Last month I wrote that Priority Pass brings huge passenger volume to lounges, at least in the U.S. where so many memberships have been issued to credit card holders. This is big business at an average of $25 per visit.
The small 3000 square foot The Club lounge in Phoenix has more than doubled the number of guests since Sapphire Reserve launched.
We now have a little more insight into the economics of Priority Pass for restaurants.
How Much Restaurants Get for Your Priority Pass Visits
Last year One Mile at a Time wrote that Priority Pass seemed to be reimbursing Timberline Steaks in Denver $24 for each $28 food credit.
According to Timeberline Steaks it’s $23, as they open the kimono on what Priority Pass has done for their business (and in ways that most certainly violates nondisclosure provisions of their agreement),
Last September, Timberline partnered with travel rewards company Priority Pass to give certain credit cardholders a $28 meal credit to use multiple times – the first DIA restaurant to do so. Nine months later, Timberline said the program is to thank for a significant boost in traffic: In May, rewards members accounted for over $400,000 in sales.
…Steinberg said the restaurant recorded about 6,000 Priority Pass check-ins during the program’s first 30 days last year. That number had tripled since then, with nearly 18,000 check-ins for May, or 38 percent of Timberline’s total business.
But the increase in sales doesn’t necessarily mean increased profit. The rewards program reimburses Timberline just $23 of the $28 credit; the remainder goes back to Priority Pass and its parent company, The Collinson Group.
“So from the front end, it’s bringing in a lot of traffic,” Steinberg said. “But if you’re sending out $5 per person back to that company, is it truly profitable?”
Is Priority Pass Profitable for Restaurants?
Priority Pass is now 38% of the restaurant’s business. $23 reimbursement on a $28 tab is an 18% discount, it’s not surprising that the restaurant’s biggest customer gets a better deal than retail. The discount cuts into profit to be sure but airport employees frequently receive 10% – 15% discounts at restaurants and these are all customers at the margin that the restaurant wouldn’t otherwise receive.
Of course if the restaurant is so crowded they’re scaring away full priced guests they’re made worse off.
Priority Pass Customers Don’t Tip Without a Nudge
According to Timberline’s manager the “restaurant credit can’t be used towards the gratuity” and that only 25% of cardmembers started out tipping, however they’ve since offered “coaching and printed notices” boosting tips to 75% of covers.
The Priority Pass website says “Any remaining balance cannot be used towards gratuity.” However when I was at Timberline Steaks in March I was going to separately tip but my server told me that the tip was included (I didn’t use my full $28 on food) and did not see any signs.
I think the issue here really is misunderstanding. If you’ve got a $28 credit you assume it can be used towards tip. The restaurant’s servers were similarly confused.
Will Timberline Steaks Stay in Priority Pass for the Long Haul?
The Timeberline Steaks manager says they may ask Priority Pass for an increased reimbursement when their one year contract ends in a few months. Denver will be getting a Plaza Premium lounge which will presumably be accessible via Priority Pass, and that may reduce Collinson’s interest in squeezing its margins on each visit. It will be interesting to see whether the Timberline Steaks relationship continues — at least past fall 2019.
Don’t have time to sit down and eat and use your $28 per person credit? Consider take away. Here are some of the other US airport restaurants where you can use your Priority Pass.
The restaurant should raise there prices to offset the $5. 400K in additional revenue from Priority Pass and You can’t find a way to be profitable?
Spending more than my share of time in JFK Terminal 8, and having a Priority Pass through Amex, this has been a boon to me and I’ve become a good customer at Bobby Van’s. These days, I would say that the number of Priority Pass customers is approaching 100%, and the place is constantly near capacity. While the food is still excellent for a lounge, its not that great for a proper restaurant, is badly understaffed, often out of basic items (i.e. hamburger rolls, bread, etc.) and I probably wouldn’t pay beyond what my cash contribution for a gratuity is to eat there. Still, its a pleasant place to sit and wait for your flight. If I was the real Bobby Van’s, and cared about how people viewed my brand and how the Terminal 8 affiliate affects my willingness to go to the real restaurants in Manhattan and the Hamptons, I would be very circumspect about it.
You can add MSP PGA in MSP Terminal to the list of airport restaurants accepting Priority Pass. The credit, however, is only $15 for food (from Ike’s) or golf activities.
Tips are essentially a way for the business to directly pass on their labor costs to customers. How novel would it be for them to pay the full cost of their workers and raise prices to cover what you’d tip. Then there’d be no confusion over the use of the $28 credit.
Although, if airlines enacted a tipping model for FAs, service would dramatically improve. Of course, they are only there for your safety.
I wonder what happens if your bill total is less than the $28. For example if you get something for $12. , do they still charge Priority $23 ?
@Andy 11235: “Tips are essentially a way for the business to directly pass on their labor costs to customers. ” As opposed to who? Name me a restaurant where the customer does not pay labor?
I was pondering the same as Jkca. My guess is that the restaurant is reimbursed $23 regardless of the amount charged (up to the $28). They may win or lose depending upon their food and beverage margins, as well as the actual amount spent by the customer.
As someone who has long dealt with restaurant/bar finances, I’m going to disagree a bit with the idea that $23 for $28 in marginal income is unprofitable. Though it is, of course, not as profitable as full price.
Assume 2 major revenue streams: meals and alcohol. For meals, food cost is never above 33% (unless you’re screwing up); labor cost is much lower thanks to US labor laws and tipping. $28 in meals should cost maybe $15 food/labor (probably less), leaving the rest for overhead and profit. I cannot speak for their restaurant or any airport restaurant, but $5 of the remaining $13 should still leave you a noticeable profit, if not a great one. For booze, the margins are far far better, meaning your $28 in booze is costing the restaurant $2-$9 before overhead, so PP drinkers are a huge boon.
Your point about opportunity cost is very valid, but given the basic industry numbers I’d hope they aren’t losing out by adding thousands of extra 18% discount customers to their rolls.
The $5 can be considered the cost of acquiring a customer (and filed under a marketing budget line). With Groupon offers and other “afternoon specials” and other deals that restaurants offer which can cost the restaurant probably more than $5, how is this deal unprofitable for Timberline?
A percentage of people may dine with family members who don’t have a Priority Pass card and right there, the restaurant is making their 100% margin on customers they may not have attracted.
What are we missing?
Thanks for the insight. I enjoy the look into the economics behind the scenes. But “Open the kimono”? It distracted from what was otherwise an informative article.
I expect that many people go over the allotted amount, which goes right to the restaurants. And the stat about tipping….way more tools out there than I thought….and that is hard to do.
@ProfitTom – its a restaurant, those don’t have great margins to begin with, plus airport fees.
@Vet&Banker – having operated in the industry as well, that 33% is ideal, there are numerous places above it – it’s bad, but it’s mroe common than you think. However, more critical is you miss the different (assuming) – airport – the airport fees alone are likely to account for anywhere from a few percent to 16% on top of rent. So the $13 you mention (which is really $8 based on the 23 they get and the 15 you mention as cost) is likely to be much lower based on revenue share. And when rent can exceed normal standards, the margin is lower.
(Admittedly, clearly business succeed in airports, but, there is a lot more too it so it’s important for those extra details to be known.)
Those small kiosk cafes (like Dunkin Donuts) you see in airports can run $12,000+ a month in rent alone.
@Mike – many businesses/restaurants failed as a result of coupon “marketing” – see above regarding other expenses pertinent to airport space.
I’m more curious how priority pass can support such high costs.
I ate there last week and tipped. I find it surprising that the majority of people don’t, especially when they are receiving such a significant discount.
Interesting article Gary. My home airport is DEN so I frequent the restaurant whenever it is open and I’m flying. I have always gone over the first $28 and have always tipped on the pre-discounted total.
Takeout: They were adamant that takeout wasn’t allowed. They wouldn’t even give boxes for leftovers for dining in. We’ve had different experiences at other places, like Miami.
@matt — Priority Pass is billing this back to the banks.
Gary, any idea what happens if you do not spend the full amount?
Last time I tried to use my Priority Pass at Timberline, I was informed of a whole host of new rules regarding the program. Amongst others, you are no longer allowed to get take out with the credit and my waitress refused to let me pack up any leftovers to go. They also now demand you inform them that you are using PP after being seated. The waitress implied that the program may not be long for use at Timberline.
Actually, the Priority Pass website specifies that take out is not available at Timberline: “The US$28 is valid for the purchase of any meal and/or drinks excluding ‘To-Go Orders’ and ‘D Bar French Macarons’.”
@gary – I understand that the banks ultimately pay – I guess the average utilization is relatively low per member. I’d expected a tad more commission/discount/lower operating expenses to priority pass I guess.
I visited a location at JFK for a can of COKE. I suspect something interesting was billed because I was not allowed to see the check or bill, I was just told it is all taken care of. Really expensive COKE, even for an airport.
@JKCA – I wonder what happens if your bill total is less than the $28. For example if you get something for $12. , do they still charge Priority $23 ?
Regardless of how much a customer ends up consuming (if it’s $5, $10, $15 or the full $28) Priority Pass will still pay the agreed upon reimbursement rate of $23.
We were just there this weekend twice (on arrival and departure) – my wife and I and our 6 kids. First time the server let us just register 1 guest on both my wife and my PP card (4 total). The $112 was more than enough to cover our bill (~$84). On our return Sunday morning, the server was adamant that we could not do this and needed to have all the guests accounted for. My Prestige allows immediate family, so I put my wife and 1 kid on one card, and I guested in the other 5 (8 total – $224).
Our bill was $71 so I am assuming that the Timberline will bill PP for 8 guests * $23 or $24 and make a healthy profit on $71 of food
They did allow us a to-go container for some of the fruit that we didn’t eat Sunday morning
I tipped both times
@Lucas: yeah, the airport fees are something I cannot speak to, as I noted. But still – if you signed this contract as a loss leader, that’s on you. 🙂
FYI – the post does not clearly state this, and the tag to other links is suggestive that you can order food to go from Timberline, but to-go orders are not permitted for Priority Pass under the terms. This was added, as was the specific reference to macaroons, after several months of Priority Pass acceptance.
Timberline wait staff were shockingly bad at DEN, not surprising some folks don’t tip.
Absolutely refused to box my leftovers to-go and was treated like second-class citizen immediately after showing PP card.
I tipped for my $14 hamburger and made a mental note never to return. I’m fine waiting in Denver’s AA or Delta SkyClubs without the attitude.
@gary
one question, if I have a membership through amex platinum, does it mean amex pays priority 27 bucks every time I visit?
if I visit 10-15 lounges a year, how is that worth it for amex?
tks
@DOUGLAS – for every one of you, there are probably 30+ who go to a lounge once a year, probably less, and are still paying the same annual fee to AMEX. They wouldn’t offer it if it was costing them money.
Re: tipping – I suspect those not tipping figure they aren’t(won’t) tipping inside the lounge. so why at the restaurant? I suspect this is more common w/ the infrequent traveler (I’d hope). And the reaction from the servers when they see the card are exactly b/c they know not only are they going to get hosed on low quality tip, but none at all.
I suspect they are ‘bad actors’ in all those PP restaurants. I bet there are a fair # of single ppl going (biz travel) who don’t spend the full amt. I would be willing to bet that person was charged far closer to “$28” than what they ordered….and being on a business acct. probably don’t care for the receipt.
As for the higher rent at airports, I believe that’s accounted for in their higher food prices from a $3 bottle of water (or more), the $14 burger, which is smaller and/or lower quality (using other restaurants as a gauge/experience) and that the PP customer are marginal customers they likely wouldn’t have had in the past. It’d be interesting if PP told THEM to go fly a kite if Timberland would be relieved or hopping mad PP didn’t renew after the bad reviews, complaining of internal business which should be private to padding the bill on those single guest visits.
Time will tell.