I have seen a number of posts on he price airlines charge for selling miles to partner programs, like credit card issuers. However, what do the airlines pay to buy back miles from companies like the Miles for Magazines program (exchange miles for free magazine subscriptions) and MilePoint (exchange miles for discounts off retail from selected merchants)?

1 - How does this model work? I assume the airlines buy those miles back at a certain agreed price per mile. In other words, the airlines are willing partners.

2 - If so, what is the buy back price for those miles? This would set the absolute floor in the value of a mile.

3 - What financial incentive do the airlines have for reducing their outstanding miles? Do they recognize miles outstanding as a liability in their financials? Does reducing outstanding miles improve their balance sheet?

4 - What other non-travel related companies, other than the two I mentioned above, have a business model that allows the consumer to use miles to partially or fully pay for good and services?

I am intrigued by this business model and what to learn more about it.


MTP

First of all there are very few examples where this is in play. In the Magazine for Miles campaigns, you really don't see airlines paying for any of those miles to dissapear, rather there is no fee since publishers seek out this artificial exchage of miles for magazines to satisfy certain requirements for that to count as "circulation" and all of them have used this ploy for years to build up circulation so they may in turn charge a higher premium to advertisers. As noted, I don't beleive airlines pay for that since the magazine guys typically have been nice to stimulate the dead part of the airlines database - those without miles to redeem.

Now, I think you may be making a false assumption in "What financial incentive do the airlines have for reducing their outstanding miles?" Truth is while many people wonder about liability, airlines in general could not care less about this liability and thus have no real incentive to get miles off thier books - which is why all these years there are very few efforts to really do anything in this area. Besides, there's really nothing in this world better for redemption value for them than the use of an empty seat.

The reality, my guess - and it's just a guess is that this amount is less than a tenth of a penny per mile, which is why not many have convinced airlines of any other reason.

Since most of the miles appearing on books these day or pre-paid to the airline from partners, would you worry about burgeoning liability? I'd put the moeny in the bank that's necessary to cover it from there and declare the rest of it profit.....

What about Hilton, who gives you actual HHonors points for your miles? They aren't getting much of an intangible benefit out of that, so the airlines must be paying them?

Almost certainly hotel programs like Hilton are NET buyers of airline miles : to accomodate the minority of customers who want to convert miles to points they are just transfering miles to other customers that want to convert points to miles.

Of course they still need permission from the Airlines to transfer these miles between accounts, but as long as the Airline is guaranteed that the Hotel will remain a NET buyer of miles, the Airline is making a profit given the typical liability of 0.1c/mile on their books. It is possible the Hotel has to pay some small fee to the Airline for each transfer of airline miles between accounts.

I doubt Hilton in a net buyer of LatinPass miles!

I have a feeling that milepoint works the same as Magazine for miles, and milepoint makes its money from the merchant (and not from the airline).
*** UPDATE - I got information that this is not true, and that the two models are different ***

The airline->HHonor question is quite interesting, and I'll speculate that both parties assign some value to the miles and the points - with the expectation that Hilton is buying more miles. When AA and Hilton allowed AA->Hilton, the conversion rate was half of what other airlines had agreed on previously. As Randy mentioned, AA could care less about reducing their liability for miles.

[This message has been edited by PG (edited 06-11-2002).]

PG, can you share any details on what milepoint's model is? Thanks!

I don't know, other than I was told that what I had originally said was incorrect.