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Is the award game dying?

Is the award game dying?

Old Oct 8, 19, 11:15 pm
  #16  
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Originally Posted by hhdl View Post
Holding points/miles over the past few years has basically been being short yield management technology, with about the same result as being short any big data/predictive analytics technology.

Fundamentally for airlines and hotels, the point price is determined by: (p*m + (1 - p)*r))/c, where p is the probability the seat/room wouldn't have sold, m is the marginal cost, r is the expected cash revenue if the seat sold, and c is an internal cash/point valuation. Yield management does a better and better job of maximizing r and minimizing p, inflation is generally if anything increasing m, and the data scientists of the world are improving their estimates of p, m, and r. All of that means that even if the internal exchange rate c is constant, the visible effect is persistent devaluation of points/miles. It's going to be less and less likely to find absolute steals, so if that's what you were in the game for, well, the prognosis isn't good.
Not for all hotels. Marriott Bonvoy, for example, tends to price points stay according to points redemption demand, not related to cash prices. So far that reason, hotels in parts of the world where points are not used as often, such as Africa, Middle East, and parts of Asia, tend to need very low numbers of points even if the cash price is not so cheap, while hotels in some high-redemption-demand parts of the USA tend to require lots of points, even if the cash price is fairly low. So I've gotten hotels priced near $200 US at 15k points a night in the Middle East and 7500 points a night in South Africa, while seeing hotels that can go for just $80 a night some weeks of the year near Disneyland charge 45k a night (because of points redemption demand there the rest of the year).
:D! likes this.
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Old Oct 10, 19, 3:15 pm
  #17  
 
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Originally Posted by sdsearch View Post
Not for all hotels. Marriott Bonvoy, for example, tends to price points stay according to points redemption demand, not related to cash prices. So far that reason, hotels in parts of the world where points are not used as often, such as Africa, Middle East, and parts of Asia, tend to need very low numbers of points even if the cash price is not so cheap, while hotels in some high-redemption-demand parts of the USA tend to require lots of points, even if the cash price is fairly low. So I've gotten hotels priced near $200 US at 15k points a night in the Middle East and 7500 points a night in South Africa, while seeing hotels that can go for just $80 a night some weeks of the year near Disneyland charge 45k a night (because of points redemption demand there the rest of the year).
That's not necessarily incompatible with my generalized model (note all the low point prices in the places you mention in Hilton Honors, which would seem like the closest hotel program to that model). Since labor is generally going to be the biggest contributor to m for a hotel, low labor costs (relative to North America/Europe) in those places will decrease m. If real estate is cheaper in those places (suspect so, relative to North America and Europe), then there's more reason to overbuild for the usual occupancy, which would tend to increase p, which largely decouples those from r.
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Old Oct 10, 19, 3:31 pm
  #18  
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Interesting you mention Asia: this coming spring, I'm going to blow through about a million HHonors points in Asia, because why not? They're not that useful in North America. 11 nights - Singapore-Koh Samui-Bangkok.

On one hand, the points aren't worth much anymore. It will be interesting to see whether I actually place a $850/nt "value" on Koh Samui, which is their cash asking price, but I guess I don't care because these points are like water. But on the other hand, I often earn 40-50 per dollar on spend, so it's just different math.

When I started in HHonors, it was 10 points per dollar and you needed 100,000 points for a week in Hawaii. Now 40-50/$, plus huge CC signup bonuses, and you need 380,000 for 5 nights at the top resorts. They've become Zimbabwe dollars, but I guess if you don't hoard for too long it's okay...
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Old Oct 10, 19, 5:01 pm
  #19  
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If your focus has been on aspirational awards, then yes, that game is dying.

Consider long-haul premium cabin air travel. For a long time, economy US-Europe was 60k round trip while Business was 100k. It cost 67% more miles to fly Business than Economy. That's almost never the case with cash tickets, with business class tickets usually costing 3x or more compared to economy. So even business travelers who flew a lot of cheap domestic coach tickets used to find such award tickets within reach as an occasional treat for a spouse/family vacation if they were flexible on dates and could land saver space.

That sort of thing is going away. The future of travel rewards is a fairly boring rebate %. Earn based on $ spent, and burn based on the cash price of the desired reward. In reality, when airlines get to this point, there is no reason to put spend on an airline card anymore. But people are irrational. Look at all the people that saved up 25k points and then are thrilled when they turn them in for a "free" ticket when that ticket would have only cost $200 cash to begin with.
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Old Oct 11, 19, 3:31 am
  #20  
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Originally Posted by hhdl View Post
Fundamentally for airlines and hotels, the point price is determined by: (p*m + (1 - p)*r))/c, where p is the probability the seat/room wouldn't have sold, m is the marginal cost, r is the expected cash revenue if the seat sold, and c is an internal cash/point valuation. Yield management does a better and better job of maximizing r and minimizing p, inflation is generally if anything increasing m, and the data scientists of the world are improving their estimates of p, m, and r. All of that means that even if the internal exchange rate c is constant, the visible effect is persistent devaluation of points/miles.
Very interesting!

Would you be willing to elaborate on the equation? I don't quite understand how it is derived and what are the assumptions behind it.
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Old Oct 11, 19, 6:10 am
  #21  
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Originally Posted by javabytes View Post
If your focus has been on aspirational awards, then yes, that game is dying.

Consider long-haul premium cabin air travel. For a long time, economy US-Europe was 60k round trip while Business was 100k. It cost 67% more miles to fly Business than Economy. That's almost never the case with cash tickets, with business class tickets usually costing 3x or more compared to economy. So even business travelers who flew a lot of cheap domestic coach tickets used to find such award tickets within reach as an occasional treat for a spouse/family vacation if they were flexible on dates and could land saver space.

That sort of thing is going away. The future of travel rewards is a fairly boring rebate %. Earn based on $ spent, and burn based on the cash price of the desired reward. In reality, when airlines get to this point, there is no reason to put spend on an airline card anymore. But people are irrational. Look at all the people that saved up 25k points and then are thrilled when they turn them in for a "free" ticket when that ticket would have only cost $200 cash to begin with.
Good point.
Just booked a flight yesterday. EWR-RGN, BKK-EWR. $1760 with AmEx Plat discount,plus 22K UA miles, plus 5x MRs...after all said and done, the total is around $1300. How can you beat that with miles? I didn't aspire to fly CA again, but as I only care about the hard product, it works for me.
The coach price on that itinerary is $399, for almost 40 hours of flying time. OTOH, I routinely pay close $1000 for coach NYC-Caribbean on the weekends I want, for 7 hrs. I have a feeling I'll be using a lot of these miles to redeem standard awards for these flights.

Last edited by stevento; Oct 11, 19 at 6:27 am
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Old Oct 14, 19, 9:16 pm
  #22  
 
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Originally Posted by 8mh View Post
Very interesting!

Would you be willing to elaborate on the equation? I don't quite understand how it is derived and what are the assumptions behind it.
The basic assumption is that the true cost to a loyalty/reward program of a redemption is the difference in the provider's net cash profit/loss between the universe(s) where the redemption happens and the universe(s) where the redemption doesn't happen. Both of those are of course, impossible to know with certainty, so thinking in terms of probabilities is quite useful. If in the absence of the redemption, the flight/hotel would have sold out (or the relevant class of seats/rooms would have), the difference is basically what the last seat/room would have sold for. Otherwise, the cost of the redemption is arguably some likely-small premium over the marginal cost of the seat/room (in the airline case: fuel to move a person of typical weight the distance of the flight, the labor cost of whatever extra portion of labor is required (FA, cleaning), and the wholesale cost of whatever amenities were provided; in the hotel case, it's the small amount of electricity an occupied room draws over a vacant room, a housekeeper to clean the room, and things like wholesale cost of a complimentary breakfast).

In the formula provided, p is basically the probability that the latter case holds and (1 - p) is the probability that the former case holds (one can make things a lot more complex and maybe improve things by considering more than 2 possible outcomes). m is the marginal cost plus some small premium, and r is the price the last seat/room would fetch in cash. c is an internal valuation of a point; it's almost certainly more than what "providers" (the businesses of flying people in metal tubes or renting rooms by the night) "pay" the loyalty program for points, and a lot less than the cash purchase rate for points and less than what transfer partners effectively pay for points, and it's also greater than the value at which the points are carried as a liability on the balance sheet (if nothing else, because of points lost through account expirations, etc.). In Hilton's case, I'd spitball that the provider purchase rate is 0.1 cent per point (though this is insignificant compared to the other fees properties pay HLT), the internal valuation is something like 0.2 cents per point, and transfer partners like AmEx effectively buy points at 0.25 cents/point (considering that AmEx's swipe fees at airlines and restaurants are probably something like 2%, you can see how the Aspire is profitable for AmEx even if almost all of the annual fee goes to HLT to buy Diamond status).

In the airline case, of course, m is basically fun-bucks as are the notional purchases of points from flying. An airline has broad latitude to make the people-in-metal-tubes business look good at the expense of the reward/loyalty program or vice versa; to the extent that a hotel program's properties are owned by the program, the same latitude exists. The further-and-further the provider is from the program, the more I'd expect the program to be close to my formula: imagine Oneworld launching an alliance-wide FF program and it would probably somewhat resemble Hilton's by being largely revenue+segment (vs. distance) based for earn and dynamic for burn.

As noted, if cash prices are being adjusted by a yield management system to minimize p and manage to do so reasonably well, the rewards will basically become a straight percentage-of-spend (especially to the extent that points are awarded based largely on spend). However, if the cash price were constrained from falling to increase utilization, e.g. because discounting too much would ruin the image of flying first/business or staying in Bora Bora, then this formula suggests that the apparent redemption rate will look really appealing (and that there will be more award redemptions than cash purchases). Comparing typical redemption rates for a Ritzstoria resort to any number of Courtgardens provides some evidence here: it wouldn't really surprise me if a lot of Doubletrees in the US get more from HLT per award stay than the Conrad Koh Samui.
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Old Oct 15, 19, 2:12 am
  #23  
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@hhdl: Thanks, though I still don't understand the formula

(p*m + (1 - p)*r))/c

If p is the probability that the room wouldn't sell regularly, then (1 - p) is the probability that the room sells "regularly" (= for cash).

In both cases, the hotel will have to pay the marginal cost of providing the room. So I don't understand why you have the m in the first term but not the second.

Furthermore, if the hotel lets somebody redeem an award, it gets a compensation from the chain. That should somehow factor into the first term. The compensation usually at least covers the marginal cost of providing the room.

Finally, there is the issue that it isn't in any way an accurate model of all scenarios. There are at least four outcomes:

1.) The room wouldn't sell regularly but the hotel can sell the room as an award.
2.) The room won't sell regularly and nobody redeems it as an award.
3.) The room sells regularly.
4.) The room would have sold but that didn't realize because somebody took out an award before it could be sold for cash.

In any case, I'm still totally lost with your equation. It cannot stem from a consumer's optimization problem, because the consumer doesn't factor in m. It cannot stem from the chain's optimization problem, because the chain doesn't get paid r (but a small percentage of it) and doesn't incur m. So it must be derived somehow from the hotel's optimization problem.

But what can the hotel choose? It's totally unclear to me. Can it choose award inventory (as with IHG)? Or is it assumed that every room is bookable as an award?

From my perspective, the hotel takes m as a paramter. It takes the compensation it receives in case a reward is redeemed as constant as well. If we assume the hotel can set award inventory, that would be a choice variable. If, instead, we assume the hotel must make every (standard) room available as an award, it wouldn't be a choice variable.

Then, the only choice variable would be r. In any case, it seems to me the probabilities should be endogenous variables that are a function of r.
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Old Oct 15, 19, 6:13 am
  #24  
 
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Loyalty benefits for status members are shrinking but the awards game is hardly dying. As recently as 7-8 years ago virtually no US cards had big bonus categories. Then Chase came out swinging hard first with the CSP and then with the CSR to take down Amex, and the 2 have been at war since coming up with more and more bonus categories and ways to earn points to try and woo customers, and now with Citi and Capital One stepping into the game the competition between them is only going to get more fierce.

Have redemption cost in points gone way up, yes definitely, but so has the ability to rapidly earn points, in my opinion at an even faster rate.

As others have mentioned here the game is changing. Earning serious mileage through flying is really tough these days, and the days of mileage runs are pretty much over. Mileage programs now earn the airlines big bucks from the CC companies buying points at 1.2-2c each. This will put the brakes on them devaluing awards too much, and ESPECIALLY devaluing partner awards too much because then people will choose to transfer into a different programs and they'll miss out. The loyalty programs should really now be though of more as points programs, as the airlines see points less as a way to reward FF and more of a way to generate revenue through having Chase,Amex etc buy the points.

Yes, right now there are only the big 3 airlines in the US but their FF programs are also competing with all the transfer partners in the world.

The big losers here are the CC companies that are trying to do everything to woo consumers to misspend their points on BS giftcards and other really bad redemptions, but it seems they are failing at this since most people realize that the transfers present far more value.

How does this play out in the long run, i'm not sure, but there will always be partner award redemption sweet spots. Yes business class redemptions to south america are sometimes really cheap in cash, but they are sometimes really cheap in points too. You can fly from Mexico City all the way to Arequipa in the south of peru in avianca biz (a distnace of nearly 5000km) for only 25k united points or 20k avianca points.

ANA is probably the best Amex partner and is better used for redemptions to Asia such as 100k from USA to SE asia roundtrip. Those flights are nearly $5-7,000 in cash. OK maybe you see a 2x3x2 outdated biz with a mainland chinese carrier and 3 layovers for $1.7k RT on a brief flash-sale, but thats not apples to apples. Also, thats to say nothing of first class redemptions that no normal person can afford, i've been able to take 25+ hour first class flights on Cathay and Korean Air can cost 5 figures in cash and those awards are still relatively plentiful. I think the game is changing but its certainly not dead.

Last edited by PointsPanda; Oct 15, 19 at 6:36 am
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Old Oct 19, 19, 3:57 pm
  #25  
 
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I havent paid for a flight or a hotel stay (other than Airbnb / Homeaway) since 2009 (ie, when I joined FT). Harder, maybe. Needs more planning, yes. Dying, absolutely not.
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Old Oct 19, 19, 4:56 pm
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Originally Posted by rajuabju View Post
I havent paid for a flight or a hotel stay (other than Airbnb / Homeaway) since 2009 (ie, when I joined FT). Harder, maybe. Needs more planning, yes. Dying, absolutely not.
The days of 67,500 to Asia is over, but 180,000 is not hard to do,

It has been fun over the years
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Old Oct 20, 19, 9:31 am
  #27  
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Originally Posted by rajuabju View Post
I havent paid for a flight or a hotel stay (other than Airbnb / Homeaway) since 2009 (ie, when I joined FT). Harder, maybe. Needs more planning, yes. Dying, absolutely not.
I find that incredible. Sure, this year was the first time I paid cash for international flights, because the rates were so absurdly low, miles wouldn't give much value.
But domestic awards values are usually horrible... and local flights abroad are often on non-alliance airlines.
And hotels...if you only stay in big cities with big chain hotel presence, I get that. But there are no chain hotels or AirBnB in the African bush, S.American rainforest, or SE Asian jungle.

We always planned 9-12 months ahead, and generally could find awards we were looking for (for 4 people, on same flight, during school holidays, always J or F). It required having 2M miles across different alliances at all times, for max flexibility. But I've never in my life spent as much on travel as now when I travel for free. Before, taking a 30 hr flight would give me pause ... in J or F, who cares how long the flight is if champagne is flowing... But even if the flight is free... top non-corporate lodges are not...
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Old Oct 24, 19, 2:30 pm
  #28  
 
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Originally Posted by izzik View Post
I'd say it's evolving but definitely in danger of dying, especially given all of the over-exposure this site (and blogs) have contributed to.
The "game" requires there to be non-players involved as well as players.. if everyone is trying to game the system, then it's not going to work for anyone. It becomes a race to see who can game first, rather than who games at all.
What it comes down to is choosing your circle of gamers carefully -- and keeping that circle closed.
Reminds me how there used to be a bug with Delta's website that allowed you to self upgrade yourself to first or business in certain situations when there was a schedule change (the manifestation of the bug was that under those situations the rebooking engine would offer you the same flight that you were already on but in the front cabin). I used it probably a dozen times over the course of a couple of years before someone posted on FT about it and it was shut down the next time I had an opportunity.
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Old Oct 25, 19, 12:37 pm
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Originally Posted by Zeeb View Post
Reminds me how there used to be a bug with Delta's website that allowed you to self upgrade yourself to first or business in certain situations when there was a schedule change (the manifestation of the bug was that under those situations the rebooking engine would offer you the same flight that you were already on but in the front cabin).
I remember that bug fondly. Got lie-flat business on BRU-ATL when I was exhausted. It was such a nice surprise...
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Old Oct 25, 19, 4:03 pm
  #30  
 
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Originally Posted by Zeeb View Post
Reminds me how there used to be a bug with Delta's website that allowed you to self upgrade yourself to first or business in certain situations when there was a schedule change (the manifestation of the bug was that under those situations the rebooking engine would offer you the same flight that you were already on but in the front cabin). I used it probably a dozen times over the course of a couple of years before someone posted on FT about it and it was shut down the next time I had an opportunity.
Si! Excelente! Good work senor! Especially on DL. Also can you remember ticketing TATL on BD plate, everyday OJ itins... with no YQ ever and we find lots of UA/LH flights LHR-SFO-BRU etc for ~200. LOL!
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