United announced big changes to their award chart which will go into effect February 1. But why did they do it?
United’s Explanation
United left the following on my Facebook page.
Hi Gary. We are increasing the number of miles required to redeem some Saver and Standard awards – the first time we’ve made such changes in several years – to offset the increased cost of providing award travel, particularly premium-cabin award travel and award travel on MileagePlus partner carriers. In some markets, we have reduced the number of miles required for award travel. Customers who book MileagePlus awards, especially premium-cabin travel awards, will continue to get great value and options, with the most saver-award availability among U.S. global carriers and the greatest number of options for booking United and partner carriers online. ^Rob
It’s true that this is the first time they’ve made major changes to their award chart in several years. In my post on the changes I suggested that, simply given past patterns, United was ‘overdue’ not for a correction (suggesting that the award chart was uneconomical as-is) but for a devaluation (because the pattern is to do that every few years).
Now, the number of miles outstanding has been increasing. Meanwhile the number of award seats available has not been. Airlines want to make those seats available as awards that they won’t sell for cash, but with planes full there aren’t really that many of those.
The most basic formula of monetarism (and miles are a currency) is MV = PQ, the quantity of money (miles) * the speed at which they’re redeemed has to equal the quantity of seats times the price of those seats.
Since M (miles outstanding) is going up, and Q (award seats available) is not, unless people slow down their redemptions P – the price of an award – can be expected to rise.
None of this is shocking.
But United’s explanation, that this is “to offset the increased cost of providing award travel, particularly premium-cabin award travel and award travel on MileagePlus partner carriers” seems likely only to be true from a certain point of view.
The total cost of redemption is certainly going up, as the total number of miles printed (for which United is compensated, at an amount above cost!) goes up. The total number of members of the program has grown, both organically and as a result of the merger with Continental. Of course redemption costs rise, but revenue rises faster.
It’s unlikely to be true that even as the retail price of a first class award seat has gone down (airlines are discounting those more than they used to), that the cost to United to buy a given partner first class award seat has gone up substantially — let alone anything like 85% as some awards have risen.
What’s more plausible is that since United’s partners have better award availability than Untied does on its own aircraft, and as United’s website has gotten better for award redemption on partners, that the mix of redemptions have shifted towards partners relative to redemptions on United, and partner redemptions are more costly.
None of which actually means, as United would appear to imply, that they were losing money on their mileage program or that the program has become anything but exceptionally profitable.
One Commenter Uncovers the Real Reason for United’s Devaluation
The increased award chart prices are the most extreme for the best international first class products (i.e. first class products other than United’s).
This isn’t about the cost to United — it is because the airlines collectively are trying to keep people like me out of their cabins, or so says Shafik:
This is a shut up response to all bloggers that keep bragging about flying Star Alliance first class when they can barely afford a coach ticket. It is clear that airlines want first class people on their first class cabins and not point and miles hoarders that get into their first class cabins and start taking pictures of even a paper napkin. That is what all airlines will do and they are only protecting real first class customers hat pay $15k+ for that seat and do not want to share the cabin with people that do not belong there.
Or Maybe This Reason is More Plausible…
“Because they can.”
United’s MileagePlus is profitable, and they aren’t scraping by. This was the major part of their business that remained profitable even when the airline was in bankruptcy.
And want to know how significant it is? United’s most recent SEC 10-Q filing lists the loyalty program as one of its three major assets along with aircraft and route authorities. It lists the frequent flyer program as having nearly $5 billion in short and long-term deferred revenue.
Increasing the prices of some awards by nearly 90% wasn’t a move made out of desperation to save a program.
Miles are accumulated, members are stuck with them, they cannot simply exchange their miles for gold or cash at a fixed exchange rate. United’s future expenses related to miles have just fallen.
Their bet is that they can give their members less, without those members defecting and reducing future revenue to the program (and thus reducing program profits) and without reducing future ticket purchases. They may be right, it’s an empirical question we’ll learn the answer to as they disclose financials in future periods.
Even though blogs, frequent flyer forums, and twitter was alive with this move and though it got limited media coverage as well the median member is certainly unaware and likely will remain unaware of the changes at least until it comes time for redemption (and most members do not in fact know how many miles awards are ‘supposed’ to cost). What’s more there isn’t a sense amongst members at large that other programs are different, so it may well be that case that a program doesn’t get full value out of being ‘better’. Again, probabalistic but that likely explains something about United’s bet.
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@Gary:
@Lark The missing piece of evidence is how manufactured spend — remember that United gets paid by Chase — factors into all of this.
What is the magnitude relative to the total miles issued by United?
L – I don’t know, I don’t think anybody knows.
What is the magnitude driven by bloggers?
L – I don’t know, I don’t think anybody knows.
What is the magnitude driven by this blogger in particular?
L – I don’t know, I don’t think anybody knows.
You have a theory I’m just suggesting it isn’t sufficiently developed to be a claim yet, let alone an argument. I’m open to hearing it, but just want some evidence backing it up.
L – I agree, what I state is a theory (speculation?), and I don’t know how anybody without insider knowledge could prove or disprove it.
So, who does manufactured (fake) spending hurt?
– Nobody?
– Credit Card companies?
– Airlines / hotels (the companies that sold the points to the CC companies)?
– Everybody else who just uses credit cards to earn points / miles as the programs were intended to be used?
Who benefits from manufactured spend?
– The MS’er themselves?
– The airline/hotel – because they are selling more miles/points to the CC companies?
Lark’s theory and evidence is just as developed as Gary’s three theories in this blog post. All are possibilities. But it seems obvious to me that bloggers are a part of the story; the only question is to what degree. Gary’s business bills itself as “the airlines’ worst nightmare”. Either that is pure hyperbole or he is relevant to this discussion.
“available as awards that they won’t sell for cash”
People think that those seat would remain unsold and would cost the airlines next to nothing to make them available to mileage programs.
This maybe true for coach, but business and first class seats are very expensive to cater. That caviar or onboard menu is too damn expensive. The airlines are charged outrageous prices for that menu. The LH FCT costs tons of money to operate. In addition, all that champagne, wine and liquor is sold to the airlines at higher than market prices. And the reimbursement rate does not compensate for the true costs.
So the common idea that those seat would remain empty is totally wrong.
Blaming the bloggers is ridiculous. Including Gary in that, even more so.
Airlines are selling the miles to CC companies, and CC companies are marketing their product. Bloggers might tell you how to maximize, but they aren’t inventing anything. And rest assured, if any of the techniques are contrary to what the CC company wants to have happen, they’ll shut it down.
Everybody’s getting paid. United is doing this because they can. Compared to DL, the UA MP program is still very good. If US and AA merge, UA’s chart is the new normal for the only remaining domestic *A program. If they don’t, UA still doesn’t care because US is far smaller.
If they want a cabin full of only “first class” people, get rid of first class redemption altogether. I believe that having college students who can’t afford Y in F does devalue the F cabin for those who pay $15k. But without people redeeming for F the cabins would fly empty. Raising the miles required for a family of 4 to fly in F to a point where only bloggers and mileage-runners could do it is the wrong thing to do.
If the quality of passenger is the real issue, a better solution would be to charge something akin to BA’s taxes in addition to the miles. This would be doable for upper middle class people, and keep out the college students.
I’d argue that the alliance concept is slowly showing cracks around the structural differences between the partner markets. Credit card spend (manufactured or not) and signup bonuses are not exclusively an American phenomenon, but definitely more pronounced here. And airlines like the alliance when it brings money in, but not when it sends money out.
Look at what Delta is doing with cutting MQM-earning on some of its partner airlines. Now look at this UA move, along with how they treat *G differently in terms of perks vs. their own 50k fliers.
UA doesn’t want to pay to upgrade their F hard product to be the equal of LH or SQ. They want people flying UA to the foreign gateway, and the alliance partner beyond that. It’s not a real “alliance” but now they can’t undo things and not allow redemptions to the foreign gateway on the alliance partners.
Instead, they do ham-handed actions like cutting capacity themselves (Starnet, anybody?) and now setting differential rates.
At the end of their day, this is UA admitting that their J/F product isn’t as good as their alliance partners.
Confucius Jackson nailed it.
Certainly if I were LH or whoever and I saw that UA was covering up its mismanagement on the travel provider side by selling billions of MP miles to credit card companies to give away, I would charge UA a premium for putting award travelers in my premium classes. Especially if my own customers had to earn those kinds of awards the hard way.
Gary… in which markets have they “REDUCED the number of miles required for award travel.” That’s not been made clear.
@Stvr there are a handful but none originating or terminating in the US
@Confucius Jackson – yes the alliance structure is not appearing as tight as it once did but the interesting thing here is that the new partner award chart vs United chart applies equally to flights on United’s joint business venture partners as it does to their mere alliance partners
@Stvr one that jumped out to me (I’m based in FRU) was Central Asia to Europe went down 5k for economy and business redemptions. I’m sure there are others out there as well.
@Jason – the seats WOULD be empty, that does not mean they would be free, and they cost more than an empty coach seat to fill. The point isn’t that they are free to offer, but that if inventory management is doing its job right then saver awards won’t trade off with revenue passengers and the airline won’t give up $20k for a roundtrip first class award ticket.
The caviar though, they aren’t likely boarding or even opening more cans because of your first class award. So you’re eating something that in many circumstances may otherwise have just been thrown away.
@Fred it’s called being cheeky 😉
UR transfers to United were the only reason I used Chase credit cards. Goodbye Chase.