NextTrip

I get where Southwest would be coming from, is that is how it is going to come down. Why should they open a market, say to Hawaii, that isn't profitable if too many folks are flying for free? I don't like it. But, I get it.

joshua362

Is this the rub on all loyalty programs though? Spend 20 weeks in a Hilton in a Detroit winter for business and use points for the overwater bungalows in Bora Bora, it used to be pictured right on their printed signup application. Not for a Hampton Inn aside I-65.

You make bad and unprofitable marketing, credit card giveaways and operational decisions and have to change that, I get that. Don't make the people who earned points the hard way and saved them suffer.

rsteinmetz70112

It shouldn't matter to Southwest in any meaningful way which flights people elect to take using points. The points were already paid for, whether in cash by their partners or as a rebate from air fare. In fact it might be worthwhile to open a popular route for the express purpose of luring people to use points, reducing the liability those points represent.

sbtinme

Well, I, for one, am holding out hope that this talk of "massive devaluation" is seriously overblown. We don't know anything yet -- except that things will change to some extent this spring.

I think Southwest has almost been too generous in some cases with their FF program. For instance, I'm holding a ticket to Cancun next month in the height of spring break travel. Leaving from Maine, round trip, I spent just 16500 miles to get there. They could've charged 50% more than that and virtually any of us would've paid it. It would still be LESS than what legacy carriers are charging.

I've appreciated that SW operates by completely different rules than the rest of the industry and it's one component that has kept me somewhat loyal to them. I don't expect a "massive devaluation" at all -- I do expect some fine tuning of their program and that aligns with the recent changes we've seen industry wide. Load factors are approaching all time highs and profits are strong.

Time will tell.

texashoser

Yes, time will tell. My only concern at the moment is if you'll be able to tell when looking at WGA redemption fares whether the ones with premium redemption rates will be identified in some way. I doubt it, though.

Halo117

[QUOTE=sbtinme;24387003]

I think Southwest has almost been too generous in some cases with their FF program. For instance, I'm holding a ticket to Cancun next month in the height of spring break travel. Leaving from Maine, round trip, I spent just 16500 miles to get there. They could've charged 50% more than that and virtually any of us would've paid it. It would still be LESS than what legacy carriers are charging.

QUOTE]

There is nothing generous about what WN is doing regarding your cost to redeem with points. The 16,500 you paid is tied to the cash equivalent at the time of booking. So you chose to use pts instead of cash. The real issue is why did WN price your trip so low to begin with where they could have easily charged 50% more on the cash price.

nsx

The problem is that, at least in the case of partner points, Southwest received quite a bit less than the 1.43 cents you think they are worth. People who seem to know are posting that airlines pay banks something closer to 0.5 cents per point. I'm pretty sure that's correct if you imagine that the signup bonus is split 50/50 between airline and bank (i.e., the bank pays for only half the signup points).

Your points are already paid for, they aren't paid for at the redemption value. What's the airline to do except devalue your points before you can redeem them? That means capacity controls and/or boosting the number of points needed to redeem for a given flight.

The airlines' original sin (they all do it) was selling points far below redemption value as if that were a great idea.

traveller001

It though is a business requirement that liability gets too large to handle and the unpredictable effects affecting future cash flow.

Other airlines have devalued miles frequently.

This approach is unique and considering the many WN routings probably not so bad unless one is looking for a direct at peak times.

I am now looking at cash even on other airlines versus points in the future.

No worry on my WN points as spend/earn habits keep them alive forever.

rsteinmetz70112

The prediction of points use should be no m ore difficult than the other aspects of yield management.

Also I'd bet a sizable percentage of points never get used, whether these are points from infrequent fliers or credit cards.

PotomacApproach

WN can do what they want with redemptions as long as ticket changes remain free.

Chuck2009x

Ah, now this gets into one reason why I thought this move might have been made. I'm not a finance guy, at all, but I know that points have to be accounted for as liabilities on the balance sheet.

In the simplest possible imagining of how that works, a dollar's worth of points on the liability side is equal to a dollar of revenue. If you redeem points and wipe out a dollar's worth of liability, it affects the BOTTOM line the same as if you paid a dollar.

But, adding a dollar to the TOP line (ie. revenue) looks better to Wall St., even if your bottom line stays the same.

By charging a loyalty penalty on points, they wipe out more liability and improve their bottom line. If they steer people away from redemptions and towards cash, they improve their top line.

olouie

They are suffering due to their own mistake of offering so many point promotions in the past. WN fares are no longer cheap and if they take away no change and cancel fees they are basically another legacy airline.

InkUnderNails

Generally true, but the liability of points is discounted on the balance sheet. It is not at redemption value.

Also, liabilities are not part of the P&L. They are used in the calculation of shareholder value, the same as net worth to the individual. That does not make them unimportant. When a business takes on a liability, the money is not accounted as income. When it pays off the liability it is not a deductible expense, and any reduction of the liability even if it is not realized as cash, is a taxable event.

That exposes the thought process of devaluations and why there is never an increase in valuations of any points program. The liability is held against the value of the company. If by some magic power they can reduce the liability value by changing the discount value of the future liability, then that decreases the exposure to future taxation when the liability is reduced.

If they are carrying points on the balance sheet as a liability, the "sale" of points is not a sale at all but a loan from the balance sheet perspective. It still has to be paid. When points are used, the discounted value is removed from the liability and creates a taxable event. A devaluation that decreases the value of the liability is also a taxable event paid in the year that the liability is reduced.

Where does the money come from to pay off this liability? From us, in reduced value. It is quite simple.

Bottom line, every time we redeem points, we reduce their liability on the books and create a taxable event. Except it doesn't. Since the redemption incurs costs and expense that has no offsetting cash income, the taxable event become less taxable. In a perfect accounting world, cost of providing the redemption will equal reduction in liability and net zero tax liability. With reduced value points, the taxable event from the reduction of liability may even be less than the expense of reduction creating an on the book reduction of taxes. Yes, those diverted taxes were paid by us in the devaluation of the liability. (If you are still reading the much too long post, the light may have just gone on about certain routes costing more points.)

They could just buy our points and pay off the liability, but then we would really scream because they would only pay for them at the discounted rate. It is much easier to take a fractional part through devaluation. We all still "have" points, there are just as many on the balance sheet and in our account, but as they are now worth less they do not buy as much. And the liability is reduced increasing shareholder value since the taxes on the reduction is about 35% at top rate. Reduce liability by $1 pay $.35 in tax and be ahead by $.65 per $1 of liability. Its a good deal. Except for us.

I am not a CPA, but I do own businesses. The accounting is the same except for scale. And, you now know why businesses push gift certificates at cash value. If they want, when they sell one it is not income, it is a loan. They only pay taxes on the ones that are redeemed, carrying the others as a liability. They also put expiration dates for the same reason as it decreases the discounted book value and limits the potential liability from redemption to those sold in a specific time period. Granted, some small businesses just account for them in the regular cash flow. It is easier, and in the long run it is a wash tax wise. Either way, they make additional money on gift certificates as some are never redeemed.

texashoser

[QUOTE=Halo117;24387212]This is incorrect. Cash prices for fares are set by market forces, competition, etc, not with regards to reward redemption.

What Southwest is doing with these changes isn't at all hard to comprehend. Their bean counters have simply determined, at least for certain routes and flights, they aren't charging enough points for reward travel. They want to both decrease the amount of non-rev passengers for these flights and make it more costly (in terms of points) for those non-rev passengers.

Have they 'given away' too many points with credit card spend and bonuses, car rentals, and points earned by actual flights? Maybe. Did they need to reconcile that with higher redemption requirements for certain flights? Only they know.

What we don't yet is how many flights will see WGA redemption rates at higher than 70 points per dollar. Hopefully not that many.

What I see, though, is still a pretty good deal for me. When you factor in the 2x bonus for flights purchased with the RR Visa card, I'm getting a 31.4% return when paying for AT fares (also factoring 2x points with AL+) and redeeming at WGA prices. One $1,000 fare gets me $314 worth of travel. If planned well, that's a possible 'free' round trip with the purchase of one round trip. Does any other airline come close to that?

LegalTender

More like obviously. More than half of airline ancillary revenues result from the sale of frequent flyer miles:



I banked 180,000 MileagePlus points last year and haven't flown UA or CO since '03.

Flyers able to pay off their card balance every month are killing it.