managers uncomfortable. I believe this also explains the emphasis on complimentary cabin upgrades in USA based programs, largely missing from (for example) European programs.

Nope, not the case at all. Rebates are not taxable. Cashback credit cards have an exact value and are not taxed.

There are lots of marketed credit cards that give you a point per dollar and that point can be used toward travel at rates typically between 1-2 cents. (Even AXP's Membership Rewards can be used this way)

You think that Southwest airline revamped their FF program to cost them more money?

Rather than guessing, here are some facts:
(a) The minimum interest for 1099 to be issued is $10.
(b) Rebates are not taxable
(c) Cashback from cashback credit cards are considered rebates.

I think it is possible WN made the wrong calculation.

The question is: Will more seats on full planes that would have been otherwise sold for cash be redeemed now for points under the new program than the old program? I do not know the answer.

As we know, giving away seats on planes that never fill up costs far less than giving away a seat that causes a would be purchase to be turned away. That is why legacy FF programs consider their programs so profitable; most the seats they give away would have flown empty. Will that be true on WN plane going forward?

No, they revamped their FF program to save them money. But not compared to other FF programs, but just compared to their own previous FF program.

The existing FF program allows people to take cheap $29 (OW) flights paid, and use them on more expensive transcon or midcon flights on awards, including last-minute when the discount paid fares are long gone. Southwest didn't like giving away more expensive flights so easily.

The structure of the new program means you can get about 1 flight free for every 10 you buy, but only in the same fare category and at the same price as the ones you buy. So no more one transcon reserved at the last minute for 8 LAX-LAS hops bought on Ding fares months ahead.

Now, if you want to reserve at the last minute (or for some other flight where the cheap fares are gone), you'll need tons of points (not just double!). So with Southwest's new FF program, most people won't be able to use the FF program to work around high fares.

LCCs look at FFPs differently than legacies. For most legacies, the FFP is a big profit center (so big that some outsiders want legacies to spin their FFPs off as stand-alone companies to increase shareholder value). For most LCCs, my understanding is it's not necessarily profitable, but judged a necessary evil, and (these days) they want to structure it so as to be able to say they have an FFP but to have it cost them as little as possible (rather than earn them as much as possible).

Southwest's original FFP was designed to be simple, and to gain them business. Business has been gained, and so the goals of the FFP have changed. Unfortunately, simplicity also got tossed out the window (because it's not completely money-based, it's got complicated fare category multipliers). "You thought you had enough points for a $300 flight? Sorry, that's only if that $300 was in another column!"

Not true, as stated above, FF miles are considered to be rebates which are not taxable. Also, FF miles are considered to be owned by the airline, again... not taxable.

I think one reason why a simplistic, dollar based system (based on $ both earning and redeeming) would not be that great of an idea, is that it would be _too_ simplistic and too see through.

Many people can kind of cheat themselves into using their favorite airline even when competition is cheaper, by assuring themselves that the miles they collect make it worth it.
Try to do the same with a simple $ based system: Say a ticket with DL is $300 and ticket with US is $270. Assume you're collecting DL "dollars". Every DL dollar (that you get by using $1 on DL), you get 0.05$ to be used on a future booking.
Now try to convince yourself that those $15 dollars you earn are worth more than $30.

I think a $ based FFProgram would make people more price aware, which probably is the last thing the legacies want.

Also while traveling is usually something you either want to or need to do if you decide to become a customer to an airline, spending money on traveling is probably something you want to do as little as possible (or your employee wants to do as little as possible).
Therefore I think it's at least psychologically a lot easier to get people to want to travel more miles, than to give airline more money (even though the two are obviously connected).
At least for me it is a lot easier to think "I'll try to fly 10 000 miles more next year and get this and that" than "I'll try to burn $2 000 more on traveling next year and get this and that".

I was not referring to current law, which I think you are.

I was referring to the attempt a few years ago to make FF miles taxable, which was thwarted by the inability to assign an exact determinable value.

What I meant was not that it'd be taxable from day one, but it could allow this past attempt to make FF miles taxable to be revived and succeed (in the case of RR 2.0 points, if RR 2.0 points had an exact value).

A rebate? If you are allowed to buy them on a website, now is that a rebate???

You cannot buy extra cashback from a cashback card, so that's why it's a rebate. But miles and points can be different, if you can get them through ways other than rebate-like, which includes purchasing them outright. They are for all intents and purposes "currencies", because you can earn them, save them, and spend them, just not at exact determined rates like conventional money.

In case you're not aware, miles are already taxed in the specific case of sweepstakes which award a large amount of miles. I never enter sweepstakes for big miles prizes, because I'm afriad I'd win, and then be liable for taxes I couldn't afford (owed way before I could use most of the miles). In that case, there's some somewhat artbitrary "average" redemption value that the airline assigns as the value of the sweepstakes award (luckily, it's not based on redemption on business or first class international flights, but on the average redemption most "kettles" do).