Why Every Rewards Program Has The Same Two Components

Nearly every frequent flyer program is really two separate programs bundled together. There’s the reward (points/rebate) component and the recognition (elite) program. They’re separate but related.

Some airlines have even tried separating them out, at least partially. Cathay Pacific has Asia Miles (reward) and Marco Polo Club (elite recognition) but they’re folding elite into Asia Miles. Singapore Airlines does part of its elite recognition through PPS Club, separate from status in the KrisFlyer program.

Member behavior is driven by a mix of recognition and reward. Recognition tends to be a key driver of repeat purchase decisions for flying an airline, while in modern airline frequent flyer programs a majority of miles (reward) are earned for things other than flying.

Both program experiences have been degraded over the past decade,

  • Elite status has in some cases gotten harder to earn with minimum spend requirements for status, though American’s new method of accruing status (almost any account activity counts) reverses this trend.

  • With planes so full there are far fewer upgrades, and airline revenue management has gotten tighter to so saver awards and upgrades have become tougher even when there’s seats available

  • The cost of awards has gone up, up, up – even for saver seats.

Part of this is a function of airline executives thinking that Delta leaders knew what they were doing (‘monkey see, monkey do’) without realizing that their businesses were different. Delta has gotten away with its devaluation in ways that wind up costlier to their competitors, in part because of their strong position in their hubs and in part because of a strong brand built on historical reliability.

Whenever airlines not named Delta have devalued their programs they’ve seen hits to their co-brand credit card charge volume. Delta hasn’t seen those same hits. In other words, program devaluations can hurt a bottom line but airlines have historically released too little of their program’s financial data to make this transparent (and it’s frequently not made transparent to senior leaders at the airline, while senior finance leaders are often the ones calling for devaluation).

These devaluations have had spillover effects on purchasing behavior. A decade ago when I needed to fly I would go to AA.com to find out my options. American Airlines treated me so well as an Executive Platinum that I didn’t consider other airlines. I would take less convenient flight times, more expensive flights, or connections.

With changes over the past decade I no longer do this. I still earn Executive Platinum status, but American gets a much smaller wallet share from me. Instead of giving them all of the business I could, I give them a relatively small portion of my business.

American Airlines’ own data shows that following devaluations of the AAdvantage program elite members moved flying away from the program. AAdvantage itself generated more revenue, because its credit card deals became more lucrative. That earn-burn program grew, while the most engaged members stepped back.

That may even be the right business decision! Flying has frequently been unprofitable for American while net revenue has been driven by selling miles to banks. Maybe they should reward flying less if they’re not making money on it.

Much of my American AAdvantage elite status this year will be earned for things other than flying including online shopping portal purchases and their Hyatt partnership. Non-flying activities are higher margin than flying. Overall American reports a 52% operating margin for the AAdvantage program and this is why activities other than flying go farther than flying in earning elite status now with the introduction of loyalty points.

You should view elite status and mileage accrual separately, too. You may want to earn Delta SkyMiles Medallion status, especially if you’re captive in a Delta market. But that doesn’t mean you want to earn Delta miles for things other than flying unless doing so is crucial for earning status.

A majority of mileage currencies are more valuable than SkyMiles. Earn Delta status, but accrue miles elsewhere (indeed, even if you want Delta miles you can generally earn more of them using American Express Membership Rewards credit cards that have better accelerator earn, and then transfer points from Membership Rewards to Delta).

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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Comments

  1. Delta doesn’t see the same hit when they devalue their program because they are the only airline card that can be churned many times over, across multiple card, to the tune of hundreds of thousands of miles.

    Folks don’t care so much about devaluations when you can rack up a million SkyMiles from 4 personal cards and 3 business cards.

    Couple that with retention offers, upgrade offers, no lifetime language offers, and the ability to transfer to Delta from any MR earning card plus their shopping portal and you have the answer as to why they don’t take the same hit as others when they devalue.

  2. Indeed. As a lifetime platinum I would always prefer to do business with American Airlines, but not now. I gave up on AA when they devalued their elite program. If I buy a ticket, I’ll go with the best price or schedule. When it comes to rewards points, I’m all in on Chase, AmEx and Capital One. And I just transfer to the flight program I need at that time.
    On the other hand, I dumped Citi Bank and the Advantage Dumpster Fire.

  3. A family of 4 traveling one-way to Asia in business class would require 800k to 1 million Delta Skymiles, assuming DL releases award inventory in J class. Using skymiles for J-class inventory on partner airlines is equally challenging. Finding J-class inventory for 4 on One World or Star Alliance partners is relatively easier. I haven’t used skymiles for long-haul international J-class awards since 2014. I canceled my AmEx Delta Platinum years ago and don’t see the value in applying for a card that earns DL skymiles. My current strategy for 4 J-class award tickets in long-haul international is spending on cards that earn transferable points and transferring points once award availability is confirmed.

  4. Gary – glad to finally see that you are applying some nuance to your analysis of Delta by admitting it can make sense to spend on the cards to earn miles if it also helps you earn status.

    I do think that the ability of award tickets to earn MQM on Delta is a bit of an underappreciated game changer. I am now much more likely to burn SkyMiles on general domestic travel because it can still help earn valuable status. I’m surprised we haven’t seen the other US airlines copy this year.

    Art Czar – we share the same strategy for “J-cass award tickets in long haul international.” I spend on Chase Sapphire or Amex. However I also spend a ton of my Amex Delta Reserve for the purpose of enhancing domestic flying. Diversification.

  5. @ Gary — LT PLT/EXP here still sitting on ZERO LP for 2022. It’s simply not worth spending $200,000 on their credit cards at a loss of 2% to renew EXP. No way is EXP worth $4,000 more than PLT, especially considering that we only buy coach when the flight is short and our upgrade chances look like 100%.

  6. @Gene – LOL this article in the suggested reading carousel with the zoom in of a close up of Gary is hilarious

    Is it some tribute to Brian Cohen’s header on ‘The Gate’

  7. Great article. Really enjoyed it. Glad to see more people questioning the value of tier status.

    Gene, consider this: Take the $4000 and use it to buy domestic first class. You’ll get virtually all of the benefits of tier status (and upgrades become irrelevant). Some have offered that tier status gets you help during IRROPS but try to get through on the phone. Ha. And, if you’re traveling I/J or better on long-haul / trans-con, you get the lounges . . . as well as short-haul outside of the US.
    Separately, if you’re an AA or Alaska person, consider crediting your flights to BA and obtain Silver status — that will get you into the US lounges. (Can’t say the same for Delta.) Just a thought.

  8. @ Reno Joe

    IMHO you are absolutely correct on all counts.

    Interestingly, it used to be possible from an Australian base to do an annual status run from Hawaii to the Caribbean (or Central America) on instant upgrade fares and not only get the lion’s share of status credits (over 900 of the 1200) needed for renewal of QF Platinum / Oneworld Emerald, but ALSO earn sufficient points in the process to defray the cost entirely in terms of premium redemption value. One such trip cost about USD1500: HNL-LAX-DFW-BOS-MIA-POS-MIA-BOS-ORD-HNL.

    That status had value in those days – Flagship Lounge access in the US, you could fly domestic routes on international feeder flights in Australia and access the QF First Lounges in SYD and MEL. Your points / mileage earn doubled on paid fares. You had access OneWorld first lounges (mostly). You could request reward seats to be released from inventory (sometimes they’d say yes). You got the pick of the seats. Etc.

    You could safely take the position that if you focused on the status, that the points would look after themselves!

    Loyalty (in its true sense) was compelling.

    But it all crumbled:

    – Status earn on US-based flights was reduced (first class sectors only recognised at business class)
    – Double point earn for QFF Platinum disappeared
    – Point earn became based on miles flown not kilometres flown
    – Point redemption rates went up
    – Fuel charges were added

    The overall value proposition was repeatedly diluted. Crucially, it became easier and easier to earn points from non status-related and non-flying related spend.

    Now you can safely take the position that if you focus on the points, that the status will look after itself! That may mean no elite status, or may mean elite status. It matters not. You are free to chase down the best premium airfare of the day or direct you stash of generic points to the airline which happens to be offering a premium redemption that suits your needs.

    Of course the shift to non-flying “loyalty” engagement has encouraged some programs to imbue status earn from such. So be it.

    So unless you are flying for work and your employer is paying solely for coach, then status is a (sometimes costly) distraction rather than a desirable goal.

    Ironically, supporting non-US based loyalty programs can be prudent, if you are US-based. When Virgin Australia was still partnered with delta, I could find trans-Pacific reward seats on DL for around 94,000 Velocity points – the same seats were showing on the DL website for 100,000s of SkyMiles.

    And the, as you point out, for US domestic lounge access, you’d want to have elite status in a partner program.

    Recently, loyalty programs have also been throwing up new ways to maintaining status – I’ve kept my Velocity Gold status without setting foot on an aircraft since they’re keeping to keep higher tier customers locked in and continue complimentary renewals. Some maintained their KrisFlyer status through miles transfers in the SQ promotion. Others “bought” status with the Finnair buy-miles promotion.

    These examples make chasing status through flying a fool’s game!

    But who actually does the math?! Most base their decisions on emotion and habit and the love of status itself (meant literally and generally) because it swells their egos to have recognised status.

  9. People ask why UA and DL allow people to cheat PQP and MQD by flying partners. Well you can only cheat when other airlines’ prices are cheap. Fares that don’t generate much profit? Give them to partners!

  10. I think Gary nailed this one.

    I have lifetime UA status but that only generates loyalty when UA economy fare is equivalent to what I pay on the competition for E+ seats. If domestic F provides a reasonable value I will take that any day regardless of the airline. So in this sense, elite status builds loyalty when it provides tangible quantifiable value that effectively lowers my total cost.

    UA has also built up loyalty by allowing me to redeem millions of miles at what I view as fair “saver” award pricing – both for domestic economy and international biz class seats. Ditto for AA. By contrast I have been adding to a DL balance for years because it has proven almost impossible to redeem skypesos at anything close to UA saver pricing. So I am actually disincentivized to fly DL unless required for biz travel or when fares are too good to pass because the skypesos are not usable.

    The mileage awards also have a significant secondary effect on my paid use alliance partners – I will always prefer *A and OW and avoid Skyteam due to value (or lack thereof) offered by their US partners.

    I can’t see why anyone would choose to earn DL miles unless they live at a captive fortress hub or require ST partner flights. The historical reliability is no longer a factor.

  11. DL miles continue great domestic – more so now considering the current market. Booked 13k miles in standard economy for a $260 flight yesterday SEA-LAX in early August. $.02 per point is great right now with the capacity full. Anything international is with AA miles or *A via Amex & Aeroplan/Lifemiles. I’m AA Plat Pro & DL Plat. The only benefit right now is auto upgrade to the better economy seats & free booze, if that’s your thing. I have gotten a couple of upgrades to biz in the past couple of months but don’t expect much in this market.

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