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.