Alaska Airlines is Making Too Much Award Space Available and It’s Hurting Their Business

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,

  1. Seats are redeemed for points that would otherwise have been sold for cash
  2. 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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. They have already stopped selling discounted miles when buying a ticket, it use to be 10K for $190.00 Having said that while in the short term seats are being taken off redemption long term the long term is they have depleted those miles off the balance sheet.

    Not sure AS is going to change their model too much they may tinker but it would take entering into a real airline alliance to do so, but then stranger things have happened.

  2. Huh? Have you tried recently to get award seats using AS miles and website? This is my actual recent experience!

    Routing LAX-BKK in business, gives you LAX-LAS-SEA-PEK-BKK with horrid 12+ hours at the atrocious PEK. Then, tried SEA-BKK to game the search engine and get my own flight between LAX-SEA, it gave me the following: SEA-LAS-PEK-BKK … really? As if they want to make your life miserable for redeeming AS miles! Wouldn’t it be cheaper for them to give us the fastest route to destination to minimize the usage (wear & tear) of the product.

    Also, fees associated with AS miles redemption are 10X or more than the fees charged on UA redemptions for the same departure/arrival cities.

  3. If AS is opening up low level award seats which they are reasonably certain would have otherwise sold to cash customers, then that’s definitely an issue for revenue management to address.

    However, I think there’s a big leap of logic if airlines believe that a passenger who booked with miles would have booked the same flight with cash if only the airline had refused to make saver level awards available.

  4. This is strange coming from the CFO of a publicly traded company — under new revenue recognition rules (ASC 606, or, for the non-Americans out there, IFRS 15 — they’re virtually the same), airlines have to account for mileage redemptions based on “standalone selling price” — which is, roughly speaking, going to be based on historical revenues for that redemption (i.e., if the customer had instead bought a cash ticket, what would you reasonably expect that customer to have paid?). Prior to this year, airlines could use the incremental cost basis, which reduced the values of both the liability for outstanding miles and the revenue associated with frequent flyer redemptions, because the “value” attributed to the miles redeemed would be based on the *marginal* (not average!) cost of transporting that passenger — which would make the hit to revenue much higher.

    I guess the fact that it occurred in the “peak summer booking window” might make some sense, as historically mileage redemptions tend to be made available for flights that aren’t too full/high-priced (since the airline thinks those flights are the ones that will have excess capacity), but it’s a little weird on its surface.

  5. I’ve been an Alaska Gold Mileage Plan Member for a few years now
    I give it an 8 out of ten stars
    The problems are charging elites for seat assignments due to letter class but having no correlation with price paid (on that alone I am considering leaving them as much as I love their business culture and service.Even with the merger there are many cities they serve poorly with no or very limited service only out of Seattle
    Their award availability sucks and they charge 30k to 40 k in miles one way for an award ticket in coach more often than not.
    Its BS IMO that they are giving away to many seats
    So much for the saver award seat!
    They get a fraction of avail award seats the big legacy carriers get with their massive alliances
    so though they may charge less for an award good luck booking it
    Added insult to injury you cant for example book a n American segment and a BA on one ticket causing members to book two separate awards.There likely goes the savings of their lower priced awards
    Some routes on their partners I’ve simply never seen availability for ever with Qantas and BA Though seats are readily available and plentiful on AA and BAs website and other One World partners
    Whoever these folks are that are gobbling up the seats good luck finding them when there isn’t any at the lowest level of redemption or flying at potentially odd hours
    I’m not fully buying the over redemption conversation when Alaska is selling seats 79 to 199 but when they let members redeem at 12,500 to 40k one way in coach they are losing money?
    Sounds like a bit of fake news to me!

  6. @AR – Delta and United have been accounting for the transportation component of mileage sales at fair value since coming out of bankruptcy. However neither has been saver seats available on all flights at all times. Airlines don’t want to trade off low mileage with paying passengers even under required accounting rules. This still represents less than the marginal paying passenger on a full flight by far. And more saver ivnentory can screw with breakage assumptions too.

    Furthermore they explicitly note AAdvantage member redemptions, and AA is paying less for award seats than the cost of paid seats.

  7. @Wes there are both elements they are trying to fight against, however when flights are full they reasonably assume the award passenger would have been a revenue passenger.

  8. If you’re saying as an airline that your mileage currency is just a cashpoint then why am I keeping your credit card in my wallet? Clowns

  9. I don’t understand. They said as members gobbled up the inventory. That means AS was compensated.

  10. I thought the traditional goal of frequent-flyer programs was to create loyalty, i. e. customers buy tickets on your airline rather than from a competitor, i. e. a competitive advantage.

    When delta went revenue based, it contended that change would increase revenue. I never heard an explanation but perhaps delta thought many who don’t pay for their own tickets (business travelers) would be less price sensitive if they were getting a personal benefit from having the employer pay a higher price sometimes.

    The current Alaska program is a competitive advantage. Tweak it, but don’t throw away that advantage.

    If part of the problem of too many redemptions was an unfamiliarity with Virgin America Airbus inventory, then it sounds like the dummies should have kept some knowledgeable VX employees around after the merger on retention bonuses at least. The question then becomes where else did Alaska underestimate the need to keep expertise from VX that might affect earnings?

  11. I loyally chose Alaska and their partners since around 1998. Reports from this earning call confirm that customer retention is worth little to top management.

    I’d carried a Alaska Airlines credit card for about 10 years. Those days are over. First it was BA fuel surcharges, then losing Delta/KLM and then I learned how much easier other airlines are to redeem miles.

    My days of flying Alaska/Mileage Plan member airlines are also over if another airline offers a better combination of route, time and price.

    Maybe someday marketing executives will learn that long-term customer retention is at least as important as customer acquisition.

  12. I’ve noticed on transcons saver award availability is significantly reduced from a couple of months ago and they raised the standard award from 60k to 70k.

  13. I have used AS miles in 2018 and 2019 for first class tickets on CP to HKG and JP to NRT. Great flights at reasonable award rates!! Since I am flexible and book early, the problem is not on the CP and JP flights, IT IS ON CONNECTING FLIGHTS ON ALASKA FROM FL TO THE WEST COAST THAT NEVER HAVE ANY AWARD AVAILABILITY IN THE “RIGHT FARE BUCKET. I am not questioning whether they have too much award availability, it is just not available for a premium redemption, and no one seems to have the authority to make a seat available to complete a premium redemption. Has anyone experienced this?

  14. There costumer service say they will look in to it but they will never do anything for you. Example I purchased tickets through there website paying extra for PREMIUM CLASS what a joke for an extra $295 per person and I got the same cattle car service, a small bag of trail mix on each four hour flight! Couldn’t even buy a drink, I was thinking is this like being in prison? I felt like a homeless person and the flight attendants were someone driving a high end Mercedes. If you would like to be treated like that Alaska Airlines is your next conn air!

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