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..)

In that case, though, the "value" you think you're getting isn't 8¢/mile any more. It's half of that to begin with. Then factor in fees and taxes you have to pay in cash, and the miles you'd earn with a paid ticket (with class-of-service bonus) but won't earn on an award - the end result is probably 2.5¢ to 3¢ per mile. That's much closer to the amount of money AmEx, etc., paid for those miles. It's also close to, perhaps even more than, what big companies with good corporate discount deals would pay for the seat.

That depends. Some carriers, such as CO, no longer make their "rule buster" awards eligible for last seat inventory to non-elites.

Also, most airlines these days have assigned some dollar value to their points. If they think that the "revenue" that a point redemption will generate is greater than the revenue that they will realize by holding the seat for sale they make it available for reward redemption. And for the ones who do enable last-seat availability they feel that the cost in miles of those rewards is sufficient to cover the potential lost revenue. On DL and CO, for example, the last seat availability for premium long-haul seats is actually more than double the base redemption level.

Depends on the carrier. While the 330-day window used to be a sure thing for redemption not all airlines still do that. There are a few that generally do not, including CO.
It is closer, but still not really close at all. The airlines generally sell the points to 3rd parties for less than a penny each.

Do you have any sources for how much airlines charge for miles?

Like previous poster said, I have heard that it costs about a penny each, but have never seen a source for that. Do you have one?

While I really love the idea of getting 8c/mile, I really, really doubt that's even close to the case, as many previous posters have pointed out.

Here are some reasons:

-As previous posters have mentioned, the quote fares are really just ballpark numbers put out there, in part to make those seats seem like a tempting way to use miles instead. Ask yourself, do you know anyone who has actually paid $12K for the first class round trip from NYC to Paris? Even most business travelers can't get away with that. While I'm sure some tickets are sold at that price, I have no doubt that the vast majority of those seats were not sold that way.

-You paid Amex a transfer fee for the miles, and then the first FF site a fee to book on the other airline, right? Those do add up.

-You aren't getting miles for the flight, so that reduces the cost of flight in comparison. If the flight were $12K as in my example above, you would likely be getting 6,000 base miles, and maybe triple miles, all in, plus qualifying miles. Since you aren't getting that, you aren't really getting the full value of the ticket.

I do use Amex MR a lot and I like the flexibility of it, but for my current charges, I've been going the Schwab 2% route. That's a true 2% and I get miles if I fly.

Back to your original question of who pays, you really pay in the end. Here's the flowchart in my mind:

1 - You buy merchandise. That costs a bit more because the merchant has to pay 3% to Amex to accept payment from you (hence cash discounts in some circumstances).

2 - Out of that surcharge that you paid to the merchant, they've paid Amex, and Amex then pays the first airline for miles.

3 - The first airline then pays the second airline for the seat.

It's really a transaction with a lot of friction. I personally think we'd all be much better off if we followed the European model of debit cards being the de facto payment standard for many merchants, with credit cards incurring a higher fee. Then our costs would be lower and more direct and more efficient.

No.1 and 2 are not true as long as there is no surcharge upfront to pay by credit card.

The merchants costs are absorbed and burried in the overheads, which are born by all shoppers - and since the CC users do get something back, it is the debit card or cash users who subsidize the CC users, i.e. "pay" at least partly the awards CC users enjoy.

True, not many would pay for an F ticket out of own pocket - but why not take advantage of the award scheme and treat ourselves a nice flight when it really does not cost you extra? Personally I have no problem to give up the 6K miles and fly in J or F, in a Flat-Bed or Lie-Flat seat, nice wines/champaign, decent foods, and airport lounge accesses ... for the taxes and fees paid, would still be LESS than a coach ticket cost for the flight. :D

I'm always amazed when people use cash for anything, but, I agree, they're subsidizing us, so I can't really complain.

What do you mean by 6k miles to fly in J or F?

Yes and no. In theory, if merchants did not accept credit cards, they could reduce the price of the merchandise. If 50% of people use a credit card and it costs the merchant 2% fee for accepting credit cards, theoretically everyone is paying 1% more due to the fact that the merchant is accepting credit cards.

So I do see No. 1 as being true - theoretically.

Having said that, I am still puzzled at some businesses who say "no checks" - one local business started such a policy. But within a couple of months they realized that the percentage of bad checks was no more than the credit card fee they were paying so they started accepting checks again. So both the bad checks and the credit card fees are just a cost of doing business.

Doesn't a merchant get dinged with bank fees if a check bounces? Whereas with credit cards, as long as the merchant follows the rules for obtaining an authorization it is protected and the credit card issuer incurs the risk of fraud or non-payment.

Not so! I wish, but no, even with an authorization, credit card accepting-merchants are in no way protected from the risk of fraud. Sorry.

The merchants are protected in the way as long as the credit cards charges are cleared - then the unauthorized charges become the battle between the cardholder and the card issuer, with very little or 0 involvement of the merchants. With the POS system, the merchants would NOT sell any merchandise should the authorization does not go thru.

Do not confuse charge back with fraudulent charges on one's credit card by someone else other than the owner of the card.

The merchants only get involved when the cardholders dispute a charge because they are wrongly charged by the merchants, do not receive promised merchandise / service, things in such nature. It is a totally different situation versus the fraudulent charges on one's credit card as they are commonly defined.

No.1 is only true as you say, theoretically. But we are living in a practical world - that is why it is moot to talk about the theorectical outcome, as it is not how the system function.

Bad check bounce fees would far outnumber the credit card transaction fee. Big merchants have the means to prosecute bad check writers to the letter of the law, and they dont hesitate to post such warning at every register. Small businesses dont have the means to do so - so they would need to weigh the pro and con about accepting check / credit card, or cash only.

One ethnic grocer we frequent, takes only CASH. Period. His business is not affected at all by such policy as there is only one place to buy Chinese BBQ pork, roast duck and other delicacies in 30 miles radius, plus his stuff are good. I was there today and witnessed an American woman trying to use her CC or check for, like, $8.50 purchase. Of course she was politely told NO, Cash Only.

If you think taking checks is good business, why would rental car companies, everyone of them, would only take credit card as form of guarantee payment when you take the car out? On the bookings, they specify that if one wants to use debit card at pick up, one must pre-arrange such and receive pre-approval. Of course you can settle the rental bill at return. But you will not be able to take the car out without a credit card.

Years ago, when CC POS system was just introduced, in Houston where we lived back then, a regional grocery chain did a study on whether they would install such machines at their stores - they found CC transaction costed several pennies LESS than processing a check, when everything taking into account, including the time the customer had to spend at the register, using CC versus writing a check (using CC saved labor cost as a cashier can process many more customers for the same time.) So, Randall's, the regional chain, was the one first installed the system. It took Kroger and Safeway almost a year to follow. Needless to say, Randall's had captured most of our business.

In the argument the poster said if you fly an award, you would forfeit 6K miles by flying a revenue ticket, JFK to Paris - obviously he was talking about coach ticket, as if you fly revenue J or F, you would earn 50 to 100% more miles depending on each FF program.

I say I would give up the opportunity to earn 6K miles sitting in pay coach, to fly J or F, having nice sleeper seat, wine and dine not just onboard, but in pre-flight lounges, with often LESS costs than paying for a coach ticket... In essence, I dont care whether it is 8c or 10c per mile value or 0c per mile value for my J or F award ticket, I only know I would do a whole lot better than paying more $ to fly coach and get the 6K miles back. :D:D

I didn't say that I think taking checks is good business. Might be, might not be. But the reason car rental companies don't accept checks has nothing to do with that. A credit card, at least to the car rental company, gives some sort of validation of creditworthiness of the customer. Taking a check for an $8.50 ethnic meal is a WHOLE lot different than taking a check when someone rents a $20K vehicle and might never return.

I don't agree with this point (though many here seem to have this opinion). It doesn't matter if a $12K ticket is sold at a corporate (or any other) discount for a much lower price. What matters is the lowest price *you* can get it at. If you use miles for a ticket that is quoted as $12K to you (either on the airline website or through a TA or your corporate travel desk), then you are getting $12K value for your miles. I'm sure the airline executives can fly free in their F/J seats. So does that mean you are getting 0c/mile value because someone can get it for free?

Now its a different matter, as I had posted on another thread, whether you would have bought the ticket at that price in first place. True value of miles is valid only when they are used for something that you would have bought by paying money. Otherwise its just something to feel good or bad about and brag/complain on FT.

I agree with you on this. A friend have repeatedly bugged me about how to valuate a mile's worth. I keep telling him it depends on HOW you use it and receive benefit from it.

I give him 2 examples of our recent redemptions:

1. A J all partner award costed 100K AA miles BCN-ZRH-xJFK-MIA-YYZ-xLHR-BCN last year when international stopover was still allowed. Said itinerary priced out at $8800 if using AA TATL both ways. Using BA on the return leg back to BCN, jumped the price to $9800. So, a mile worthed either 0.088 or 0.098.

2) A J Oneworld award costed 150K AA miles to travel 25K miles that we just finished the trip with such itinerary: MIA-LAX-AKL-SYD-SIN-KUL-HKG-TPE-ICN-KIX-CTS-NRT-SFO, visiting 11 cities. Similar itinerary but not exact, due to different rules between award and revenue, on the minimum stay at each stop (award is less restrictive), can be achieved with a OneWorld Circle Pacific fare - if originates from US, the cost is $11,200. (more restrictive rules but can travel an additional 1000 miles to 26K).

http://www.oneworld.com/ow/air-trave...#fare-estimate

In case 2, a mile worthed 0.075 only by this Price/Miles formula. Yet, the OneWorld award would allow me to stop at a maximum of 16 cities though we only used 11 slots, versus the higher "valued" J class to Europe award which only let me stop at a maximum of 3 cities - one gateway each at domestic / international gateway plus destination. Not to mention that there were only 2 longhaul segments in the TATL award, but there were 3 longhauls - 2 TPACs and 1 SYD-SIN (7+ hours, about the same as YYZ-LHR) in the Oneworld award.

So while the miles look worth "less" per mile, the OW150C offered a lot more in return.

3) To bring the illustration to an extreme, (unfortunately my friend still does not quite get it). He can claim 4 x 25K domestic Y ticket with the 100K a TATL J award would cost - but even if the domestic ticket costs $700 a piece (could only happen when going to Alaska, or to some destinations in Canada, from far corners of US, like MIA) - it is still $2800 in total, versus the $8800 or $9800 price tag for the J TATL. Then this boils down to, whether you want / need to save cold, hard cash for a family trip to Alaska, or you want to indulge and get yourself a J ticket to Europe?

That is why I keep telling him, there is not a way to value how much a mile worth - it all depends on what you want and how you would use it!

You're starring the word *you* which is partially fair, but I would change the word *can* to *would* to make this more accurate. It's worth the lowest price you *would* pay. Most of us who use miles would never consider paying $12K for this ticket. Not even close. I'd go further to say most of us would never consider paying for *any* first class ticket. I've only done it once, and that was a bizarre situation where it was $20 more than coach for some reason.

But somebody here did routinely get 3 cents per point value up until march this year sometimes at 6 points per dollar spent earning or a whooping 18% "cash back" by applying their thank you points to airline tickets that you'd change into useful tickets that still would earn miles!

I miss the usefulness of my Citi Amex Platinum and Driver's Edge cards dearly...

In that case it was Citi who paid big time for the rewards.

I think there are two issues here, the first is the issue of CC fees. The second is how to value a point/mile when it is spent.

Arguing that using credit cards costs business more money isn’t always true. If you want to talk about the ethnic food store where the guy behind the register owns the place and stops by the bank to make cash deposits on the way home, cash probably costs more. However if you are talking about major chains it isn’t always the case.

+ Credit Cards don’t require hiring armored cars to make daily/weekly cash pickups.
+ quicker for cashiers, and they can’t miscount with CCs
+ If your 7-11 gets held up, they can’t steal revenue from CC purchases.
+ Customer doesn’t have to have the cash on them to make buy the item


Value of a mile:
You many enjoy the F or J seat that you otherwise couldn’t buy with cash. However you can only value an award at whatever you would be willing to pay for the ticket yourself. Furthermore, awards are far more restrictive than paid tickets. It’s like when you see the Billy Maze style ads where you get something for $9.99 that has a $30 ‘value.’ Who said it was worth $30? It is only worth $9.99 because that is what it is being sold for. Buying a ticket with your CC probably gives you additional protection for delays or lost luggage.