Using my points and miles - who pays?
 

I wasn't sure where to post this question, so mods please feel free to move it.

Today I made an award reservation, where I took my amex mr moved them into my FF account and then booked a trip on a partner airline. I got a nice value of about 8 cents per point, which I am quite happy about.

It got me thinking, at the end of the day, who is the one that ends up paying for this?
Is it Amex, where the points came from in the first place?
Is it the airline I used to make the reservation?
Or is it the partner airline, that I will actually fly on?

I assume that its not a split cost, that would make things pretty messy for everyone to figure out. But how does it work? Anyone able to offer insight? Thanks

Very basically, Amex charges stores/vendors a fixed rate for your purchases, lets say 3% or 3 cents per dollar per purchase. When you want to redeem your points, Amex pays the airline for the FF miles, which is probably under 1 cent per point, though I don't think many people here know that actual cost.

So in essence, merchants pay for the miles, but credit card companies also make a boatload off of interest on balances and fees, which allows them to still be extremely profitable and still give out miles like candy.

Part of where your "8¢ per mile" figure comes from is artificially inflated F/J fares. Over half of the "cost" of your ticket comes from the difference between what we see as the fare when we look at an airline or travel Web site and what the airline really needs to get in order to make money. Look around any international front cabin: nearly everyone is there on an award ticket, an award upgrade, a non-revenue ticket, a corporate discount, a two-for-one credit card promotion or something else. Those who really pay what we see as the fare are few and far between.

(Ask yourself: what is the most the fare could be for you to pay it, in cash, out of your own pocket? That's the true value of this award. The official fare is just a number, though it comes in handy for bragging rights.)

Although I hear what you are saying, you could not buy the ticket at a cheaper price, so I think it is worth that much.

Anyways that does not answer the question...

So amex does pay the airline something. Ok, but who ends up paying after that? Its an expensive seat that could have otherwise been sold for $$$. Would it be the airline that the reservation was made through, or the partner airline that was actually flown?

An empty airline seat and an unbooked hotel room are the most perishable, high-priced merchandises.

Award seats are capacity-controlled, and if you book the Saver Award, you only get the seat when the yield management softwares determine said seat would remain unsold most likely - hence it is released for award booking.

The airline which miles you used to claim the award would pay the partner airline you will fly on, an agreed-upon price for the seat you redeemed. It is a reciprocote agreement among partners who signed into an alliance. Needless to say, the formula to calculate such cost is a highly guarded business secret.

And in a perfect world, each airline would book a similar number of seats on each other's partners flights so things balance out. Again, how that all is calculated is unknown.

If the airline actually thought that they'd sell the seat they wouldn't make it available for points.

As for the cash exchanged between carriers, they have contracts that dictate the rates and that is in part how they determine the number of points to charge for a reward ticket on partners. That's why you'll find some carriers (CO definitely does this) that have different rates depending on the carrier used.

It answers the question to the extent that, if you're looking for the entire fare, it doesn't come from anywhere. The explanation in the second post explains where a penny or two per mile come from. The rest of it was never really there to begin with. It's the airline's "funny money" price. You could say that the airline pays the difference by accepting much less than that for the seat, but they accept much less than that for just about every seat they sell up front.

Perhaps you couldn't buy the ticket for less, but most of the people who buy them - including partners who buy them with your miles - do. If an airline thinks someone might show up with a credit card to pay for a seat, it won't release that seat for an award. Yield management systems won't release award seats unless they figure that the probability of selling them is under 10 percent, sometimes way under.

Finally, there's no such word as "anyways" in English.

I hear what you are saying, but that wont be true for a ticket booked months in advance. Maybe if only a short period of time is left they can say there is less than a 10% chance.

Actually the airlines revenue management systems are pretty good these days and they have pretty accurate historical models to work with in terms of predicting future sales of flights/routes, even several months out.

No details offered so no direct response possible. However, many valuations this high overlook the much cheaper ways get a C or F ticket. They also usually value a limited availability ticket the same as a ticket bought on the day of travel via walking up to the ticket counter with cash.

The above are just the redemption side. On the earning side, time value of money and ultimately unused miles are often not considered.

Totally correct. F/J cabins have few full-fare-paying pax. Airlines know from the get-go that their chances of selling the entire cabin for revenue, even discount revenue, are essentially zero. That's why they can set aside some award seats as soon as a flight becomes available for booking.

[QUOTE=sbm12;12066617]If the airline actually thought that they'd sell the seat they wouldn't make it available for points.

Are we only talking about "saver" award seats? Airlines will always let you get a seat for miles although frequently you have to pay twice the number of miles.

That is generally true, I believe this is because miles are considered a liability on the airline's accounting books, and at double-mile rates it's worth it to the airline to let a potentially paid seat go in order to get some of those miles off the books.

(Of course, delta's been giving away miles like candy at halloween, and has started to restrict double-mile reward seats, so we'll see how long this policy lasts..)