Southwest sent out an email blast today to let its members know that it would be reducing the value of its points for their best use, “Wanna Get Away” or discount advance purchase fares.
There’s at least some notice given — bookings made March 31 onward will cost 70 points per dollar, rather than the current 60 points per dollar.
Southwest is a ‘revenue-based’ program with the number of points earned being derived from the price of your tickets, and the number of points it takes to redeem for a given flight depending on the price of that flight.
With this change each point will become worth 1.42 cents apiece. That’s a 15% hit to the value of Southwest points.
The Points Guy says “I wouldn’t call this a massive devaluation” — I disagree.
Yes, it’s “only” 15% and other airlines have done worse things to their award charts. And Southwest points remain hugely flexible since there’s no cancel and redeposit fee if your plans change.
However, there are two reasons that this is a very big deal.
- The new Southwest program (“Rapid Rewards 2.0”) is only 2.5 years old.
- There’s fundamentally no reason that a revenue-based program ever has to devalue at all.
We think of mileage programs increasing the cost of awards for one of several reasons.
- There are too many miles chasing too few award seats. They need to increase the price to balance supply and demand. But a revenue-based program has access to all of the seats on the plane, and those seats are paid for with fixed-value points.
- The price of tickets goes up. In this case, award pricing just keeps up with price inflation. But a revenue-based program like Southwest’s has this built in — more expensive tickets simply cost more points already.
- The economics of the program changes. Seats are costing the airlines more (such as a shift to more partner awards), or more rewards are being claimed at the rule-buster level and so the program increases the price of those. But the costs to Rapid Rewards are pretty constant since each point had a fixed value, and Southwest isn’t offering alliance partner redemption.
- Sticking it to your customers. They’ve built up a stash of points, and you can reduce your costs if you arbitrarily decide their points are worth less. And you hope they don’t notice enough to move the needle on their business.
I’ve offered explanations for why each of the first three reasons do not make sense in Southwest’s case.
A revenue-based program does not ‘need’ to devalue, but Southwest proves that one can. And in doing so they simply declare the value of their currency to be lower.
That brings to mind one of the greatest YouTube videos of all time which explains the federal reserve inflating the U.S. currency.
So why do they call it the quantitative easing? Why don’t they just call it the printing money?
Because the printing money is the last refuge of failed economic empires and banana republics, and the Fed doesn’t want to admit this is their only idea.
Southwest Rapid Rewards proves that even fixed value currencies can be devalued — they just declare that your points are no longer worth as much.
And in so doing, they categorize themselves with failed empires and banana republics. For shame.
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if enough bloggers and we tell them we are not happy with it. they will not do this
Really? That is easy!
I’d argue that even before the changes the amount needed to redeem with points was typically MORE THAN using revenue!
The greed in this is absurd
I am cutting up my credit card and not using the airline for family and friends anymore
I will use another airline
done
This might have to do with baggage fees. The other U.S. airlines have improved margins with baggage fees. Southwest painted itself into a corner with its your bags fly free stance. So, they might be trying to squeeze margin, that other airlines make from baggage fees, out of the loyalty program. And in general the airline has not been as profitable as in years past as the carrier matured and its model maxed out in the U.S. market. So, the loyalty program is low-hanging fruit for squeezing out revenue.
Good point Christopher
some don’t check luggage so why should those who don’t check subsidize the rest of the carriers passengers many of the legacy carriers are considerably less for a ticket on revenue and award since southwest started charging as if it has a first class cabin onboard
and the quality of service better especially when one has a seat assignment!
one thing we all know this is no longer anything remotely tied to anything called a low cost carrier
You are right, it is a big deal. It undermines trust, more than anything. I think it further proves the point, that if you don’t spend a ton on credit cards, you are better off focusing on cash back. That’s not to say, that dollar inflation will not occur in 6 months. But its unlikely, it will be 15 percent.
@Christopher Staab – they haven’t just maxed out the model they are no longer a successful commodities trading company. But baggage fees? Award tickets or paid tickets are the same in this regard. Dollar used to be worth a dollar, but come the end of March it will be worth 85 cents.
@Gary: my thoughts exactly:
What is the history on fixed-currency devaluation? The US Dollar already devalues with inflation and as the industry recovers, fares are increasing.
I was shocked when I got the email this morning. And this point sums it up:
“There’s fundamentally no reason that a revenue-based program ever has to devalue at all.”
If you understand economics, you understand that there is no logical explanation for changing the redemption rate in this program. (Unless, as some have theorized, they also change the earning rate — I doubt it.) The only real reason is, as you say, to stick to the customer. (Or because they screwed up when they designed the program in the first place!)
This move is very legacy-like. Years ago I would have said that it’s un-Southwest but I’m afraid we may have to retire that adjective.
Virgin America and JetBlue have revenue-based programs very similar to Rapid Rewards, in which both earning and redemption rates are linked to cash ticket prices. Both those programs pre-date Rapid Rewards. As far as I know, neither of those programs has devalued its earning or redemption ratios.
In a way, it’s good to have an early warning of Southwest’s intent to devalue its points over time. We now know that we cannot afford to save points for use years later, such as after retirement. We have been warned in time to avoid committing too heavily to the program, and it’s only costing us 14% of whatever points we can’t spend by the end of March.
My guess: Southwest ran too many generous bonus point promotions and someone belated ran the numbers. Rather than eat their mistake they decided to take it out of their customers’ hides. If decisions like this continue, at some point Southwest’s bank account of customer goodwill will become overdrawn.
I used to think that Southwest had a good understanding of the costs it was incurring for all the quick revenue it was raking in on those 50k credit card offers. Now I’m thinking they probably didn’t.
I think it’s a combination of Southwest discovering that its greatly hyped no baggage fee policy, along with its other no fee policies, which are to still be commended, has backed it into a corner from which the only way out is to raise rates.
Couple that with too many large bonus promotion deals and you have an airline looking at trying desperately to see where it can cut or generate income in order to meet its profit projections.
As Gary points out, they are no longer a successful commodities trader and their fuel costs are now not significantly lower than anyone else. It’s just one more reason that Southwest no longer resembles the Southwest of old. The price competition has all but disappeared unless you are in a market that is heavily trafficked and has more than Southwest and one other major airline serving it from other major markets, This price/rewards cut is not only one more example of that but it’s an unfortunate harbinger of greater cuts to come.
Not sure what the issue is here. This seems pretty simple
Southwest, like the rest of the airline and hotel industry realized that they are having fuller planes and thus less need to incentivize people to buy SW tickets. So they are decreasing the incentive to buy SW tickets
It doesn’t matter what your points/redemption model is. At the end of the day, an airline/hotel won’t provide more incentive that needed to fill up a plane or a hotel
Interesting to see that VFTW claims arguments that I have posted elsewhere before. A HT would have been welcomed.
Neverminds…
@Minos –
Thanks for commenting, though I am not sure what you are referring to, or even who you are.
You’re making a pretty substantial allegation, I think, and regular readers know that I cite sources and acknowledge when I get an idea or link from someone else pretty darned proactively.
I have not yet read anyone on the Southwest changes other than The Points Guy and Mommy Points — way too packed a day, in fact I am just now coming up for air out of my spreadsheets. If I missed something important, feel free to share the link.
Best,
Gary
Gary,
I think you responded perfectly to Minos! Kudos for a first class blog, and you do consistently recognize your sources. Great post, and I agree completely!
Mark
I think Rob has pretty much nailed this on the head: WN simply believes it doesn’t need to be as generous with its ff program as it used to be.
And, candidly, if a ff program is a prime motivator in your choice of airlines, you ALREADY are unlikely to be flying WN. When they went to a revenue system a couple years ago, there was no longer a way to get “more than they paid for” out of the WN program. So Rapid Rewards just became something you collected when you chose to fly WN — not THE REASON to fly WN. So why not devalue and increase profits? Your remaining profitable customers aren’t likely to care.
I tweeted my disapproval to Southwest.
Perhaps WN just realized that they didn’t set the value of points correctly in the first place. After 2.5 years they have had time to evaluate how their program was being used and how it was impacting their profits. I use southwest for short flights, because I think they have good customer service for a no-frills airline, and I really appreciate how few extra fees they have.
Hashtag: #NoLUVfromWN
Let’s let Southwest know how we feel
Thanks for posting the video – great explanation of quantitative easing!
All loyalty program points are quintessential fiat currencies. This is particularly pronounced with programs which, like, AC, have decoupled the points program from the mother company. Others merely recognize them as separate profit centers within one company.
Banana republics often must, as a response to populist demands, make local currency denominated commitments, avoiding the bite thereof later by devaluing. But, in time, the lenders become aware of currency risk and insist on future transactions be made in more reliable currencies.
At some level, award programs surely are business oriented enough (more so than banana republics) that they kill, or at least injure, the goose that lays the golden egg, when they devalue.
Spent on wanna get away fares, essentially provide 1.6666 cents – this may be so generous that people actually use them, reducing breakage. Face it, programs need some breakage to make them work. This devaluation may bring things into an equilibrium where highly active members still get quite a bit, but there is ample breakage to limit the cost to operating.
But as with all fiat currencies, buyer beware.
The semi-permanent double points promos may have been a factor too.
I think they misunderstood how customers behavior changes when you introduce revenue based earning and no award capacity controls. It doesn’t make sense to save miles as you get a flat rate for them, so if you have enough just use them.
@Nick
That is very true – Rapid Rewards might as well be used when you need to go from BWI-Buffalo – they are just money after all, and there is thus no point to hoarding them in hopes for F or C to Bora Bora.
There is no reason to devalue, I agree, AS LONG AS the market is free of Chase UR points! ( or whatever CC points)
So Southwest is having its cake and eating it !
So, abusing the Companion pass and stuffs are irrelevant? Is that why not talked about?
Could this possibly coincide with WN flying international next year (As in AUA, CUN, etc)???
That’s the difference between TPG’s blog and this one. TPG will go the extra mile to spin the message in a way that still gets people to apply for the Southwest credit card – in fact, he manages to slip in a link to the card in his post.
Gary’s doing no such thing. He’s calling the devaluation what it is, analyzing it, and not pimping a credit card to earn a commission. Keep that in mind when you’re reading the usual blogs for “advice” on miles, travel, whatever.
I’ve been hard on Gary in these comments in the past, and probably unjustifiably so because he’s pretty transparent in the funding of his trips, credit card links, etc. In reality, this blog probably has the most integrity of any of the major miles/points sites.
I think the devaluation had to do with WN not anticipation the increase use of award flights compared to the old model…the old way people would hoard certs for longer(more expensive flights) now with the new Rev based model, even if its a $49 ticket why not use the points….I think their flying a lot more planes full of award tix than ever before…lets hope it doesn’t get worse…
You managed to get an attack on the fed in this post. Why am I not surprised?
@Haldami – It’s just a classic, funny video with 5.5 million views that captures I think the devaluation of a reveue-based currency.
I do not think all of the criticisms of the Fed in the video are actually fair, for instance the Fed buying bonds directly from the Treasury would not serve its purposes.
Seems to be in line with the banks lowering fixed price redemption values. Amex dropped the value of points when redeemed for travel not long ago for certain customers from, if I remember correctly, 1.3 to 1 cpp. Citi is dropping the value of thank you points from 1.33 to 1.25 cents for premier card holders. Makes me wonder if some of this is driven by chase. I don’t know how much chase pays for SW points. But maybe like citi and amex, chase has decided the swipe fees are not sufficiently supporting the amount it pays for points and so is not willing to pay WN as much for points. It would be interesting to know what percentage of WN points are earned by credit card spend as opposed to flying. My guess is that it is a big percentage. If the Chase/WN deal is changing, that would explain the move.
Definitely one of the bigger devaluations over the last few years. I think a bubble chart showing the relative size of the devaluations by year would be really interesting – anyone know if there’s anything like that out there?
I’m thinking Hilton’s bubble would be the largest in 2013 (bubble size is in relation to devaluation amount). These last couple of years have been brutal for the game.
One good reason to hoard RR points remains to make “speculative” bookings when you’re not sure of your travel plans. The devaluation is a bit painful, but doesn’t change this fundamental WN competitive advantage.
It is poignant and appropriate to consider miles/points as a currency. The fact that as a fiat currency we expect it to remain stable and unchanging is fair. But as with nations, the *exchange rate* can (and sometimes should) fluctuate.
Doing so on a frequent basis (daily, as with actual national currencies) is ridiculous and foolish for any business. However, marginal and infrequent corrections to the exchange rate are reasonable. From our perpective we view this as a devaluation… I’m sure they just see it as REvaluation.
Thus far, Southwest has had their RR points “pegged” to the dollar (e.g. revenue price of tickets). As many have pointed out, they’re probably finding that flying 1, sometimes 2 (CP, anyone?) people, with no baggage fees, and no seat upgrade fees, etc etc is a losing proposition. It’s their own fault (or perhaps Chase’s?) for flooding the market with RR points, but the facts remain.
All they’ve done is adjust the exchange rate and re-peg it back to the dollar at the new ratio. That’s the REvaluation.
Am I in support of it? No, so don’t get me wrong. They just should have incrementally raised all ticket prices if they want a revenue increase, instead of explicitly targeting RR redeemers. It’s still revenue based pricing, but they’ve essentially said ‘We need to adjust ticket prices… but aren’t going to hit up paying customers. We’ll just adjust prices for the award ticket customers.’ (insert evil laugh)
This has clearly become the norm this year, with nearly every airline devaluing and ‘sticking it’ to the award flyers. And as one airline (or hotel) does “A”, so then do the others follow suit.
But, go back to Economics 101– finding the equilibrium for supply and demand is done, in its simplest form, by adjusting price. Since they can’t exactly change supply so easily… the way to affect demand/equilibrium is to change the price. And the price on WN just went up. 🙁