Friday, March 31st, 2017, 11:24 am
One of the themes I’ve written about during my 13 years of blogging here is that the mileage game continues to exist due to it being a win-win-win situation.
-The banks need the airlines to lure valuable customers to their products and make massive profits from their credit card divisions.
-The airlines need the banks to buy their miles by the billions to keep afloat and rescue them from bankruptcy.
-Consumers benefit from the banks largesse and the airlines ability to provide aspirational awards at attainable pricing when there is distressed inventory.
Commenters over the years have taken issue with my right to complain about things going wrong when using miles. Even after we were marooned in JFK for a day, there will always be the commenters that say I’m taking advantage of the airlines by using miles.
But Bloomberg today writes what I’ve been saying for years. The airlines need the mileage game in order for the aviation industry to exist and thrive. They make more money selling miles than they do actually selling seats on their planes. That’s why mileage earning for paid flights has been devalued while mileage earning from credit cards continues to be enhanced.
They also have incredible leverage over the banks. If a bank loses a co-branded airline card it would be devastating to the bank. That means the airlines can demand high rates for their miles. It’s how Costco was able to squeeze Citi to offer free credit card processing in exchange for switching over their co-brand relationship from AMEX. That’s an incredible amount of leverage.
The Bloomberg article says that the banks pay 1.5-2.5 cents for each mile. Some DDFers say they would be shocked if they even pay a third of that. However it corroborates what a former Citi employee and DansDeals reader once wrote that Citi pays American 1.8 cents for each mile and I’m inclined to believe that banks do pay very high rates for miles in order to keep their co-brand business. That’s what makes me angry when American not only devalued their award chart, but wipes out the vast majority of their award inventory. Predictably, there were comments saying I had no right to complain. But at the end of the day it’s a 2 way street. I’ll focus my accumulation strategy on other airlines and in the end, the unfair programs will lose out on that revenue.
In November 2014 I ripped into El Al Matmid changes. The next day I got an email from Gal Egozi, Matmid’s business development manager and the face of the Matmid changes. We spoke for 90 minutes on a broad and fascinating range of topics, perhaps one day I’ll share a transcript of it. He tried to spin the changes as positive, but I wasn’t buying into any of that. The real eye opener is that El Al had no idea that the US airlines were doing so well specifically because of their mileage programs. El Al looks at Matmid as a cost center, which is why it’s such a poor program. With a little help it could be transformed into the same profit center that it is for the US carriers.
At the end of the day, there’s a reason you can still book a $30,000 first class suite for 100,000 miles, an outstanding value of 30 cents per mile. The airlines want to keep selling miles to the banks and if they switched to a flat 1 cent or even 1.5 cents per mile program, people would abandon ship in droves. Part of the lure is also the thrill of the hunt and the ability to come ahead.
Over the years the game has gotten tougher as banks and airlines crack down on the loopholes and the more lucrative parts of their programs.
At the same time we have seen new outsized value from hybrid cards like Sapphire Reserve and Business Platinum that give the ability to redeem points for a value of 1.5-2.5 cents each or the ability to transfer points into miles. By smartly using other cards from AMEX or Chase you can even earn 2-5x the points per dollar spent on top of those redemption values. In some ways that’s better than we’ve ever had it.
And so the game lives on and luckily for us, it’s quite sustainable. It evolves. It’s not as lucrative as it once was. But the ride goes on.
Long live the mileage game.