First, I’d like to wish a happy new year to everyone who is celebrating it. And if you aren’t celebrating a new year, let me assure you that apples and honey makes an excellent combination.
Could Redemptions Go Dollar-Based?
I got to thinking a lot about what to expect over the next year and, as always, a young man’s fancy lightly turns to miles. For years, the legacy carriers have been devaluing miles, whether it’s charging more miles for a particular flight, instituting “high-season” premiums or eliminating award charts. It’s that last one that makes me the most nervous.
Traditionally, carriers have charged a fixed amount of miles to fly to different geographic zones. For instance, it had always cost 25,000 miles to fly from New York to San Francisco and 35,000 miles to fly from New York to Hawaii, even if the dollar cost of the flight to San Francisco was higher than the fare to Hawaii. As revenue management tools became more sophisticated, airlines were better able to segment redemptions. But still, the dollar price of the ticket and the number of miles it cost were only tangentially linked.
Then, the low-cost carriers arrived. JetBlue and Southwest (2.0) established programs that based the cost in miles on the cost in dollars. In other words, a flight that costs $75 in cash will cost 50% more miles than a flight that costs $50. Each mile is worth a certain number of cents and the cost in miles is directly proportional to what you would pay in cash. Now, customers could use points for any flight. If the flight was a particularly valuable one, the cost in miles would reflect that.
Could Delta, United Or American Do That, Too?
You betcha. In fact, they are already talking about it internally. The issue is not “if,” but “when.” Delta already moved that direction by eliminating its award charts. Now, it has the flexibility to price an award ticket at any level it wants. The question is, how much will each mile be worth? Regardless, those luxurious long-haul, first class tickets are going to go up in cost, and they’re going to go up a lot. For example, if you use your miles to upgrade or make purchases through Delta, they are worth a penny each. If Delta used that ratio, a first-class ticket to Asia wouldn’t cost the 200,000 – 300,000 miles that it currently costs. Instead, that figure would be more like 700,000 miles, based on a $7,000 ticket price if you were going to pay cash. True, you would benefit on the really inexpensive tickets, but you’d probably pay cash for those, anyway.
So why now? Why not last year, or two years from now? There are a few reasons.
First, there has been an accounting change regarding how airlines have to accrue for miles on their balance sheets. The details are complicated, but suffice it to say that the pools of miles now reflect bigger liabilities for the companies than they once did.
Second, they actually began this process two years ago. Remember the good old days, when you got miles based on how far you flew, rather than how many dollars you spent? The conversion to dollar-based earning was simply the first half of the equation. Dollar-based redemptions are on the other side.
Finally, the business models for low-cost carriers and legacy carriers have been converging for years. Dollar-based redemptions would simply continue the pattern.
Canaries in The Coal Mine?
Delta has been leading the industry for years in innovations, both good ones and bad. They also have a meeting for Wall Street analysts coming up in a couple of months. I would not be surprised if we got some kind of announcement there.
The Bottom Line
Everything above is, of course, speculation, and the airlines’ biggest purchasers of miles, the credit card companies, would go bonkers, since their rewards would instantly be devalued. But a dollar-based redemption program will happen eventually, whether consumers like it or not. It just makes too much sense for the airlines’ bottom lines, and that’s really what the business is all about.
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