Experts Are Predicting Frequent Flyer Apocalypse From Too Many Miles Chasing Too Few Seats

Lending Tree pitched research claiming that customers redeeming their frequent flyer miles for travel would use up all the seats on planes and there’d be nothing left for customers wanting to buy tickets with cash. That was a rather silly claim, but the underlying points are notable.

  • Customers built up mileage balances during the pandemic. That’s because they kept earning miles, mostly on airline credit cards (albeit at a slightly reduced rate compared to the Before Times). However they didn’t redeem their miles for travel like usual.

  • Now they have 10% more miles, and want to travel. There’s no discussion of why a 10% increase in miles is going to crowd out paying customers.

There are more miles outstanding than before, and fewer airline seats available than before. Domestic load factors are very high, comparable to the Before Times. ‘More miles chasing the same or fewer seats’ is a recipe for award price inflation. In fact it’s the basic reason that mileage programs devalue their currency.

The Lending Tree piece described mileage programs as a burden on the airlines, displacing the cash sales they really want and need. But that’s not right. The airlines have already gotten cash for these miles without having to spend to redeem them over the last year. Accumulating these balances without redemption pressure over the past year has been a windfall for airlines of sorts.

  • A 10% buildup in points balances isn’t nearly the factor that redemption of travel credits for trips that were cancelled during the pandemic has been, as discussed in airline earnings calls. That’s cash they’d received in late 2019/early 2020 that is being used for travel today.

  • These mileage buildups meant cash during the pandemic as banks continued the revenue streams. In fact, it’s precisely the resilience of these mileage programs that generated much of their liquidity. American Airlines raised $10 billion in debt against AAdvantage (after first pledging the program against its subsidized CARES Act loan from Treasury). Delta stopped around around $9 billion. And United’s debt raise against MileagePlus was closer to $6 billion. Between those 3 carriers alone the fact that customers kept using their cards was critical to $25 billion in liquidity.

  • Airlines have been thrilled with the deal of cash up front and delivering travel later. Think of it like Wimpy in Popeye (I’d gladly pay you Tuesday for a hamburger today). Southwest pre-sold points to Chase for $600 million during the fourth quarter 2020. That’s taking in cash up front for points that will be redeemed for travel later. That move shows they viewed the ‘cash first, travel later, perhaps in lieu of paid tickets’ as a win.

  • More broadly, airlines are flush with cash after $79 billion in subsidies ($25 billion of which was federal CARES Act loans). So the loss of ticketing revenue isn’t going to create a cash crunch.

On the other hand Dan Reed at Forbes makes the case that mileage programs are ripe for devaluation.

As a result, most airlines’ balance sheets, which thanks to all the borrowing they had to do just to stay afloat over the past 15 months of pandemic, and all the borrowing they were doing even before the pandemic to pay for new airplanes and other facilities, are now grossly overweighted to the debt side. And the cost of carrying all that debt – including frequent flier liabilities – means that the airlines costs, which are already high because operating even a discount airline ain’t cheep and oil prices are up significantly, are painfully high. And that will making a return to post-pandemic profitability even tougher for them.

So, what’s a poor, heavily indebted airline to do?

Devalue its frequent flier miles.

Reed makes the case that airlines can shrink their liabilities by raising the price of redemptions, so that outstanding mileage balances have them on the hook for less future travel. That’s not insane, but it’s also not the most likely scenario to play out (even the most likely one leading to award price inflation).

  • The value of outstanding mileage balances are dwarfed by total debt taken on by the carriers

  • Reed thinks doing this “will lower airlines’ financial costs some” but there’s no debt service to be paid on these balances (airlines don’t pay you interest on your unredeemed miles). They only need to pay off the balances as customers redeem. Devaluing does nothing to reduce their interest expense. It just pretties up the balance sheet a little bit, but doesn’t help the business.

Reed sees the risk in alienating frequent flyers with devaluation and says,

That’s why carriers will be reluctant to be the first to make frequent flier program changes that devalue their members’ miles. No carrier wants to lose even a few percentage points worth of its best customers because it made them angry by devaluing their points.

In fact, United and Delta both already devalued their miles multiple times during the pandemic – focusing on inflating the price of partner awards that they have to pay real money for (versus just moving money around on the balance sheet to fill seats on their own aircraft). Southwest did an across-the-board devaluation as well.

Now that airlines have moved towards more revenue-based redemption pricing, award price inflation is baked into the model. As demand rises and prices go up, so too do award prices for much of an airline’s inventory.

Ultimately it is never a great idea to save miles for the future. As I’ve recommended for 20 years, earn and burn miles in the same period so that you aren’t the victim of inflation. Your miles will almost never be worth more in the future than they are today. But if you earn them under one set of pricing and use them under the same set of pricing, you’ve lost nothing from such changes. And then go earn more again.

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, 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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  1. Any news on which airlines are sneaking immigrant children into Tennessee? Maybe that’s why there is no availability.

  2. Two comments –

    Agree tickets will cost more miles since it is supply/demand and no need for airlines to have saver awards or other promotions.

    Of course there will devaluations for both airlines and hotel programs. First of all there always have been. Secondly the combination of high sign up bonuses and larger balances due to less travel over the last 15 months will almost force the programs to raise the cost of awards.

    Just accept this as reality since there is no avoiding it and move along. Doesn’t do any good to get upset over things you can’t control. For those that say this will turn away frequent flyers/stayers they will ALL do it so no avoiding it.

  3. Basically you’re screwed, because it’s impossible in real life to earn miles “under one set of pricing and use them under the same set of pricing”: you need time to accumulate them, when you go to use them you find out there’s no availability, etc. etc.

  4. I’m with Sam
    After decades of accumulating many many millions of miles I prefer mostly cash back
    Delta started the cancer of massive devaluations long ago and United and American have mostly followed
    And the once great Alaska is laughable with their 80k one way wards in first class domestically
    Despite offering slightly better partner awards for international travel
    Covid did Alaska in with massive miles devaluation, cut backs to confirmed upgrades earned as an elite,, over pricing of flights and canceled routes as well as smaller aircraft
    Cash is king.I’m 80% cash back 20% points/miles

  5. Firstly, devaluation is the lazy way out and there is always blowback for airline management. There are other ways to manage the trillions of miles in existence that don’t involve screwing the customer.

    Secondly, banks won’t let them devalue by more than a small margin. If consumers stop believing in the currency value, they cancel the miles earning credit cards. Banks have too much invested in the co-brand portfolios.

    Effectively, banks could either veto a devaluation or force the airline to renegotiate (generally lower rates per mile) the co-brand contracts.

    For those reasons, as a FF miles collector, I wouldn’t be too concerned with a devaluation.
    The author of that original article is not an expert.

  6. They left out the huge impact of new flexible cancellation policies on award flights – how many speculative bookings that wouldn’t be made if there were cancellation penalties are eating up award availability?

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