The Secret Economics Of Airline Miles: What Banks Really Pay Vs. What You Think

One Mile at a Time speculates on how much banks pay airlines for miles. I thought I’d add some additional context.

He suggests different programs charge different prices, and that banks pay less than airlines charge consumers. IHG charges customers as little as half a cent per point, and Hyatt points are worth far more – different values of points imply different prices, and different volume buyers get different deals. He suggests that,

  • “the average redemption costs for transferable points aren’t more than a cent per point” which I do not believe to be correct.

  • and that Hyatt charges 1.25 to 1.5 cents per point. I’ll confirm that Hyatt points are among the most expensive for transferable points programs to buy.

One of his commenters wrote, about the price of points:

Most of it is artificial. The sale of points to the banks is genuine income.

But the sale of points by the Loyalty subsidiary to the Operating Subsidiary within an airline group has no actual reality, and is at a price the airline group chooses arbitrarily (higher to justify the charging to the banks?!)

The airline groups tend to overprice these to create apparently profitable subsidiaries to which the investment bank analysts ascribe higher values, and of which they sometimes sell part (or all) to raise cash.

This just is not quite correct, and leads me to want to clarify a bit about how programs account for the points that they sell.

  • Airlines generally charge partner airlines less than they do banks, and they charge themselves less as well.

  • What this commenter may be thinking about is that the amount of liability for future travel booked when an airline passenger earns miles for flying is greater than the liability booked when that mile is earned via credit card.

  • The reason for this discrepancy is simply that the accounting rules are different. When an airline sells a ticket and awards miles, they are required to split the revenue between current travel and the future travel those miles represent. Hence assume they book around a penny per point to cover future travel.

  • When they sell miles to third parties there is greater freedom with the accounting, to allocate revenue things like the airline’s brand, customer list, current benefits like priority board, as well as future travel. Assume they book around 1/8th of a cent in liability for this

  • There is also not one price charged to banks. Generally an airline will charge less for initial bonus miles versus miles for ongoing spend. That represents the airline partnering on card acquisition costs, since adding cardmembers benefits both airline and bank.

    The specific arrangements vary but on average think that a bank might pay a penny per point for initial bonus, 1.5 cents for ongoing spend. There are other discounted elements too, think the American-Mastercard partnership with SimplyMiles and bonuses run on the site.

When airlines raised debt against their frequent flyer programs during the pandemic we learned a lot about their internal accounting for these programs. American represents that AAdvantage has a 53% margin, while Delta shows 39% and United 44%. But much of this variance is just a function of how much the airlines are charging programs for seats.

A year ago I explained how much it costs an airline to produce a mile. American Airlines, for instance, atttributes a cost internally of around 74 basis points per mile and generates on average 1.4 to 1.5 cents per mile they sell to partners.

Banks are paying more for miles than One Mile at a Time thinks, but co-brand partners aren’t just buying miles they are buying benefits for their customers (like priority boarding) and use of the airline’s brand.

Although pricing does vary – transfer deals are different and negotiated bilaterally but may be facilitated by a company like points.com or Kaligo. And in the past Points in some cases would even guarantee sales to an airline for a discount and mark them up in sales to consumers.

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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  1. There is no way in hell Chase (among others) are paying more for points than what they value their own points at (giving a redemption ratio of 1:1).
    If you think that Chase is buying e.g. Mileageplus Points at 1.5 cpp, I have several bridges to sell you.

  2. If the banks pay 1.5 cents per mile for ongoing spend, how does it pencil out for Cap1 where you earn 2 points per $ spent?

  3. You can actually calculate the upper limit for the cost of airline points paid by the credit card company.
    Let’s assume the following: a barebones card with no annual fee and no benefits, except for accruing say 2 points per dollar spend. The swipe fee is 2%. That means that for each $100 transaction, the customer gets 200 points and the credit card company gets $2. Therefore, the credit card company cannot pay more than $2 for those points (1 cpp) unless it wants to go bankrupt. And even this number implies that everyone works for free at the credit card company (good luck with that). So, in reality the acquisition cost per points must be WAAAAY lower than 1 cpp.
    Also note that even if there is an annual fee, that fee will be negligible when spend goes up exponentially. In short, you cannot spend more on acquiring points than you receive in swipe fees.

  4. Points/miles have been devalued so much they are now valued at about 1 cent. I don’t think there is a bank stupid enough to pay that much as their internal programs value bank points at 1%.
    I’ve switched to cash deals especially transferring brokerage accounts between Wells Fargo and Chase and pick up $4,000-$6,000/year. Yes it’s taxable but for lower bracket folks it’s a better deal and when you throw in a few $500-$600 cash credit card bonuses. Who needs any frequent flyer program? Just pay cash for the lowest price bus ride.
    It’s impossible to devalue CASH.

  5. I find it very difficult to believe that banks are paying 1.5cpp for airline miles, especially ones they buy for the purposes of covering their customers transferable currency transactions…for the simple reason that if it was so expensive, they would offer much more generous other cashout methods for their own transferable currency, since even a 1.4cpp cashout rate would save them money. I tend to think they are buying them for a hair over 1cpp, maybe around 1.1cpp, since 1cpp is what they are happy to cash out their own currency for (in most cases).

  6. @ Ed – You leave out interest in your calculation and banks make a lot more there than in swipe fees.

  7. There is an accurate way to calculate the cost banks pay. The credit card interchange rates charged are approximately .6 cents per dollar higher on points/miles cards . It’s fairly consistent across all types except Amex who sets their own fees.

  8. @ Gary — Those banks won’t be spending nearly as much once the CCCA passes, which is only a matter of time. Burn your miles now. I am done gving more cash to airlines and for big credit card fees. Game is nearly over.

  9. @Paul, if you believe that cash cannot be devalued, you have somehow missed the news about inflation over the last two years

  10. @Gene, if the banks won’t be buying and giving out so many points, then the points are liable to become more valuable (less points chasing each seat or room), not less, so you should hold onto your miles, not burn them

  11. @Gene
    Be careful what you wish for. You leftists never think of the unintended consequences. You think banks will suddenly just become nonprofits? Nope, they provide a service that both customers and vendors willingly pay for, and there is plenty of competition in the payments space. You restrict how much they can make in swipe fees, they will just charge merchants more directly in other ways, which will most certainly impact small merchants more than big ones. They will also charge end users more in other ways (AFs, penalties, etc). They will of course cut the cash/miles back and signup bonuses, but will also restrict more who they will lend to, since they can’t make much off your spend…hurting the most financially vulnerable. So nice job protecting small business and the poor. As usual, your proposals do the opposite of what you think it will.

  12. @paul. I agree with you . For many cash is the way to go. I will still have cards that generate me 3X-4X for business expenses that althoguh they are nto cash, on some ways can be used as cash for example Chase for paying down meals. Signup bonuses are still lucrative for those who want some air travel and hotels. Most of my personal spending is on cash back.

  13. @farnorthtrader and others. What he means is that overnight the cash back he generates cannot be wiped out like a Delta award going form 50K one day to 100K. Thats a devaluation. Or a hotel redemption going from 30K to 40K points a night. Thats a 25% move right there. I wont even mention what Marriott has doen since they took over Starwood. Few will argue (at least successfully) that inflation is anything like the devaluation of award programs. There are always sweet spots and strategies. There will also be people bitter that they cant book any aspirational travel or get those sought afttear low level awards. Looking back the last 20 yrs there have been a ton of changes. Overall I find decent redemptions with every airline for overseas premium travel except Delta. How did miles and points get political? Maybe everything is.

  14. @ Mantis — I didn’t say what I wish for here, but I am 100% opposed to CCCA. I would suffer a huge financial blow from the massive devaluations that would surely follow. I was planning to discontinue buying airline tickets and hotel rooms with cash and go to miles and points only. I have enough risk on the table already, and I do believe that the CCCA will pass one of these years. I pray I am wrong.

    Oh, and I am not a “leftist,” but I also won’t be voting for the Republican traitors up for election n 2024.

  15. @John Virtually every card on the planet is a points card these days. We had a merchant account for a long time and way back there were some cards that werent based on points. In those days it was only airline cards that offered points. These days aside form debit cards, virtually every card has a program. So if that passes the card companies are going to get a significant hit and alot of pain. As a merchant I considered merchant fees a cost of doing business. A way to avoid collecting money, bad checks whatever easily.

  16. The payments game is not going to remain static, and either way the merchants will probably end up finding different partners willing to help maintain or reduce — act as a restraint on de facto increases in — merchants’ payment-acceptance costs even as the current major card issuers and card network systems will likely try to maintain profits and margins in the aftermath of possible legislation/regulation capping card processing fees charged to the merchants.

    One response I would expect to see from such kind of legislation/regulation is credit cards having a higher spread in interest rates.than they already do over benchmark rates.

  17. I would have to think that a significant amount of this information is available in airline and bank 10-Ks, annual financial statements and other public filings, although one probably would have to read an awful lot of footnotes to find it. These transactions are way too “material” to escape disclosure of some kind. Also, I suspect that there was a large “data dump” on this subject in Canadian public filings when Air Canada spun off Aeroplan, and then took it back.

  18. @Mantis
    I don’t get the sense that you really have an open mind about this, but the primary point of regulating credit card exchange fees downward is not that it would reduce the cost of everything (which it would) at the expense of bank rewards (although nothing prevents the banks from setting up a parallel system of rewards based on something other than exchange fees). The primary point is that Amex, Visa and MasterCard have established an oligopoly which is reflected in inflated exchange fees, much higher than the cost of the service being rendered. That much is obvious, because fees are less in many other countries where there is actual competition. Assuming that one believes in Pareto optimality — a fundamental free market principle — this oligopoly is a bad thing, and the only way to change it is to regulate it. I’m pretty sure that @Gary can explain it to you.

  19. I wouldn’t be surprised if the average redemption rate is close to 1 cent per mile on average. Many people waste miles on overpriced redemptions. Domestic first class comes to mind. They also have a lot of spoilage which could factor into that math. In addition, many people might redeem for gift cards, etc. because they aren’t that vested in the miles and points game, or on the opposite end of the spectrum you have people who generate a ton of miles, more than they can use so they throw them away on bad redemption.
    Oh, and Alan is reading the wrong sort of blog it seems.

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