In the June 23 Airlines Confidential podcast, former Spirit Airlines CEO Ben Baldanza lays out his framework for the circumstances under which to expect airline frequent flyer programs to devalue. He sees strong airline credit card performance as working against devaluation, which I think is incorrect, and he sees the future of business travel doing a lot to determine the value of miles.
There’s going to be a repricing in most airlines’ loyalty programs..meaning how expensive is it point-wise or mileage-wise to get an upgrade or to get a free trip..is somewhat a function of how the miles or points are earned in the first place, and how the airline makes money when they issue the miles. Do they make money because you’re buying tickets on them to fly or because they’re selling them to a bank or whatever.
If people are earning more miles from a credit card or more miles from spending not on the airline, where all those miles are paid for from the bank, that might make it cheaper for airlines to say go ahead and take a free trip because I’ve been paid a lot for this.
On the other hand if people are flying less, and therefore earning points less often through their business travel and if business travel doesn’t all return that could be a real risk, I could see over time that the prices to buy things in these programs like free trips and upgrades could go up – because if people aren’t earning at the rate they used to they’re probably not going to be able to use the points at the rate they used to.
He predicts when airlines figure out what’s happening with business travel, that’ll tell them what changes they need to make on pricing.
Ben Baldanza wasn’t just the former CEO of Spirit Airlines, two decades ago he was Vice President of Marketing (with responsibility for loyalty) at US Airways as well. Before he was a guru of ultra low cost and low fare travel, he was the face of US Airways declaring that only full fare tickets would count towards elite status (a move the airline backed off of). He famously said that customers buying the low fares US Airways offered wasn’t necessarily the kind of loyalty they were looking for.
And I think he gets this one backward. The future of business travel isn’t going to have a lot to do with award price levels, outside of how it affects the flights airlines offer. It’s going to effect how airlines think about elite status – both qualification and benefits. But the way it might influence redemption pricing is,
- Airlines offer flights for business travel. Often these flights have empty seats, but they’re profitable from high fares paid by companies that are less price sensitive.
- Extra empty seats are great for saver award availability, as long as revenue management doesn’t think those same travelers would have paid cash for the same seat.
The quantity of empty seats on routes that customers want to spend their miles for influences award pricing to a significant degree. Reduced business travel might dry up some of those flights and seats.
Baldanza is right that selling miles is a higher margin business than awarding miles for travel. And an airline might spend more to ensure they can continue attracting that high margin business (devaluing credit card miles is a dangerous game, one that Delta has historically played well while United has not). But prices are fundamentally driven by the number of miles chasing a quantity of seats.
In that way, the more sold miles to third parties including card issuers, the greater the pressure on pricing – holding the number of seats available constant.
When airlines are growing, and aren’t filling planes, there’s more and more seats to be redeemed by passengers earning more and more miles. But when airlines are shrinking, or passenger demand for paid travel is taking available seats and airlines aren’t growing, it because difficult for customers to use their miles at a reasonable price.
- When airlines print lots of miles, devaluation follows. For instance United Airlines was exceptionally generous giving away miles when it was in bankruptcy, and months after it exited bankruptcy the new award chart came.
- When airlines are filling most of their seats with paid passengers, devaluation follows. Customers are either finding they can’t use their miles, or can’t use it at the prices they expect, so airlines balance supply and demand with higher overall prices.
Miles are a currency and work along basic monetarist principles. There’s nuance, of course. Since these are proprietary currencies with no central bank, there’s temptation to use the airline’s discretion to devalue more frequently. And that’s doubly true once a program eliminates award charts, so it can do so opaquely.
But it’s ultimately not business travel volumes that are going to directly drive devaluation decisions. Indeed, it wasn’t the expectation of an immediate snap back in business travel that caused United, Delta, or Southwest to devalue their miles during the pandemic.