We know that overall passenger numbers are, for very good reason, down massively. But airlines have relied on their loyalty programs to provide a significant, and perhaps more importantly steady, stream of revenue for the operations. So, as the airlines use those programs to collateralize billions of dollars in new financing, it is worth considering if that revenue flow is as reliable as airlines (and debt holders) hope it can be.
Given the uncertainty in travel demand caused by COVID-19, we currently estimate a greater percentage of award redemptions will occur beyond 12 months.
– United Airlines Q3 2020 10-Q report
The dollar value of points being issued by programs is down compared to 2019, but not down as much as passenger revenue. Consumers are, generally speaking, still earning points in the frequent flyer programs at rates exceeding the precipitous drop in travel or travel spend. Considering that the points earned during travel are generally tied to fare paid this implies that an even larger share of points are being earned through third-party partnerships. That’s generally good news for the programs given the economics of those points.
But points being redeemed is down even more. Looking at the four largest US carriers so far in 2020 the drop off is massive. Delta Air Lines and United Airlines saw the dollar value of points redemptions drop below 10% of the 2019 levels in Q2 while American Airlines and Southwest Airlines fell below 20%. All four recovered somewhat in Q3, but the rates remain depressed.
This is not an unexpected development given uncertainty in the global health situation and generally suppressed travel demand. Indeed, the airlines acknowledge that points redemption is expected to remain massively down for at least another year. But that raises questions about what the points will be worth for consumers in the longer term.
If the deferred revenue value becomes too far out of balance the programs must choose to either reduce the consumer accrual rates (i.e. raise the cost of points or reduce earning options) or reduce the future revenue liability by adjusting the value of the points. United Airlines saw that spread increase by more than $600 million in the past year while Southwest’s margin increased by $850 million. American’s loyalty deferred revenue spread increased by more than $400 million and Delta by about $300 million. These changes come against balances that are typically measured in the billions anyways, so the initial shock might not be quite as bad as it seems. But if the spread continues to grow apace it could become a concern for the program economics.
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It was ~7-8 years ago when AA gutted their redemptions without notice (the first of many to follow). As a 20 year ExecPlat sitting on 1.2M miles, I learned the importance of ‘earn and burn’ the hard way. I even had to reorganize plans for a family vacation that I had planned later that year, as the devaluation was a surprise, and under the new math … the miles wouldn’t get me there. I was an IDIOT to trust that the airline had any sense of loyalty to their most frequent fliers.
Fortunately, as a small business owner, I found a good option, and paid myself back by burning those miles for business trips for pennies on the dollar. I feel vindicated as I cashed out / saved almost $40K in airfare, dropped my admirals club membership, dropped my status (except lifetime), and I hadn’t paid for an AA trip in 8 years. AA has definitely closed the loopholes that I was using for those redemptions, but they were good while they lasted.
Now, I pride myself on zero balances across my accounts and while AA is dead to me, I also have no loyalty for the other programs. I am a total free agent.
So, this article is interesting from the standpoint that I’m enjoying the schadenfreude, and eagerly await whatever further manipulation and chicanery ensues. :-D.
Seth -Appreciate you trying to apply lessons of financial economics to airline miles. However, these are not the same IMHO. The increase in liability on the books of the airlines is inconsequential to the debt in dollars they hold. That is because the debt for miles is completely under the control of the airline. While the airline has no ability to affect the debt in dollars they owe, they could (theoretically) wipe out all the debt for future obligations in miles by eliminating the program. They can also devalue that debt which we have seen happen on an incremental basis several times.
The airlines are more than happy to sell miles today and “pay” for those miles next Tuesday – my best Wimpy reference I have had in a while.
Glenn