Why IHG Rewards Devalued Their Points

IHG Rewards devalued their points without notice and in the middle of the pandemic, when hotel properties have been suffering. Those hotels, for the most part, should want award guests filling rooms more than ever before. And with room rates in most places down, points should go farther than before not be worth far less.

So why would IHG do this? I try to avoid starting with explanations like

  • Evil. They can stick it to their members, so why not?
  • Stupid. They are sacrificing the long-term loyalty the program has built over decades

IHG says they went to dynamic pricing of awards last year, so the gutting of point values now isn’t really new. This is disingenuous.

I assume that smart people are running the program, and one story I’ve heard – second hand, so I’m not vouching for this – is that IHG is trying to manage cash flow challenges. By increasing the points price of redemptions that means fewer redemptions:

  • When members see so many points for an award, they may just pay cash (even if it means paying cash somewhere else)
  • Member points don’t cover as many room nights, so IHG doesn’t have to pay its owners for as many awards.

I’m not saying cash flow is the reason, but it seems more plausible than ‘evil or stupid’ and any of the reasons I’ve been able to come up with for devaluation without notice during a pandemic point away from consumers investing long-term in the program. IHG executives have to know this, so I assume they were willing to trade long-term customer value for short-term benefit.

To be sure they are not alone,

Always and everywhere the elimination of award charts has presaged devaluation. The new President of American AAdvantage says he doesn’t understand why people care about award charts but will leave them in place.

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. Many of you always painted rosy picture of rare award that was good but IHG points always sucked . $80 standard room cost 90000 points a night. And $130 intercontinental hotel standard room cost 140000 points. The crap IHG card bonus of 140000 point is only worth around $100. Also they never had any benefit for elites . I was spire and platinum and never ever got any room upgrade and never ever welcome amenity or acknowledgement of my elite membership. You would better pay $80 for the IHG too in cash then paying 90000 points a night

  2. Your explanation makes the most sense among the dozens of different opinions I’ve seen online so far Gary.
    However, raising reward night redemption prices without warning/notification during a pandemic is still “evil”, and trading long-term customer trust for short-term cash flow is still “stupid”.

  3. Would the devaluation have allowed them to increase retained earnings by decreasing the value of the liability on their books? Hotels are highly leveraged so perhaps they were about to breach a leverage covenant in a bond (due to the pandemic causing big losses) and they needed to increase equity to prevent it? Just a thought.

  4. I was able to snag the Fairbanks Candlewood for 17.5K/night The going rate is ~$200. My IHG bonus of 140K will be worth well more than $100… but I think I got lucky and booked right in time.

  5. I only have been using points for European bookings that are not too bad. I certainly do not want more points.
    They have a nasty and incompetent CS team so I guess they do not pay them either.
    Since they own very few of the properties their profits might all come from selling points to Chase. As soon as Chase wakes up they will probably be gone.

  6. I typically (even now) can get somewhere between .8 cent and 1.2 cent per point. HOWEVER- I only use them for 4 night stays so one of the nights is “free” which helps a lot w caluaosimce you would have to pay cash for 4th night and I use total cost of 4 nights paid versus points for 3 nights to determine value. Also I usually just pick something like a holiday inn express for my trips (usually golf or hiking) and search for any property in a reasonable area and go w the cheapest.

    Doesn’t work for many and I agree their points are pretty worthless but you can find value if you look, use the 4th night free and don’t mind which property you stay.

    That being said, still have a little over 100,000 on them and not trying to earn points. Also rarely use the card. At some point will have to decide if free night is worth the AF.

  7. Corporate gave in to the individual properties….it is all driven by RevPAR by the individual properties….the higher the points, the greater reimbursement from Corporate….real simple! Another example of Dynamic Pricing …..we are just seeing the bringing of it….

  8. I’m going to disagree. This goes way beyond smart people making bad decisions. Acting in such an amazingly shortsighted fashion when their loyalty program had already been insanely devaluated is nothing short of stupid. They managed to turn a decent program (5 years ago) into a bad program (a few months ago) and now they decided that wasn’t enough?

  9. Whatever the reason, I think this and other blogs have let IHG off the hook too easily for the fact that the devaluation came with zero notice. For years, you’ve (rightly) slammed no-notice changes. Yet for this one, the lack of notice has seemed an afterthought in the reporting. Gad to see it highlighted a bit now.

    Yes, not having charts excuses incremental devaluations to a point, but this was 30, 50 70& of hotels, many increasing 50% or more overnight. That’s not just rates normally adjusting to slightly higher occupancy. That’s a bloodbath, with no warning time for members to escape.

  10. A few times the invoice for my award stay had some reference to a corporate fare that the hotel would get from IHG for my (free) stay. It seemed to be very low (e.g. less than $20)
    So, it might be while that hotel benefit from being part of a chain, as people are staying and paying while trying to accumulate the useless points, it is a loss to have people redeeming the points.

    Which explains why availability was spotty even for properties that were half empty, and explains why as soon as hotel can, they would jack up the points required to stay in their places.

    Certainly giving to each single propriety a way to control cash flow is good for the hotel in this difficult times, but leads to decisions that will damage IHG program and therefore all the hotels.

    Now for the members that need to travel and pick a program, IHG has gone from a reward program that was poor but could be made to work, to a program that is completely useless.

    After years of Spire Elite and some glorious redemption in South East Asia, the time has come to move on.

  11. It seems like a mistake for IHG to devalue as much as they have. They have never had as good of benefits as Marriott, Hilton, or Hyatt but it didn’t matter because the redemption cost was less for awards. Now they seemed to have devalued into Marriott territory for awards and will eventually reach Hilton status. The problem is they still don’t have as good of an elite benefits program to back it all up. It’s really too bad it’s been a sweet ride at IHG up to now.

  12. When my road travel picks back up -40-60 nights a year I’ll change programs and move off ihg. The benefits weren’t great but I always got good value at intercontinentals internationally and kimpton domestically. I’m sure 1 customer won’t hurt them but maybe more road warriors leave their program and they feel the pinch.

    Now how am I burning those last 500k points. I guess a few HIE near hotels for early AM flights or something

  13. @LK there’s evidence that they were in danger of breaching covenants in their 2020 20-f (the equivalent of a 10-K for foreign corps whose stocks trade in the US), but my guess as to their accounting was wrong (they apparently do not show points as a liability on their balance sheet — they amange the whole program like a pension fund). They do recognize income from the program and income collapsed but “This was
    partially offset by a favourable adjustment relating to a change in the actuarial assumptions around the ultimate rate of consumption of IHG Rewards points (‘breakage’) leading to increased revenue recognition year-over-year.”

    So one theory is:

    1. Decline in revenues was causing them to breach their EBITDA or leverage covenants. This is an existential crisis for them. If they breach those covenants, their debts will accelerate AND they won’t be able to draw on their emergency liquidity bank lines (see below). That could cause a spiral into bankruptcy.

    2. They needed to find any revenues they could anywhere.

    3. Going to dynamic pricing in 2020 results in their actuaries assuming that more people won’t even use the points, which creates a positive revenue item, which saves them in 2020.

    4. Devaluation in 2021 results in their actuaries assuming that even more people won’t even use the points, which creates a positive revenue item, which saves them in 2021.

    In support of this theory note that they went to dynamic pricing right at the end of the first half in 2020 at the same time they were scrambling to meet their covenants. They measure their covenants each half year. The recent devaluation occured right at the end of a reporting period, so either that devaluation was more about flattering the income statement generally, or it’s preparing for even worse to come on June 30.

    Either way it doesn’t seem at first glance that this is a story about cash management. It doesn’t seem like IHG gets cash into or out of their points fund, although I might be wrong. But they do get income or loss.

    A few quotes:

    Managing liquidity through the pandemic
    With occupancies at hotels reaching historic
    lows, we moved quickly to preserve cash
    through cost reductions across all our main
    areas of spend, including capital expenditure
    and operating expenditure. This meant that
    during the year the business generated free
    cash flow of $29m.
    We also took rapid action to strengthen our
    liquidity, building on our conservative
    balance sheet approach and the measures
    we took to reduce costs and preserve cash.
    This included withdrawing the 2019 final
    dividend recommendation, and the issuance
    of £600m of commercial paper maturing in
    March 2021 under the UK Government’s
    Covid Corporate Financing Facility (CCFF).
    Furthermore, we issued €500m and £400m
    bonds maturing in 2024 and 2028
    respectively. We concurrently repaid early
    £227m of our bonds maturing in November
    2022. Our next bond maturity is £173m in
    November 2022, with no further bond
    maturities until October 2024. As a result,
    as at 31 December 2020, IHG had available
    liquidity of $2.9bn.
    In addition, we secured covenant waivers up
    to and including 31 December 2021 for our
    $1.35bn syndicated and bilateral revolving
    credit facilities (RCF), further covenant
    relaxations in 2022 and extended the
    maturity of the facilities by 18 months to
    September 2023 (see page 70).
    Despite the comprehensive actions we have
    taken to reduce costs and preserve cash,
    due to the impact of the pandemic on the
    profitability of the Group, our net debt:
    adjusted EBITDA ratio of 7.7x as at 31
    December 2020 is outside of our previously
    stated aim to maintain a ratio of 2.5-3.0x.
    Looking forwards, our approach remains
    unchanged. As the business recovers, our
    priorities for the uses of cash are consistent:
    ensure the business is appropriately invested
    in to drive growth; target sustainable growth
    in the ordinary dividend and return surplus
    funds to shareholders, and do this whilst
    considering our stated aim of a leverage ratio
    of 2.5-3.0x, and our objective of maintaining
    an investment grade credit rating.

    Under the Downside Case the Group is
    also forecast to generate positive cash flows
    over the 2021-2023 period and the bank
    facilities remain undrawn. In this scenario,
    the Group could be at risk of breaching the
    covenant requirements in 2023 (which have
    not been amended at this time). However,
    additional actions could be taken in order
    to mitigate this risk such as reductions in
    discretionary spend.

    This means that in the event the
    covenant test was failed, the bank facilities
    could be cancelled by the lenders but would
    not trigger a repayment demand which
    threatened the viability of the Group.

    The Syndicated
    and Bilateral Facilities contain the same
    terms and two financial covenants: interest
    cover and a leverage ratio. Covenants are
    monitored on a ‘frozen GAAP’ basis
    excluding the impact of IFRS 16 and are
    tested at half year and full year on a trailing
    12-month basis.

    System Fund
    The Group operates a System Fund to
    collect and administer cash assessments
    from hotel owners for the specific purpose
    of use in marketing, the Guest Reservation
    System, and hotel loyalty programme, IHG
    Rewards. The System Fund also benefits
    from proceeds from the sale of loyalty
    points under third-party co-branding
    arrangements. The Fund is not managed
    to generate a profit or loss for IHG over the
    longer term, although an in-year surplus or
    deficit can arise, but is managed for the
    benefit of hotels in the IHG System with the
    objective of driving revenues for the hotels.

    In the year to 31 December 2020, System
    Fund revenue decreased by $608m (44.3%)
    to $765m, largely due to lower assessment
    fees reflecting the level of reduction in hotel
    revenues resulting from Covid-19, as well as
    fee reliefs given, and lower loyalty revenue
    due to lower redemption activity. This was
    partially offset by a favourable adjustment
    relating to a change in the actuarial
    assumptions around the ultimate rate of
    consumption of IHG Rewards points
    (‘breakage’) leading to increased revenue
    recognition year-over-year. A System Fund
    income statement deficit of $102m was
    recorded over the year, resulting from lower
    revenues, partly offset by actions targeted
    to lower costs including a reduction in
    marketing spend. System Fund expenses
    included $24m of expected credit losses,
    $20m reorganisation costs and $41m
    impairment principally relating to the US
    corporate headquarters (see page 136
    for further information).

  14. I do agrwe to some extent the points have been downgraded without notice and at a time when others such as Marriott are trying to add more value to their program.

    For example, last month I could book a night at the Holiday Inn in Gdansk for 12000 a night. Now it’s more than double. It’s quite disappointing to say the least…

    Fortunately, I found that many destinations are still the same and competitive. You just have to look harder now and hope they will adjust to a more transparent process. Otherwise, I will be jumping ship to a greater value competitor.

  15. @SeanNY2 The problem with your story is that the loyalty program should have little direct effects on IHG’s bottom line. Marketing, reservations, and the loyalty program are shielded off from the rest of IHG’s business. Look for “system fund” in the annual reports for details. Basically, they have contractual agreements with the hotel owners which require them to run the system fund at zero profit over the medium and long run.

    If the devaluation is designed to improve operating income for IHG, it will have to work through indirect channels (altered customer behavior changing group revenues and costs).

    If, for instance, these devaluations cause breakage to rise, something that would increase profitability of the loyalty program (at least short term) and hence profitability the system fund would not also lead to a higher operating profit/smaller operating loss for the company overall.

  16. Ultimately I don’t think it’s any surprise travel companies are raising points redemptions rates right now. Between business travel and leisure travel, I imagine leisure travel is more likely to be where redemptions are at. There is no (or very little) business travel right now, so redemptions on the leisure side aren’t being balanced by cash on the business traveler side. Points are a liability to the travel company. So they need revenue to support their business. Increasing redemption prices means travelers are more likely to pay cash. Is it short-sighted? Perhaps, but if they don’t take care of short-term problems, there won’t be a long-term to worry about.

  17. If anybody thinks 140,000 IHG points are only worth $100 they’ve forgotten about redemption for gift cards. 140,000 would get $250+. They do say there are shipping delays for some cards, so maybe there is some demand there.

  18. @John says “The problem with your story is that the loyalty program should have little direct effects on IHG’s bottom line … Marketing, reservations, and the loyalty program are shielded off from the rest of IHG’s business. ”

    @John good use of the word “should”. For GAAP purposes the System Fund is not separate from the rest of the company. It produced net revenues of $765mm and (oddly) a net loss of $153mm in 2020. But because they would like it to be separate, they also report non-GAAP “adjusted ” revenues and income that excludes it.

    So the key question is: which measure do the covenants use? GAAP or “adjusted” GAAP.

    “The interest cover covenant requires a ratio of Covenant EBITDA : Covenant interest payable above 3.5:1 and the leverage ratio requires Covenant net debt : Covenant EBITDA of below 3.5:1. Covenant EBITDA is calculated (on a frozen GAAP basis) as operating profit before exceptional items, depreciation and amortisation and System Fund revenues and expenses.” [end of paragraph]

    So they say that the coverage covenant references adjusted EBITDA but they don’t say that the leverage ratio does too. Which suggests that the leverage covenant uses regular US GAAP, which would be directly affected by losses in the system fund.

    However, I’m going to guess that Gary is right after all, because they also say they got the banks to waive the covenants until June 1 2022.

    And then the money quotes:

    1. It is a measure of the resilience of IHG’s business model that we were able to generate positive cash flows in this most challenging of years.

    2. “Free cash flow of $29m was down $480m year-on-year with significant reductions in revenues driven by Covid-19, together with a System Fund outflow, partially offset by cost saving measures taken across the Group and a working capital inflow, following proactive management through the year.

    3. “Impact of Covid-19 on cash flow mitigated through cost saving actions taken across both the P&L and System Fund to reduce salaries and incentives and challenge discretionary spend.”

    So I think that Gary is right, it was about cash flow. They bury it as hard as they can, but the fact is that they just barely barely eked out positive cash flow in 2020 (and crowed about the fact) and part of that eking was the decision to “challenge discretionary spend” in the points program.

    But watch out for next year: their leverage ratio kicks in in the first half of 2022 (measured as of June 30, 2022). Their current leverage is 8.3x and they need to get down to 7.5x. If it’s true that the leverage ratio for their covenants is unadjusted GAAP then further devaluations would indeed help them meet this existential target.

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