Dadaluma83

All we can do is survive and adapt. Although I could earn the lowest tier status if I stuck all my flying on only one carrier, that is silly in this day and age both with lowest tier status not worth much, and miles devaluations.

I am loyal now to whatever credit card signup bonus I am happening to be going after. I used to freak out about devaluations, worry about my AA miles, etc, but now I don't even care anymore. Just going to go after whatever credit card has the best perks and points at the time.

My only loyalty question nowadays in the travel world is should I collect ultimate rewards or membership rewards?

HansGolden

Nice evaluation, nsx!

nsx

Thank you, Hans.

I wonder why the need for some form of capacity controls did not occur to the brainiac consultants who recommended revenue-based redemption to Virgin, JetBlue, Southwest, and other airlines. In retrospect this seems like fairly basic math: The value wedge can be positive with capacity controls, but it's guaranteed to be negative without capacity controls.

"Points are as good as cash", i.e, no capacity controls, can't compete with "Cash is as good as cash". The airline needs to offer "Points are better than cash in selected situations", which can be profitable only under tight capacity controls as practiced by most major airlines.

How did the consultants miss this? How did Virgin, JetBlue, and Southwest (but not Delta!!) miss it?

I'm thinking that all three airlines started from a prior program (or no program) which carried zero long-term liability. Any FF program will look great financially at its start because the accounting understates future liabilities. There was a non-recurring accounting gain from starting a program. This may have blinded Southwest in particular to the deep flaw in its program.

GUWonder

I think you nailed it. Absent some massive economic disruption, expect to see at least one of the US3 to try to eliminate its FFP -- probably by way of selling it off first while keeping an elite benefits version.

luckypierre

That would be a surprise to me. It is so much easier to simply gut the entity through starving mileage earning and setting sky high redemption levels (aided, of course, by a lack of any permanent references like award charts) than formally announce a change. It allows the marketing department to continue manufacturing gas about "award winning programs," "changes you will like," "we listened to your desires" while reality has run aground.

On another note, I think the Big3 have all converted to a revenue based accounting program with SWA the only major player still using the incremental cost method for FF accounting.

pinniped

Remember 10 years ago or so...there was serious discussion of whether an airline would float their FFP as an IPO of its own. The mileage units were/are apparently very profitable, whereas the airlines themselves were, at that time, not so profitable. AA could raise a lot of cash by spinning off AAdvantage.

I wonder what killed the idea? I suspect a publicly-traded company entirely based on a business of buying and selling miles would have to be a bit more transparent about its accounting of the miles. Perhaps exposing such a company to too much scrutiny would shine the light on what appears to many to be a greenstamps scheme. The very profitability of such a company would make it obvious that the profits were coming from the suckers participating in the scheme.

GUWonder

If you gut the program too much, the value to be had by selling miles or selling off the program unit drops like Greenstamps too but does so fast enough to be to the disadvantage of current management.

The reason US airlines backed off considering liquidity events for the programs was because the financial markets in the US had dried up and having one company teetering on the edge as your most critical client and product supplier wasn't going to fly with the so-called smart or dumb money set at that time.

The financial and economic and industry market situations are far different now than ten years ago. I will be surprised if none of the big 3 seek a liquidity event for the loyalty program unit.

nsx

I looked it up:
I think AA also made the switch to Deferred Revenue for miles earned by flying, taking the opportunity for a fresh start that its bankruptcy provided. As the name implies, deferred revenue allows an airline to push revenue (and tax on that revenue!) into the future, when it might be badly needed.

The same source paper concisely makes my point about capacity controls:

Southwest made an error by combining "good as cash" points redemption, which promotes displacement, with incremental cost accounting for points earned by flying. Southwest could fix this by taking the big paper loss needed to switch to Deferred Revenue accounting for flight points. US accounting rules are likely to force such a change anyway within a few years.

Southwest instead appears to be moving to limit displacement by focusing points redemption on flights which cannot be filled even with the lowest fare bucket wide open. Southwest, like Delta, is saying by its actions that it doesn't really need or want to reward its customers much for flying. I think that Herb Kelleher would have agreed with that sentiment: He was one of the last holdouts against creating a frequent flyer program.

GUWonder

I would have expected DL to be the first of the big 3 US industry cartel kingpins to try to get a liquidity event for its loyalty program unit; but with the internal move of Jeff Robertson (of DL SkyMiles infamy), I'm not sure if his internal move marks a path closer or not to such liquidity event. The conditions -- accounting-related at that too -- seem rather ripe to again consider such a liquidity event. Particularly if you think you will no longer need/give a loyalty program for anything more than elite status benefits. Then you take a play from Cathay (and do the Marco Polo Club separate from Asia Miles) and Air Canada/Aeroplan.

luckypierre

From an 8K the reorganized entity filed with the government in Jan 2014

"Frequent flyer revenue.
Adjustments were made to passenger revenue and other expenses to reflect the effects of adjusting US Airways Group’s frequent flyer liability to fair value. In addition, US Airways Group will apply the relative selling price method to recognize the revenue components related to frequent flyer miles sold to business partners under the provisions of ASC 605-25, “Multiple Element Arrangements.” Previously, US Airways Group used the residual method of accounting to determine the revenue related to the transportation and marketing components as it had not materially modified any significant agreements. Generally, as compared to the residual method, the relative selling price method increases the value of the marketing component recorded in other revenue. Under the relative selling price method, approximately 60% of the total consideration related to the miles sold to business partners is attributed to the marketing component (recognized immediately) and 40% is attributed to the transportation component (recognized upon mileage redemption). Application of the multiple element guidance results in an increase in other revenue as compared to the residual method."

Before this all came down, I would have predicted Mr Parker would be quick to implement changes in the FF program before attending to other details of the integration (like Mr Smisek), but it seems for whatever reason that at the moment, AA is holding fire.

nsx

So if the airline sells miles to a bank at 1 cent each, 0.6 cents is booked as immediate revenue and 0.4 cents is deferred? So that a 100k mile award creates a mere $400 of booked revenue when flown? No wonder capacity control are so insanely tight on transatlantic awards.

Also, the recent change by US seems to leave Southwest as the only major airline still using Deferred Revenue accounting for points earned by flying. Right? Southwest would hate to show a losing quarter, even if only on paper.

sdsearch

100k is a transatlantic business class award (not coach). With that in mind:

And yet there are virtually no capacity controls on the "anytime" versions of the same awards, which are typically just 2 to 3 times more than the "saver" versions. So $800 to $1200 of booked revenue is no problem at all (when advance-purchase coach usually even costs more than that, and advance-purchase business always costs several times that)?

There's more than capacity controls that limit how many seats are flown with miles. No matter how many miles have been sold to credit card companies, only a teeny teeny teeny tiny fraction of people have the miles to fly every route they want to fly with awards, whether on "anytime" or even just "saver" awards. "Anytime" awards are obviously self-limiting, or else they couldn't exist. (They've recently been re-calibrated a bit, to increase the amount of self-limiting , but they're still there.)

nsx

I gave this more thought and came up with this flow chart of actions (the + signs) and consequences (the equals signs). The crucial differences are in bold letters. The accounting treatment doesn't matter in the long run. That part all washes out after the redemption occurs.

Case 1 (traditional FF program)
+ Airline sells points to bank at 1 cent each
+ Bank gives members 1 point per dollar spent
+ Members redeem for award travel
= Same result as airline selling travel for what the bank paid
+ Airline offers members > 1 cent of value per point, at least for some options
+ Airline imposes capacity controls on redemption with equivalent award price < what the bank paid
= Small gain realized on redemption
= Sustainable business plan, not requiring ongoing devaluation

Case 2 (excessive devaluation)
+ Airline sells points to bank at 1 cent each
+ Bank gives members 1 point per dollar spent
+ Members redeem for award travel
= Same result as airline selling travel for what the bank paid
+ Airline offers members < 1 cent of value per point
= Members drop affiliate credit cards in favor of cash rebate cards
= Sales of points to bank dry up
= Unsustainable business plan

Case 3 (Southwest's current "points as good as cash" program)
+ Airline sells points to bank at 1 cent each
+ Bank gives members 1 point per dollar spent
+ Members redeem for award travel
= Same result as airline selling travel for what the bank paid
+ Points as good as cash with equivalent price > 1 cent, No capacity controls on redemption
= Displacement of cash customers
= Redemption costs > 1 cent per point in lost or foregone revenue
= Money-losing program

Note: Equivalent price of a redemption without capacity controls is the cash ticket price. Equivalent price of a redemption with capacity controls is the cash price given to the yield management software to enable it to allocate the correct number of seats for awards.

Comment: Southwest is trying to move from Case 3 to Case 1. Southwest and Delta are already at risk of moving to Case 2. At current points value, affinity cards would need to move to 1.5 or 2 points per dollar of purchases to regain their competitive dominance.

sdsearch

Except at signup time, bank somehow manages to give members 15 to 50 points per dollar spent.

And then a bunch of FlyerTalkers (who knows how many outside of FlyerTalk?) manage to get most of their miles that way (ie, churning).

Is that funded by those other members who incur fees (which more than wipe their earnings) on these cards?

Anyway, I bring this all up to lead to this question:

Is the sustainability for the bank the same as the sustainabilty for the airline in each your cases?

While the sale points to a credit card company is the most visible, and the easist to tie down at the rate at which the points are given back, it's not the only exchange. Hotels left and right give Southwest members a flat 600 points per stay (sometimes with a multiplier of 2x, 3x, or 4x with promos), while typically only giving either a flat 250 miles or 2 miles per dollar spent for the same stay with miles-based airlines. Is that more or less sustainable than the credit card / airline relationship? (It's much more complex, since that same 600 points or 250 miles is given for a cheap 1-night motel stay as for an expensive high-end hotel stay of multiple nights. The 2 miles per dollar spent obviously does scale to the cost of the total stay.)

But my main question is, why can Southwest partners afford to give 2.4 times the points as an airline gives miles on non-credit-card partner activity, and yet Chase can only afford to give 1 point per dollar spent with Southwest but can give 1 mile per dollar spent with United.

(Is the flat 600 points just historical idiosyncrasy which Southwest keeps not "fixing", or is it a conscious choice on the part of the Southwest by this point?)

I bring this up because for many many years (since before 2.0) my (occasional) flights on Southwest have all been free, and yet none of my Southwest points have come from credit cards (or from paid flights), only from non-credit-card partner activity (and bonuses on same) in 600-point increments (except for one or two Rapid Rewards Dining bonuses that may have been in other increments).

And that leads me in turn to wonder how sustainable the flat 600 points at all hotel / rental car partners itself is?

nsx

Credit card signup bonuses have been so high so long that I have given up trying to understand how they can make sense.

As to the 600 points, that's ordinary price discrimination. Businesses offer better prices to customers who are willing to make some effort to get the price break. These are the more fickle (aka elastic) customers. Coupons, 600 points, even Priceline. It's all just a form of price break for the attentive/elastic.