Introduction
I was literally in the middle of another post when I
realized I should write this post first. Several years ago, one of my favorite
blogs addressed
this question, albeit anecdotally. I thought I could shine a little more light
on this relatively unknown and misunderstood area. Most people I know are very
surprised when I tell them that you get better values on flights you want
through partners than on the airline you want to fly on. The best values are
often using an airline’s partner’s miles to fly on the airline you want. In
this post, I’ll explain the economics behind why airlines give their partners
better deals and give some common examples of the deals you can get with a
partner.
Types of Miles Given for Flights
First, let’s start at the very, very beginning. This post
will quickly go from Loyalty 101 to Loyalty 455, so bear with me while I get
the basics out of the way to make sure we’re all on the same page. When you
fly, an airline awards two types of miles: elite-qualifying miles and award
miles. The elite-qualifying miles are typically based on how far you fly, with
a distance bonus based on your cabin. Typically, you should expect a 50%
distance bonus for premium economy and a 100% bonus for business class
internationally. Obviously, these bonuses vary by airline and are not something
I’m ever very concerned about because I don’t buy business class tickets with
cash.
The second type of miles are the ones that we are most
concerned with: award miles. Depending on your airline, you’ll commonly receive
5 miles points per dollar if you have no status and it goes up from
there, typically 2 more miles per dollar for per status tier. As you know,
you’d be rewarded with greater award miles for more expensive flights. Buying a
$500 round-trip ticket (before taxes), would net you 2500 miles. This can be
greater than the distance of the route if you’re flying up and down the coasts,
but would be less than the distance, if you’re flying coast to coast (Seattle
to LA is 1100 miles, while New York is 2400 one-way).
Free miles vs. Paid Miles
When you are awarded points for flying, the airline
recognizes these as “free miles”, because they are giving them to you in
exchange for your butt in their seat. They cost the airline money. They need to
save a certain percentage of the value of your ticket based on the number of
miles awarded (cost) and the value of their miles. Airlines recognize this
liability as a cost of doing business, but would prefer not to have them, which
is why more and more often, they’re tied to the ticket price. If an airline
values its miles at 0.95 cents, for instance (which is probably a little on the
high side), then for each dollar you spend, they’re putting away a percentage
of that, which I believe is determined by the DOT. While not all airlines value
their miles the same amount, a couple of years ago, the DOT mandated that they
all measure them and calculate the liability the same way.
This is also why airlines let your miles expire. If they
allow them to persist, they have to keep them on their books as a liability. Expiration
dates vary but are as low as 3 months (Spirit) and 24 months (typical) to not
expiring – like Delta and JetBlue, and recently, United. The closer a program
is to “revenue-neutral” or “like cash”, the less liability an airline incurs,
so they can afford to let your award miles persist.
Starting with the creation of the Chase Sapphire Preferred
card early last decade, we have had the ability to earn flexible currencies and
transfer those to the airline of our choice. Airline loyalty has less to do
with it and flexibility is paramount. Banks will pay between 1 and 1.8 cents
per point, depending on the partner. In this sense, the bank is “buying” miles
from the airline. It is often better to earn airline miles using a flexible
currency versus using an airline co-brand card. Since the bank is paying for
the miles, these are obviously the preferred miles that airlines like to have.
They still must put the money away for liability, but they still also recognize
revenue. It’s important to note that for most programs, transferring your
points to an airline will reset the expiration date, because it counts as
account activity.
When you use your points to buy a ticket on your favorite
airline with your miles, your airline doesn’t get paid for that ticket. They
get to remove liability from their savings account of loyalty deferral that I
mentioned before. So when you use your points to purchase a 5,000 mile ticket
on an airline, they get to recognize a small fraction of what they could have
otherwise sold that seat for, which probably covers the marginal cost of the
flight, but likely doesn’t cover the cost of the flight if they could have sold
that seat at full price (the bid price). It also doesn’t cover what you would
otherwise have paid for that flight (dilution).
Low Level “Saver” Awards
This tension between getting a deal and displacing someone
who would have paid full price or paying more yourself is why airlines have
multiple tiers of pricing. The airline industry invented dynamic pricing in the
early 1980s and have spent nearly 40 years trying to figure out how to
personalize the system to the person to know exactly how much they’re willing
to pay. In the meantime, we have the current, still imperfect system that has
different price points and that’s a simplification of prices vary so much
day-to-day. As they’ve developed more advanced revenue systems, they’ve tried
to peg awards to the same revenue system, thus making them “revenue neutral” as
mentioned above.
The more points you redeem, the more liability they get to
remove from their books. Some are linked to the fare class, so there is “arbitrage”,
or the opportunity to get out-sized value from your points. Some airlines
knowingly build arbitrage into their tiers, while others do whatever they can
to prevent it at all costs and generally lock you into a fixed return. JetBlue
and Southwest have no arbitrage opportunities available to their average
members. Their points are fixed at 1.3 to 1.4 cents per point and that’s all
you should expect to redeem them for. Others, like United and Delta, have some
arbitrage opportunities, but you must go searching for them and they’re in
place differently. Alaska is an example of an airline whose strategy is to
allow some arbitrage, since it gives their miles extra value.
In most cases, an airline has multiple tiers based on the
selling value of the ticket, or the likelihood that the plane will sell. I’ve
never experienced this side of the equation and don’t understand when or how
they release saver space. At some airlines, it’s less complicated to predict
than others. If the fare that’s being sold is in a “low bucket” such as
something like K, G, T, and R, then you’re likely to see the saver fare. In
these cases, the arbitrage arrives when the ticket is in the highest fare
bucket of the tier. The number of points continues to rise as we move higher up
the fare buckets. Traditionally Y, M, and B are the fare classes where you’ll
see the equivalent highest charge for points. This likely means you’re booking
late in the booking curve and the flight is mostly sold out and / or there are
only a few days left before the flight. A fare class of Y typically represents
a full-fare, refundable ticket; in order to get an award ticket when only Y
seats are available will require the highest amount of your points.
This rule does not always hold true and I don’t know or
understand all of the exceptions, but it generally works for me as a quick rule
of thumb when I’m searching for an award. You may see a $250 fare and think,
“why is this 30,000 points? That’s bonkers. This trip isn’t worth 30,000
points!” You should check the fare class. You would need to look at the fare
class chart and see where it sits; it’s likely that this is on the lower edge
of the range that the airline set. The fare class corresponds to a few factors.
Primarily, how full the plane is. Each fare class has a certain number of seats
allocated to it. When those seats are sold, then it typically moves to the next
price range. To be sure, there are other factors that affect the price, but
projected demand is the primary factor.
Meanwhile, the prices and the award tiers are set
separately. A pricing analyst sets the fares for an individual market, but they
don’t set the awards for an individual market, those are mapped and then left
alone, for the most part. An inventory analyst will decide which fare bucket to
have open, again typically based on the projected demand for a flight and other
factors. The bucket that the inventory analyst has open will determine will
link to the mapped price of the award. This is where we can get outsized value:
high prices with low expected demand. This is most obvious with business-class
tickets. An airline may sell a business class ticket for $6,000 and have saver
availability open for 60,000 points. Business prices aren’t super dynamic – there
are typically only 3 or 4 business class fare buckets (J,C,D & I) , while
there can be 12 or more economy fare classes.
Why Partners Are Better
Now that we’ve discussed the airline economics of miles and
how award tiers generically function, let’s switch gears and discuss where you
can really get the value that makes this hobby worthwhile and why the airlines
allow it. Let’s say for instance, a ticket on United to Hawaii is $255 one-way,
and that’s in a low bucket, so their cheapest award or “saver” space is open.
That would cost you 22,500 one-way giving you a return (255/23000= 1.13 cents
per point). If you take that award on United, you’d be playing right into their
hands. That’s not a good deal.
However, as I’ll write more about in a separate post, one of
the best ways to get a domestic flight on Delta is through its partners Virgin
Atlantic and Flying Blue (the loyalty arm of Air France / KLM). While prices
are currently depressed, it may not make as much sense to purchase awards as
use cash, but the examples are useful for comparison.
For instance, you can transfer points from your credit card
to Virgin Atlantic, and get a seat for 12,500 points, when Delta would charge 21,500.
The fare for the flight below is $574, so already represents a great value of
2.6 cents per point; however, with Virgin Atlantic, you can get an even better
value! Transferring your credit card points to Virgin Atlantic will give you an
astounding 4.6 cents per point for an economy ticket.
Delta charges 21,500 points (above), while Virgin Atlantic
will only charge 12,500 (below)
So, why are partners usually the better deal? This is
primarily because the partner will pay the airline, vs the airline removing
liability. In general, an airline I know of looked at making saver seats
available as a marketing cost and with full planes, have to justify lost revenue,
believing that they would have otherwise sold that seat at the bid price (if
below their load-factor goal). In contrast (while the agreements differ from
partner to partner), partners typically have an arrangement to pay for
redemptions either based on distance or class of service, or both. While banks
pay the airline for the number of award miles transferred, an airline will
typically pay its partner based on a set price within distance bands and class
of service. So, whenever that low-level availability is open, the partner has
access to it and pays for it. That’s why it’s much cheaper than using
your SkyMiles.
Additionally, partners still have fixed charts for the most
part. While some airlines have stopped publishing their award charts, their
partners still have published charts on that airline, which means you know what
to expect. There are pros and cons to published award charts. They don’t have the
flexibility of revenue-based programs, so programs like Delta or United can
price their own awards in accordance to the price of the flight. If a flight is
$75, we may see awards available for 5,000 miles. However, if their cost of the
award surpasses the price of the partner award, then we get extra value.
Historically, there were two tiers to award charts – Saver Awards and Last Seat
Availability, these have been modified today, so that even the most lenient
airlines have 4 or 5 tiers, if they publish a chart at all.
Fixed award charts can potentially make your credit card
points that much more valuable. For example, American Express and Citi
frequently run bonuses with Virgin Atlantic. I recently made a Virgin Atlantic
purchase on Delta between Atlanta and Seattle. At that time, American Express
was running a 30% bonus on transfers to Virgin Atlantic. This meant I only
needed to transfer 10,000 Membership Rewards to Virgin Atlantic to get their
12,500-point ticket, instead of using 18,500 SkyMiles.
Likewise, last year my wife and I flew to Tokyo on Delta. At that time, American Express was running a promotion with Flying Blue for a 25% bonus on transferred points. We flew from Seattle to Tokyo and Osaka back to Seattle for 21,000 points per person each way plus taxes. Delta would have charged us 46,000 SkyMiles per person each way plus taxes. At that time, I never saw tickets on those flights drop below $2400, while we could have flown down to LAX and gotten a flight for between $800-1200, why would we fly 3 hours out of our way, just to backtrack? This highlights something I’ll have to discuss in a different post, but I value points at face value and don’t consider opportunity cost. Therefore, 2400/42,000 = 5.6 cents per points. Compared to the 96,000 SkyMiles Delta charges, I used less than that for two people!
Conclusion
Partners are often the best way to redeem your points for
your chosen flight. Whenever you’re looking for a flight, you’ll need to have a
flexible schedule or flexible choice of carrier but having flexible credit card
points are essential to finding the right flight. It’s important to understand
the partners you have access to through the transferable partners. At a
minimum, understanding the alliances each transfer partner belongs to will open
up options that you wouldn’t have considered before.
If you’re interested in making an award booking, I’m happy
to discuss your options with you for a small fee.
Posts
No comments:
Post a Comment