Ravindras Blog

How many miles for my dollars?

Geschrieben von Ravindra Bhagwanani am in CEO Blog

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04 January 2016

Since one year, everybody has been talking about revenue-based programs. So it is time to review the market and examine the question how many miles you should earn per dollar spent. The question as such seems not logic – and the answer is, at best, a bit surprising, too.

When Delta led the way one year ago, it decided to award 5 miles per USD spent on its own flights/tickets for base members and up to 11 miles for elite members. Without questioning too much, the same ratios were taken over by United and will now be taken over by American, too.

At first glance, it might seem illogical to stick to the mileage currency at all if it is the expressed intent of airlines to move to a revenue-based (accrual) scheme. The purest form of a revenue-based program would definitely be to say you get x% of the ticket price as credit towards the purchase of a future ticket into your account without passing through the conversion into miles (and then back into a redemption chart).

There are indeed a handful of Frequent Flyer programs working exactly on such a basis, those of Norwegian, Spring Airlines, Pegasus or Onur Air coming spontaneously to my mind. The model works perfectly fine for them as standalone carriers with no partner network to worry about – and brings obviously full transparency to customers. You no longer have 12,877 miles in your account you’re not really sure what to do with and even less what their value is, but 48 USD you may use as full or partial payment towards your next ticket purchase. Also Accor’s loyalty program works basically along these lines, representing the largest hotel program having chosen this transparent approach.

Some other revenue-based programs – and all relevant hotel programs – have opted for an intermediary way by attributing a certain number of points per dollar spent and working with a traditional fixed award chart. So at the end, it doesn’t really matter whether you earn 1, 10 or 76 points per dollar spent as you need to see this value in relation to the redemption offer. Companies are indeed pretty free to choose whatever approach seems appropriate to them – some preferring giving members the impression to accumulate quickly big amounts of points, others preferring keeping absolute award levels low in order to give the impression that awards are quickly attainable.

Coming back to Delta et al, the issue is a bit trickier as these airlines and their programs are part of a wider alliance network – and their partners continue to participate in their programs on a traditional mileage basis as they won’t share revenue data between them (and would probably not be allowed to do so from an antitrust perspective even if they were willing to do so). For mileage-based programs, it is widely accepted that full Economy fares should accrue 100% of the distance flown and factors for individual booking classes are based on this value, e.g. 150% in Business Class. This limits indeed considerably the freedom these airlines have to attribute any “mileage” value to the ticket amount since they need to be somehow compatible with the partner network.

If your value is too low, it can easily be more interesting for members to fly on partner airlines on competing routes as the mileage-based accrual would be higher – or even to switch to partner programs in which their airline continues to participate on a mileage-basis. On the other hand, if the value is too big, members would earn considerably more miles than before and award levels would need to be increased. Accruing with mileage-based program partners would hence become much less attractive than in other FFPs and the program would lose vital revenue streams from partner miles.

The initial 5 miles per USD were considered a fair value and indeed, the discussions who was winning and losing with such a system compared to the old mileage-based schemes, showed that the value was not fully wrong, but seemed to be well balanced.

But in the meantime, other FFPs embedded in wider partnership networks – though much less than “experts” initially predicted – have followed that step and introduced their own, deviating mileage values per currency unit. This is notably the case for South African (Star Alliance) and Air Europa (SkyTeam), which recently launched its own program SUMA. There were also other programs, such as Virgin Australia’s, being faced with the issue to have to decide about the appropriate dollar-mileage ratio before by balancing their own needs with the parameters of their partnerships, which can only move within a certain corridor in order to remain relevant and competitive.

An overview of the current mileage-transformed accrual values in place at these non-standalone programs – at current exchange rates – provides the following picture:
– Delta/United/American: 5 miles per USD
– South African: 9.7 miles per USD
– Air Europa: 1.8 miles per USD
– Gol: 8.0-12.0 miles per USD
– Virgin Australia (domestic flights): 6.9 miles per USD
– Vistara: 3.3 miles per USD

While there can be individual considerations taking into account yields and network structures, the prevailing discrepancy between the values seems indeed too high. There is not one truth to this mathematical-competitive evaluation, but a factor of more than 6 between the best and the worst seems indeed pointing to some issue. Some revenue- & mileage-based programs [that is what they actually are, although calling themselves revenue-based!] will probably have to review their initial choice further down the road.

And airlines only starting to look into revenue-based options should have a long and careful thought about which value to choose in first place in order not to wake up to some disappointing results. Whatever one may consider as advantages of revenue-based programs, one thing for sure is that they don’t make the management of these programs easier as they add one new, but absolutely critical parameter to the equation.