When laying out the reasons why American Airlines devaluing AAdvantage program could be bad for its business I noted financial disclosures they made to investors when raising debt backed by their loyalty program.
Taking their self-reported 52% operating margin for the program, I backed into what it cost for American Airlines to ‘produce’ a frequent flyer mile and estimated 70-75 basis points. But I didn’t show my work.
- Up through the American Airlines 2016 10-K filing, they used to disclose not just how much money they generated from mileage sales but also how many miles were issued, how many of those were sold to third parties, and how many miles were outstanding – among other rich data.
- American was consistently generating revenue of 1.2 to 1.3 cents per mile on average.
- We know that their co-brand renewal with Citi and Barclays increased the amount those banks were paying for miles. American is also now selling Loyalty Points (and the cost quoted to new partners is a multiple of the cost of a redeemable mile).
So it is reasonable to assume that American is generating 1.4 to 1.5 cents on average. A 52% margin on 1.5 cents would mean costs of 72 basis points, smack in the middle of my 70-75 basis point estimate.
Is it reasonable to assume costs of 1.5 cents per mile? As a rough order of magnitude I think so.
- That’s likely around what bank partners are paying for miles rewarded for spending. The cost of miles for initial bonus offers will be lower (American effectively ‘partners’ on acquiring customers, since those customers will go on to drive mileage sales to banks).
- The cost of miles sold to American itself are lower – they book one cent in transportation liability for each mile awarded for tickets flown. So one cent per mile for initial bonuses, and for SimplyMiles bonuses (which is a joint venture with Mastercard) seems reasonable.
- On the other hand other mileage sales raise more per mile, and there’s a lot of other miles being sold (AAdvantage generated $538 million selling miles directly to members in 2019!).
While this is back of the envelope math, I think we can assume that a mile costs American AAdvantage somewhere around $0.0072 to produce.
And the estimate isn’t that sensitive to assumptions. For instance if they’re generating 1.6 cents per mile on average, a mile would cost them $0.0077 to produce. And if they’re only generating 1.4 cents on average, a mile would cost them $0.0067 to produce. Printing miles seems a lot better than mining bitcoin!
American claimed higher costs and lower margins for Delta and United in their competitive analysis shared with frequent flyer debt investors. At the same time, United and Delta accounted for revenue and transportation cost differently until American’s 2018 adoption of accounting standard ASC-606, and the data on their competitors American referenced wouldn’t have fully captured United’s or Delta’s new co-brand deals.
Notable American explicitly argued that they could preserve margins by devaluing their program, i.e. their business model gives them the “flexibility to control costs and preserve margins.” They said this publicly, and we should believe them.
Gary, why wouldn’t their margin be the sales price 1.4-1.5/mi minus the open liability of 1.0/mi on their books which indicates a GROSS sales margin of 28.6 to 33.3. From that they have some selling and marketing costs which produces a lower net margin. They have further margin erosion when they award miles for screwed up flights and customer satisfaction complaints (heavy lately)
To get 50% margin they would have to devalue miles by about 40% which reduces their open liability or have 40% in unclaimed miles.
Looks like magic book keeping to me.
It doesn’t matter anymore. AA is not concerned with their customers. All they want to do is screw their loyal customers. 400K for a one-way business class ticket to Europe?
I don’t think so, Scooter.
If the cost were 0.72 cents/mile then how is Bask Bank sending out 1099s at a rate of only 0.42 cents/mile?
Alan, I’m on a 115k mile round trip to Europe right now, and have another one booked in February for 130 or 140k miles.
How exactly is American screwing over their customers? The occasional outlier is not relevant. The average is.
Has anyone checked R/T award business class tickets to Australia or New Zealand lately?
Did AA refund Citi and Barclay for all those miles they confiscated when they ran their great purge? How many millions in mileage liability did they wipe off of their books? No doubt in my mind the entire purge was one of the great thefts within the industry. Get paid by CIti, Barclays for something that you can just steal from the owner at your leisure.
@Alan does not realize the average frequent flyer award for USA based airlines is a domestic one. For that, AAdvantage is heads and tails better than DL and better than UA. Yes, UA is likely your better program for international premium cabin awards, but only because even when they don’t have Saver availability they will only charge you say 200K one way in business class instead of 240k. Delta’s program is total garbage for any awards now. I’ve got to wonder it will eventually start to hurt their earnings from American Express buying their miles for their cobranded credit cards. People who are not seeking elite status renewal will quickly realize they are better off using a 2% cash back card vs earning SkyRubles.
The average flyer does not realize the opportunity costs of FF miles vs cash-back; nor do they want to waddle into the calculations. Airlines will just cut, cut, cut 1% at a time as long as they can get away with it.
I know I’m in the minority on this blog, but I still argue cash-back into a brokerage account or IRA will do you far better long term than chasing points and praying award space is available.
Makes sense but I’m going to guess that a decent portion of those $ 538 million miles sold are done at artificially inflated prices. For example, selling some chump 2,000 miles to complete an award at much more than 1.5 cents or people buying the extra miles sold through bookings at much higher rates because they can get them redeemed through airline credits or expensed through business travel. This doesn’t include transferring miles or paying handling fees for miles.
@Ed RT to Oz
I checked a few weeks ago for a RT business to Oz. In 2019 it was 250k RT. When I checked two weeks ago it was 980k for one ticket. This is for a reservation made Aug of 23 and staying for a month.
Pathetic. AA has gone above the pale in screwing their customers. I have been saving for a long time, was almost there for 2 tickets, before the increase, now not in my lifetime will this take place.
Even better they have upped the Gold level by 10k. It’s almost as if they are making it impossible to even achieve, but then again once you get status upgrades are very rare.
@Ed RT to Oz
I checked a few weeks ago for a RT business to Oz. In 2019 it was 250k RT. When I checked two weeks ago it was 980k for one ticket. This is for a reservation made Aug of 23 and staying for a month.
Pathetic. AA has gone above the pale in screwing their customers. I have been saving for a long time, was almost there for 2 tickets, before the increase, now not in my lifetime will this take place.
Even better they have upped the Gold level by 10k. It’s almost as if they are making it impossible to even achieve, but then again once you get status upgrades are very rare.
Nothing new for AA.
@ Gary Leff
Oh, such a confused article.
C’mon, Gary, get your ideas and narrative into a digestible form, that is if your own mind is even clear about what you’re writing about in the first place.
For example, in one moment you are talking basis points, in another breath quoting per dollars, and in another breath quoting per cents. For starters, give your readers a chance and quote your math in a common format. Basic editing, basic communication, basic respect for your breeders (LOL).
They’re not all accountancy types with very superficial notions about economics like your good self.
Then give your readers a chance to follow what you mean by “cost to produce”.
Do you really mean cost to produce a mile / point or do you mean cost to manage / market the loyalty program, or do you mean cost to deliver the redemption or do you mean both (net cost)?!
Readers of travel /loyalty blogs will be used to the concept that the revenue per mile is divided three ways (redemption cost, marketing/operational cost, and profit) – that three-way split is more in line with the comments by @ Paul above than what you have written – idealised to a gross profit of about 34% against costs of 33% and (deferred) redemptions costs (per accountancy rules) of about 33%.
Isn’t accountancy / finance stuff your field?!