Are loyalty programs heading for a crash?

You are a member of a frequent flyer program (or hotel program for that matter) and you have a credit card that allows you to earn points/miles on this program. On the face of it, you’re happy with this way of “boosting” your ability to offer yourself free trips. Well, this device may well diminish your ability to afford the trip of your dreams. And even without the credit card in question.

At first, you earn miles by flying to get free flights

If we go back to the origin of the mechanism, everything is clear, limpid, and I would even say healthy. The loyalty program rewards customers for the flights they take and the money they spend with the airline.

The more you fly and spend, the more miles you earn, and the more you can use those miles to buy flights.

So far, so good. Then things get complicated.

Co-branded credit cards devalue loyalty programs

Then came “co-branded” credit cards such as the Amex Air France, the Citi AAdvantage card at American Airlines, etc…

What do they offer? Earn miles not only by buying airline tickets, but also by spending money at merchants on a daily basis, doing your shopping, going out to eat, and so on.

This doesn’t come for free: to achieve this, the organizations that issue these credit cards have to buy miles from the airlines and redistribute them to their customers. The mile is a currency, and the issuing bank (the airline) turns the banknote printing machine to the max because it makes a lot of money.

For example, for a long time, American Airlines didn’t make any money by flying airplanes; it lost money on its core business, but became profitable by selling miles!

In 2017, it earned $3.1 billion in net income from this activity. As we explained when we detailed how the co-branded credit card business worksIn the 2nd half of 2018, the airline sold $1.4 billion in miles (12% of its sales), while Air France KLM’s profit for the same period was just 345 million euros!

At Southwest, the business of selling miles to financial institutions represented over 15% of sales before the crisis.

There’s no need to make a list: airlines make astronomical profits from the sale of miles to credit card issuers, who recapture customers who pay high fees and charges (the reason why the co-branded credit card system works less well in Europe and especially in France than elsewhere). A magic win-win formula. Or almost.

The more miles, the less value per mile

The comparison with currency is very pertinent. The more money you print, the more miles are in circulation. The problem is that supply (the number of seats on sale) is not growing nearly as fast as the number of miles in circulation.

The more miles and the more people with miles, the more difficult it becomes to access certain good seats or fares, since there are more people “competing”, with “more money”, compared to what’s on offer.

The result? First of all, the constant devaluation of loyalty programs! As time goes by, what you can buy with the same amount of miles decreases. That’s inflation: the price of award tickets just keeps on going up.

Then there’s the growing dissatisfaction of “real” customers, for whom it’s a double whammy. Not only do they see their purchasing power in miles drop for the reasons we’ve just explained, but they also have the impression of being badly considered because they’re competing for award tickets with people who hardly ever fly, or fly less than them. But some people earn their miles by spending a lot elsewhere, in the stores… They feel that the system no longer rewards “real” customers enough.

In 2020, credit cards saved airlines!

Are loyalty programs in danger of crashing due to the devaluation of miles? Logically, we’re heading straight for it as, once again, the number of miles on the road is increasing faster than the number of seats on offer, and the COVID-19 crisis isn’t going to make things any better.

This is why airlines do everything they can to make passengers spend their miles as quickly as possible, or restrict their validity: to reduce the “money supply” in circulation. And to keep “real” customers happy, they are increasing the benefits available to them. Remember that there was a time when you could earn your status with Air France simply by using your Amex, because all the miles you earned (i.e. those earned using your Amex) were qualifying. Fortunately, the days when a father could go gold by shopping at Monoprix are over.

In 2020, and we can expect the same in 2021, credit cards saved the airlines. Why ?

People continued to spend, to buy, and so financial organizations continued to buy billions of dollars worth of miles from the airlines. Between $3 and $5 billion for the big US airlines, for example. When planes aren’t flying, it’s cash that does good!

Airlines also offered their members the chance to buy miles in advance, so that they could travel later, often at discounted rates! “Buy 100,000 miles for the price of 50,000 and treat yourself to the trip of your dreams”. Here again, billions in cash have fallen into their coffers.

If the miles business alone didn’t save the airlines in 2020, it did make their convalescence a lot easier, and the same will be true in 2021. But what’s next?

Debt must be repaid, and airlines are in for a hard landing

The airlines issued a lot of miles that customers couldn’t spend because they couldn’t fly! And it will be a long time before offer returns to what it was in 2020.

Two consequences are therefore to be expected:

Firstly, violent devaluations in the value of miles, with “award” tickets becoming more and more expensive. This is for the customer.

For the airlines, this means a substantial debt on their balance sheets. Yes, the mile is just a debt owed to the customer that will have to be honored one day. So, in addition to lowering the value of this dollar-denominated debt, as we’ve seen, they’re going to have to make sure that this debt disappears as quickly as possible. By reducing the validity of miles? Impossible from a commercial point of view given the context. By encouraging passengers to spend them quickly? This would be a good thing, but in this case they’d bring in less cash as passengers would be paying in miles, and God knows they need cash! Another option would be to offer them the chance to buy something other than flights with their miles, which would be less painful. It’s a runway they’re all exploring, but one that can’t be extended ad infinitum either.

2022: the bursting of a bubble?

The miles business has helped airlines through the crisis, but it has created a bubble with an even greater discrepancy between miles in circulation and seat supply, and what we were moving towards before may well explode more suddenly than expected.

A crisis in loyalty programs won’t kill airlines. But it risks killing the perceived value of loyalty programs, which in turn will be anything but good for their business.

In the meantime, remember one thing: loyalty programs benefit airlines and financial organizations first, rarely customers.

PS: this article concerns both hotel and airline programs, even if the bubble is much smaller there.

Image : credit by Suradech Prapairat via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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