The Economist Issues A Warning To Frequent Flyer Programs

A devaluation of the AAdvantage frequent flyer program was widely expected. It didn’t happen (yet, and they say not for next year). There was certainly work done that would have meant devaluation of miles, but they’re out selling loyalty points to their partners who award redeemable miles for transactions.

The new American AAdvantage elite program awards points for flying, co-brand credit card spending, online shopping, Rewards Network dining, and SimplyMiles. That’s all the partners who have been introduced so far because the ink isn’t dry on other deals. American isn’t just ‘deciding which partners earn elite status credit’ this is something they’re selling to partners.

The bet is that ‘loyalty points’ doesn’t just recognize the airline’s most profitable customers in a well-rounded sense (credit card spend and ancillary revenue is higher margin than transportation) but that this will incentivize customers to earn their miles through partner transactions and drive additional revenue to the airline. It’s not just status that’s going to be earned this way, but total loyalty points in the trailing 12 months will be how upgrade lists are ordered after status level.

Devaluing the program when they’ve got a huge play to earn more revenue selling miles would have undercut the plan. But there’s another lurking issue. Southwest, Delta, and United all devalued their miles during the pandemic, and this is a money see, monkey do industry at least historically. But Delta, United, and American also mortgaged their frequent flyer programs for $6 – $10 billion apiece.

And now that financial institutions are involved, The Economist warns airlines against further devaluation for their frequent flyer programs.

…In 2015 Delta Air Lines stopped disclosing how the value of its miles was calculated and embarked on a series of devaluations, prompting competitors to follow. In the past year or so Delta, Southwest and United have devalued miles on major routes by 6-20%.

…The [debt] deals have attracted more investors than bonds secured by old aircraft (which, unlike loyalty schemes, depreciate). Scheme-backed debt tends to boast a better credit rating than the airline issuing it. And investors are comforted by the structure of the deals, which use the schemes’ cash flows to repay debt, and limit risk if an airline goes bust. Affinity Capital Exchange, a fintech firm, is working with JPMorgan to securitise air miles, so that they can be more easily traded.

The trick for airlines in all this is to balance the costs and benefits of perks so that customers stay engaged, while carriers’ margins are preserved. Endless devaluations could rattle that equilibrium and upset securitisation arrangements. Sky-high valuations are not assured.

(Emphasis mine.)

I’ve been warning this for some time. Thus far only Delta has really been able to get away with devaluations with no ill effects. They have such a strong brand and so little competition in many of their key markets like Atlanta, Salt Lake City, and the Upper Midwest (Northwest executives used to say of the region “it’s cold, it’s dark, no one wants to go there but it’s all ours). And most people don’t realize they can do better with Amex Membership Rewards cards even if they want to earn SkyMiles.

How far can Delta push it? It’s not clear. But the rest of the airlines aren’t Delta. Make the currency worth less, consumers chase it less at some margin. Reduced consumer interest is bad for the long run proposition of the currency, which is bad for the price of financial instruments derived from that currency.

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. Delta has devalued a hell of a lot more than 6-20%. What was once 100K SM’s r/t is now 640K in most cases in D1. Yeah, they have the occasional sale but Tuesdays to Spokane don’t cut it. I get that they have a relatively loyal customer base but no one should collect SkyMiles(anecdotally I’ve pretty stopped except where actual flying is concerned). AMEX non-branded and Chase(a bit of C1 now too) get my spend. Transferable currencies are not only easier to accumulate but, as you know, far more flexible.
    The loyalty program collateralized loans are being shaken.

  2. If miles are taken as an asset, then valued at a certain price, then once investors give you real money as a asset-guaranteed loan – company should generally keep the asset value stable ( devaluation can result in defaulting on a loan and loosing big money ).
    United devalued their miles greatly past year and as a result lost a lot of credibility and revenue, now trying to upsell their miles via bigger CC offers, but not many biting it.
    AA is still playing smarter, hope they stay this way for long term. SW needs to keep up their game by offering cheaper fares as on many routes tickets are upward $500 one way.
    JB so far is one of the best from customer viewpoint, plus keeps expanding partner options ( used to even have S.African as redemption airline before they bankropt ). Although they can lower awards for business class seats to 35-40,000 miles on some routes.
    And all travel loyalty programs need to go away from expiration policies. All earned and points should not expire.

  3. For our purposes, it makes no difference to those of us in the Miles and Points community as sign up bonuses have never been higher. The lessons are don’t be loyal to one airline and expect much from it and don’t hoard points that can be devalued. This is why I do wish for a jetblue type of ff program with fixed redemption value (with the occasional bonus) tied to fares. We know exactly what we can get and can earn through bonuses/spend/promos with certainty.

    It makes sense why airlines don’t value loyal customers as much. The business traveler who pays for coach and flies a few times a week isn’t really moving the needle and him being upgraded into first or international business from his status doesn’t make the airline money. It’s the same with hotel programs. Those who stay in courtyards 50 nights a year isn’t making the company enough to make them happy for the traveler to redeem at 5 star resorts with free breakfast and a suite upgrade for his family.

  4. @ Gary — The only brand-specidic loyalty currencies left worth earning are.Hyatt and Alaska. I guess American is good for a little while longer, too. The rest are too greedy for their own good. Not doing business with Marriott and United has worked out well. Haven’t charged anything not rebateable on DL cards in over a year. 16-year IHG relationship next for the circular bin.

    I look forward to just flying cheapest J/F and staying at Hyatt. Hyatt please keep up your great treatment of Globs!

  5. Frequent Flyer Programs are at essence privately issued currencies regulated by nothing other than market processes (and are even statutorily immune from intervention by the Courts in the USA). Really hardly different than the mostly unregulated private banknotes issued by banks that used to circulate in many places in the world (Canada, Scotland, Hong Kong, etc.). As we have seen in the frequent flyer currency market, the issuance of banknotes was always limited by the need for market acceptance, and the discipline it instills is much greater than any discipline governing the issuance of fiat Federal Reserve Notes.

    Anybody who suggests that Delta hasn’t suffered from its devaluations strikes me as somebody not too involved in the game. This site coined the term SkyPesos, and I know my consumer behavior was greatly impacted by Delta’s reputation for unreliability in managing their currency — I never bother with SkyMiles cards and have generally avoided flying on Delta in favor of alternatives despite an often better product. I think that LifeMiles offers another excellent datapoint and that Avianca has become as much of a financial services company as an airline – and my sense is that they are trying hard to restore their credibility as they understand the potential the way few airlines do, fighting well above their weight in the miles game.

  6. Loyalty is deader than fried chicken. First, the airlines, then the hotels.
    The bean counters have won.

    “How far can they devalue?” is a good question. The loyalty value proposition broke for me 10 years ago. I really wonder what their spreadsheets are telling them that I’m not understanding. I’m not seeing the value, except for betting on the irrational behavior of flyers.

    On that note, there was a day where I’d irrationally connect all over the place and drive ALL of my corporate travel spend to one airline (AA), both because of the loyalty benefits, but also because it was straightforward to redeem points for personal travel. All my hotel spend was through…I never looked anywhere else. Today, I’m Lifetime Platinum with AA and Lifetime Titanium with Marriott, but over the last many years, they get less than 5% of my spend. I’m not seeing the win for them.

    These program changes have definitely changed my behavior. I have credit cards with convertible points (typically spent via Chase travel for 1.5x), and as a non-hub flyer, I buy on convenience (nonstops, good price for discounted first) and low friction (quality of product and service). Schedule/options are important, but not if your operations are a trainwreck (i.e. AA).

    I’m traveling the week after Thanksgiving, stopping in 4 cities. I’m on 4 different nonstops, 4 different airlines, and each leg under $150. Checking AA, that would have been a $2,500 itinerary.

    I’ve got the popcorn out…it will be interesting to see what unfolds.

  7. United has devalued its miles a lot in the last few weeks and months. We’re seeing one way 395K business awards to Europe.

  8. Delta miles are a curious beast. While the sweet spots for certain travel give outsize benefit and value.

    I’m doing NYCMUC in Feb. I ski. 23,500 miles + $150 or $900. SWEET.

    Yes I know I could convert MR to get the same deal but deltas devaluation is not all devaluation.

  9. I have one airline card, and I only hold it for the benefits. You can do much better with a Citi DC + 5% cards and invest the rewards in index funds.

  10. if you are looking for a rebate program with a fixed / well-defined return, than the banks win all the time. Now with AmEx. Chase, and Capital One + priority Pass are also operating or opening up lounges in airports and their premium cards provide additional travel benefits vs. airlines. CC rebates are fixed and not subject to a rapid devaluation as frequent flyer miles (and you can still transfer miles just before the redemption if you find a better deal). Then I would be rather loyal to AmEx or Chase rather than AA.

  11. @John, That may be true going forward, but we’ve flown about ~500K miles each in business class on awards in the last 20 years. (I’m guessing Gary has even higher numbers) That’s in addition to paid miles on various airlines, often upgraded using miles or status. So there was some significant value here. I suspect I couldn’t have got the same with a 2% cashback card.

  12. Now imagine if people realized the Fed is doing this with USD. In the last 2 years, they printed 40% of all total US dollars ever made.

  13. “United has devalued its miles a lot in the last few weeks and months. We’re seeing one way 395K business awards to Europe.”

    Very true — yet not a single one of the card-shilling blogs have said one word about this.

    A few weeks ago United’s program went from one of the best, most consumer-friendly, to one of the worst (giving Delta’s SkyPesos some competition for lowest value currency).

    Go look at what United has done to redemption costs. It’s breathtaking. But not a word from any of the blogs…

  14. I’ve switched to the 2% cash back fidelity card as of this year. Part of that is the difficulty of finding tickets for a family of 4 compared to when I was single a few years ago but devaluation was the major reason. If you’re only getting a value of 1-2 cents per point why tie it up in a loyalty program compared to cash you can use on anything?

    The old programs sold the dream of premium travel that’s too expensive for me to buy on my own. They did live up to the promise with multiple business and first class flights around the world for me. I had a great American Airlines 220,000 mile redemption about 10 years ago for 16 or so business class flights around the world when I took 2 months off between jobs. In the new programs if all I get is a free flight that I can buy for $500-$1000 isn’t the same.

  15. The comments about United are spot on. Dougie is not known for pampering fliers but now he might realize that by devaluating he may be the only major left that has a chance of keeping loyal fliers. Skypesos are trash. UA miles have become Zimbabwe dollars.

  16. Mike, you are 100% right. The Fed makes the airlines look like the model of stability. However, that’s a pretty low bar not being worse than the Federal government. I think the CC companies have realized that if they invested all the money they pay to airlines to buy their miles into service benefits for the travelers that they will make better margins on these cards & the customers will be happier. There is some small advantage to higher boarding groups, etc. for frequent fliers. I gave up on domestic upgrades when I was double the miles of Exec Platinum and still couldn’t get upgraded so that’s almost no benefit unless you’re paying way too much for tickets.

  17. 1) I have redeemed a ton of SkyMiles this year (ranging from short domestic flights in coach to round trips in D1 to SF and Zurich). Redemption values have ranged from 1.25 to 1.5 cents per point. I actually need some more SkyMiles so I will be ramping up spending on Amex Gold and Delta cards. Burning SkyMiles has been pretty easy recently. I earn at least 100,000 flying a year and would like to add another 100K to 200K next year if possible…

    2) People whine and moan about Delta, but in actual competitive markets (New York, Los Angeles), Delta always competes very well. People with actual choice of airlines very often choose Delta over other options. The market speaks for itself.

    I know Gary and others dislike Delta, but I would love to see one of these blogs post more analysis/updates on Delta like Gary does AA and Matt Klint does for UA…

  18. The only brand-specific points and loyalty worth having are from Hyatt. Everything else is near worthless, and even worse, infuriating to use. Other than Hyatt, I am a free agent when it comes to travel, especially airline because all three majors have turned their loyalty and miles programs into Monopoly money. Ditto on branded credit cards (except Hyatt).

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