Are frequent flyer programs trying to increase the CASH value of their miles?
 

I'm sensing as frequent flyer programs evolve even further, they are trying to set a base for the cash value of their points. Many programs are getting more and more into non-airline/hotel redemption such as gift certifictates and merchandise. This trend is evident in the following ways:

1. Airlines opting out of the American Express Membership Rewards program. Airlines usually have to sell their points/miles at a hefty discount to participate in the program. I've heard .8 cents per mile is the transaction rate between AMEX and its partners.

2. Redemption going higher. Continental, UA have converted the ratio for transfers between Starwood to a 2:1 ratio (2 starpoints for 1 airline mile)

3. Lack of promotional bonuses: Continental has not had a transfer bonus for a long time now (approaching 1 year). Before, 20% transfer bonuses were a given every other month.

Airlines and hotel programs have set a standard where they are trying to set a cash value of a minimum of 1 cent per mile and are trying to do everything possible to meet this cash value.

I believe it was Chase who forced CO and UA to devalue the SPG to CO/UA conversion rate.

My understanding as well. Supposedly Chase, who issues the UA- and CO-branded mileage credit cards, argued that it would be harder to market them at 1 mile/$ with a large annual fee if Starwood was giving 1.25 miles/$ with a $30 annual fee.

Chase also issues the British Airways Visa which converts 1 to 1.

I dont think the goal is to increase cash value, I believe the goal is to reduce the overall liability they are carrying on these miles. The more opportunities they give people to cash in their miles the more likely people are to spend them, and the less that are sitting on the books.

If you look just at FT that is a brilliant strategy. Many of us travel so much for work that using miles to buy airline tickets just doesnt happen, so we sit on millions (yes some purposely save them, but for me personally I just dont have a reason to use mine I am already flying so much). But given the right other opportunity to use them I am more likely to.

This also will benefit where husband travels for work all the time and doesnt care about miles, wife can use those miles for non-flight purchases.

It's a smart strategy

The original premise of frequent flyer programs was to use seats that would otherwise be unsold to reward loyalty. As the USA airline industry has reduced capacity while simulataneously offering miles through partners the demand for award flights has exceeded the supply of empty seats. I think you are seeing an attempt to rebalance supply and demand by offering alternate awards.

It certainly appears that Chase and some other issuers have been pressing their affinity card partners (e.g. Continental, United, Marriott) to restrict earning through other cards. This doesn't really affect the supply of miles or points, it just forces the participants to use a specific card.

In the US market BA offers miles through three credit card programs: Chase BA VISA, Citi Diners Club/Carte Blanche, Merrill+ VISA, in addition to transfers from hotel programs. However, in the UK market BA has partnered exclusively with American Express, plus the same hotel programs. I think this reflects the difference between a carrier's home market, where BA will be the primary carrier for most flyers, and a foreign market in which they play a secondary role.

I doubt airlines would ever want to target a specific cash value for their miles, due to tax reasons. If they ever established a specific cash value, the IRS might decide that miles/points constitute a taxable benefit for people going on business trips.

I tend to agree - we all benefit from the fact that miles are nebulous. They aren't property, they aren't a coupon, they aren't a promise of future services, they aren't a contract, and they aren't a currency. Legally, they are gray, squishy nothingness. This benefits the airlines, their partners, and the travelers.

The main reasons it benefits us: the aforementioned tax reason for one - the IRS can simply pretend miles don't exist - plus it allows the airlines to run ridiculous promotions (to the benefit of people who pay attention, like us) without carrying those miles on their books at anywhere near the value we'd get out of them on redemption.

And while the airlines aren't running many CC transfer promos, they are running regular promotions like mad. ^

I was under the impression that miles were considered a rebate and as such did not constitute a taxable consideration.

Except that if you receive miles from a flight paid by your employer value has transferred from employer to employee via the airline, and this could be construed as income.

I think I know what you're getting at, but the IRS really doesn't pretend miles don't exist.

- When the airlines or FF programs sell miles to a "partner" like a rental car company, the Feds charge an excise tax on the sale of each mile (and some of the "partners" then pass that directly through to the individual).

- And I believe the IRS considers any money received in the sale of such miles by the FF program to be income subject to tax (after expenses).

- If you win miles in a sweepstakes, the Feds are right there at the door demanding taxes based on the "value" of each mile won.

- And I suspect that if you were paid in miles for some work you did, they'd want their income tax cut of that, too.

What the IRS did, back about six years ago, was to say that they were not going to require the individual to report as income the miles he/she received from business trips paid by the employer, or the trips or whatever goods or services the employee received in redeeming the miles.

However, the IRS particularly noted that the decision did not apply to cases where the individual took the miles received from business flights paid by the employer and converted them to cash or cash equivalents (through, for instance, selling the miles or a ticket obtained by redeeming the miles).

So, really, rather than pretending miles don't exist, the IRS has carved out only a "special case" in which miles are not considered taxable.

On the other hand, banks that award miles in lieu of interest on account balances do not report these as income.

Fair enough, but since that "special case" is the exact mechanism by which most miles are still awarded, it's a pretty far-reaching decision. (Yes, I know the percentage of miles awarded for BIS travel vs. partners is lower now than six years ago, but it's still the lion's share.)

I believe, per Randy, CC companies award more miles than are earned through flying.