242-Strangling the Goose
Some time ago, we wrote a blog (see HERE) on the declining value of airline miles programs. At the time, we noted that most of those miles awarded were worth less than a cent. In fact, the airlines themselves believe that these miles are worth far less than a cent. That means the miles that you gain return less than 1% of your spending to your account.
Here is an example. United Airlines offers a one year membership in its Red Carpet Club for 70,000 miles. If you are a normal flyer, without particular value to United as a Premier or Premier Executive and so forth, you can buy a one year membership for $425. United Airlines is telling us that its miles are worth 6/10th of 1 cent.
But let’s say you are a highly valued flyer with United Airlines. Let’s assume you are a 1K flyer, one of their top categories. If you are in that fortunate (or unfortunate as you will have it) position, you may purchase a one year membership in the Red Carpet Club for $325. As an alternative, you can purchase the membership with 40,000 of your frequent flyer miles. This is a much better deal. Here your miles are worth 8/10th of a cent.
These airline-sponsored deals strike me as dangerous. (See the Symptom & Implication, “Customers are more price sensitive” on StrategyStreet.com.) They telegraph clearly that airline miles are worth less than 1%. This is dangerous because there are a number of credit cards available to you which will return 1% of your spending every month, in cash. That is a considerably better deal than the United Airline miles offer you. (See the Symptom & Implication, “New competition is entering a settled market” on StrategyStreet.com.) These airline miles keep losing their allure.
In 2022, there were many points programs. These programs included airline, hotel and credit card loyalty programs. As a rough rule, hotel loyalty programs offered less than one cent per dollar spent. Airline programs generally fell in the 1.1 to 1.4 cent range. Most credit card programs returned 1.5 to 2.2 cents per dollar spent.
A consumer using either an airline or a credit card loyalty program will generally earn more than 1% back on each dollar spent. Even within a single airline’s program, redeeming for the same route can cost a different number of miles depending on the time of year or time of day of the flight. On the other hand, there are very few occasions where a consumer would be willing to buy airline miles. The markup is simply too high.
The airline loyalty programs have been around for over 40 years now and have proven successful in helping airlines keep the loyalty of their most valuable customers. These programs are an example of using an optional component of price to reduce the effective price a customer pays for an airline trip. See HERE for more explanation and many examples.
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