Travel Rewards Credit Cards

Nov 01

Three Predictions For 2018

With 2018 right around the corner, it’s time to take a look at what could be in our future, both the good and the bad. Here are a few possibilities to watch out for:

Southwest Charges Fees

southwest

Will that window seat cost you more?

This will be the most controversial of today’s predictions.

Southwest has been known as the “fee-free” airline, advertising “Transfarency,” meaning the price you see is the price you get. Yes, there are charges for extras, such as early boarding or oversized luggage but, on the whole, the airline is the most friendly in the skies, and it’s not even close.

It won’t last. Fee income is too profitable, since it comes with no costs associated with it. In other words, if an airline charges you $25 to check a bag, that $25 is all profit on top of what they would have already earned.* And Southwest has loads of opportunities to “enhance” its products by adding a fee for second bags, a fee to change a flight, etc. It doesn’t have to be a big number. Something as simple as $15 for the second bag or a $25 change fee would generate significant revenue for the airline and not tick off its passengers (too much). At other airlines, fees have had only minimal impact on passenger demand and ancillary charges now account for over 10% of the revenue at the major airlines.

Why Now: Southwest recently implemented a new revenue management that gives them more flexibility with fares and fees. My guess is that they will build extra charges right into existing bundles.**

50K Is The New 30K for Credit Cards

Let’s see something a little nicer.

The current “standard” bonus for opening an airline credit card is 30,000 miles. There are always promotions that boost that number higher, but 30K is the base price on any given day.

It’s time to move on. Airlines are offering premium bonuses so often that they might as well be full-time, and the credit card market is becoming more competitive, not less. Over time, we have seen initial bonuses get increasingly better and I don’t anticipate that trend to change in 2018. Eventually, the 50,000 promotional bonus will become standard. Note that credit card promos vary by geography, and bonuses in the US have traditionally been much higher than elsewhere in the world. I expect that trend to continue.

The downside is that card companies have also gotten tired of customers churning cards for the initial bonuses. Over the past few years, the major banks have begun to crack down on applicants, whether it’s Chase, which will automatically deny you for certain cards if you have had five applications for any card in the past 24 months, or American Express, which is limiting bonuses to once per lifetime for personal cards.

Why Now: American Express’s loss of Costco as an affiliate a few years ago accelerated contract renewals between banks and travel partners. They have a lot of miles and points to give away, but have become more careful about how they distribute those points.

Airlines Go Dollar-Based on Redemptions

There are two primary methods of earning and redeeming miles for flights in the airline industry. Until recently, the legacy carriers based your accruals on how far you flew and allowed you to redeem by geographic zone, with a particular geography costing a certain number of miles (with some variability for on and off-peak). On the other hand, the discounters based everything on how much your ticket cost. You would get a certain number of miles per dollar spent and would then get a redemption based solely on how much the ticket would cost if you had paid cash.

The latter method eliminated two problems. In the case of earning miles, a short flight might cost more than a longer flight, but passengers on the legacy carriers would earn fewer miles for short-hauls, even though they had paid more. Redemptions were also an issue. One ticket might be dramatically more expensive than another but cost fewer miles because of geography. In other words, why should I pay fewer miles for an $800 flight to California than I would for a trip to, say, South America that costs me $600?***

Over the past couple of years, the legacy carriers have worked to move the “earn” rate to a dollar-based system, and I think that we will soon see the same for redemptions. For example, the airline might value miles at a penny each, a number that I choose for easy math. Now, let’s say that I want to fly from New York to Bangkok and use miles to do so and could choose one of two different flights. Under the old system, a flight that costs $3,000 would require the same number of miles as a flight that costs $3,500 because they are both going from New York to Bangkok. But if we are valuing redemptions based on the dollar cost of the ticket, the first flight would cost 300,000 miles, while the second one would cost 350,000. Ouch.

Note that this is the third year in a row that I’ve predicted that this change would come. Take that for what it’s worth.

Why Now: Because a modification to accounting standards last year changes the way that airlines have to account for miles on their balance sheets. Meanwhile, the airlines have locked in long-term contracts with their banks.

Other Goodies

Not as urgent, but here are a few other things that might happen:

  • Marriott and Starwood finally announce a plan to integrate their rewards programs, likely for calendar year 2019.
  • With the exception of luxury properties, hotels that still offer room service eliminate it in favor of restaurant delivery services, which are cheaper and offer better variety.
  • At least one US legacy airline installs 29″ pitch seats.

 


*You could an incremental passenger is also very profitable, since there are few costs other than a can of Coke and a little more fuel. But the cost of generating that passenger before they get on the plane is high, in terms of having to lower your prices to steal him/her from another airline. There is nothing as value destructive for an airline as a market share war.

**Beginner’s Hint: Bundled fares are a price that includes a number of optional services. For instance, the a la carte fare might be $50, but a bundled fare of $75 might include amenities such as a free checked bag and priority boarding. It’s similar to how a cable company charges.

***An oldie but goodie about airline pricing. Fares are not as restrictive as they once was, but they often makes no sense.

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