In the Alaska Airlines second quarter earnings call on Thursday Executive Vice President and Chief Commercial Officer Andrew Harrison noted that award redemptions spiked after combining Alaska and Virgin America into a single airline, “we had a significant increase in award travel following our conversion to a single reservation system in April.” He reported “redemptions grew by 22%.”
And he reported that waws too generous, that Alaska needs “to balance that with the revenue dilution it creates.” Revenue is diluted by award redemption when either,
- Seats are redeemed for points that would otherwise have been sold for cash
- Customers use miles who would have otherwise paid cash
The traditional goal of frequent flyer program saver awards was to make seats available for redemption that would have otherwise gone empty (very low marginal cost) and ideally even for incremental leisure travel with points earned through business travel.
However with airline load factors up across the board, there just aren’t that many unsold seats. So some airlines have moved to a more revenue-based model for redemption, where points have a certain cash value towards fares. That’s clearly the Delta model, and it even seems American’s opening up of connecting coach award seats is related to this as well.
Alaska’s model is more traditional, though they were one of the first carriers to offer more than just two redemption levels for their own flights. So they’ve “already made the adjustments necessary to award seats and redemption prices” to they expect the “impact of higher award redemptions will moderate by the fourth quarter.”
June 5 Alaska imposed tougher change and cancellation policies on both paid and award travel, and June 25 they tweaked the pricing of awards for travel on their own planes with some reductions in short haul awards and increased pricing of long haul awards.
Half their revenue decline in existing markets came from an increase in award travel, and this was three times as much as they had expected,
I’d like to provide more color on our results, roughly 3 points of our 5 point RASM decline was driven by same-store markets and the remaining 2 points resulted from new markets and I’ll address each of these separately. First, same-store markets or markets in operation longer than 12 months, 1 point of the decline came from the shift in the timing of Easter, while another 1.5 points came from the increase in award redemption activity I just mentioned. And while we had budgeted for 50 basis points of dilution from award travel, the rapid acceleration in redemptions in May and June led to an additional 100 basis points of impact. Based on the redemption demand we see in our bookings for the remainder of the summer we expect this 150 basis point headwind to continue into the third quarter, but then moderate after that.
Analyst Hunter Keay from Wolfe Research asked who is doing the redeeming, that it’s not just Virgin America customers burning their account balances and walking away from the combined airline.
Harrison explained, “we have a very generous loyalty program. The problem was, we were just way too generous” after integrating Virgin America.
- Saver redemptions “were up 40% year-over-year.”
- This happened “right in the peak summer booking window.”
- Alaska Airlines is used to managing inventory on its fleet of Boeing 737s and its own routes. They brought Virgin America onto that platform and misjudged legacy Virgin America Airbus inventory.
- American AAdvantage members gobbled up the inventory.
There is some potential that Alaska moves away from its traditional award availability model and more towards the rest of the industry, as Harrison explained in a response to a question from Stifel’s Joe DeNardi,
I think the industry right now is basically indifferent [to selling a seat for miles versus cash]. I would say we are not at that place although we are continuing to work on how indifferent we do plan to be as it relates to loyalty going forward. So we think we have the best of both worlds right now.
I certainly hope Alaska Airlines doesn’t become more like the rest of the industry. It’s competitive advantage is precisely in remaining different, though they’ve been telling us to expect them to become more and more like their rivals.