
Airlines Make More Money Selling Miles Than Seats - prostoalex
https://www.bloomberg.com/news/articles/2017-03-31/airlines-make-more-money-selling-miles-than-seats
======
bkohlmann
"A soldier will fight long and hard for a bit of colored ribbon" \- Napoleon.

What strikes me about this is the behavioral decision making aspect. The
airlines - and many other loyalty rewards programs - have tapped deeply into
the human tendency to accumulate currency, however meaningless. And as someone
who is well aware of this tendency, I still gleefully watch my credit card
points balance increase every month, even though it really means I'm spending
a ton of actual money. I don't begrudge the airlines at all for this
technique. It intrigues me than in our advanced society, we are easily fooled
by simple measures.

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abetusk
I'm currently at 512 karma and counting...

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rev_null
512 karma ought to be enough for anyone.

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fizixer
I don't understand. I read about half of the article and it doesn't explain
how that works.

I mean money has to come from somewhere, I assume the tens of millions of
credit card holders. But credit card holders do their usual spending, and in
fact save between 1% and 3% on their monthly bills instead of paying more.

Unless.

\- They increase their air travel frequency.

\- They get addicted to collecting airline miles, because it gives them the
feeling of free air travel.

\- And as a result they increase their average spending (so no longer the
'usual' spending), and buy useless stuff, just so they can collect more and
more miles.

Is that the real story or something more/different?

~~~
vmarsy
One way normal credit card companies makes money is this way: They charge the
merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the
customer. They make profit on the difference.

With a deal with an airline, the company doesn't have to do the 1-2% cashback,
instead they give 0 to the customer. The airline company will give them miles
though. Now the airline company can say to the credit card company: "look
these thousands of customers you have them only thanks to me, so let's split
your profits from the merchant 50/50 (or at least give me that 1% cashback you
don't have to pay the customer), plus at some point I'll have to actually
offer a plane ticket to those customers who earn enough miles"

What a customer gets usually is something like 7 miles per dollar. Consumer
website estimate[1] that in the best of case, a mile is equal to ~$0.01, so
they're also saving money there. (Plus the money the credit card company give
them is today, whereas the plane ticket might be in one year or more, so the
present discounted value of that ticket is even less)

[1] [https://thepointsguy.com/2017/04/april-2017-monthly-
valuatio...](https://thepointsguy.com/2017/04/april-2017-monthly-valuations/)

~~~
rando832
> What a customer gets usually is something like 7 miles per dollar. Consumer
> website estimate[1] that in the best of case, a mile is equal to ~$0.01, so
> they're also saving money there.

Your math is way off. If it's 7 miles per dollar spent on the card, that is 7%
back by your math, compared to 1-2% cashback, this conflicts with "they're
also saving money there."

With that math, you're saying that it's a great deal for the consumer. Perhaps
the other things you mentioned still add up to being in the airlines favor,
but whats really going on?

~~~
true_religion
The marginal cost of a single passenger is fairly low to an airline. That's
why they have blackout days, and restriction on where you can actually fly
with earned credit-card miles... in order to make sure the cost of your flight
is _always_ to their benefit or at worst break even.

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tuna-piano
1\. There's a reason high margin businesses are so rare- generally,
competition will bid the prices down to more reasonable levels of profit. I
understand each airline has their own branded credit card, which they have
pricing power over. But besides branded cards and direct mileage purchases,
why would mileage margins stay so good? Surely the mile buyer would have
negotiation power between the airlines. Why can't these mileage buyers (banks,
rental car companies, etc) get lower prices for the miles, given the high
margins? Is it possible there is mileage price collusion among the airlines?

2\. How do airlines account for the cost of mileage seat redemptions when
calculating their margins? Do they just use their marginal cost of carrying
that passenger (very small)? In my mind, the cost of selling a seat with miles
should be at least as much as the lowest price they charged other paying
customers. If a plane flies 100% at capacity with mileage redeemers onboard,
certainly the airline could have sold the mileage seats for at least about the
same as the lowest ticket price paid onboard. I'm skeptical that this how they
account for it though...

3\. Like others have mentioned, the miles game really is fun for many people.
It's fun to collect points, to win things, and get the satisfaction of free
travel. In general for me psychologically, the price of airline tickets is the
bar for whether a trip is worth taking or not- regardless of the other trip
expenses. When you get a vacation with free redeemed airline tickets, it
somehow feels so incredibly satisfying.

~~~
dakial1
1\. It's a matter of reference. Even with the 40+ margin airlines put over the
miles price, banks put even more. In the end the one who is paying for it is
the consumer. Also, this mileage programs are made by contract over a period
of time, and airlines usually don't have contracts with different banks. This
lack of "liquidity" makes it harder for banks to have an upper hand in
negotiations. 2\. Airlines have different ways of calculating the cost, but
usually they use the normal price as a proxy for the redemption price.
Airlines actually can charge less than the cheapest fare because they segment
their consumers by travel patterns and (sort of) split the flight total seats
into this different segments. So they have a certain quantity of seats alloted
for redemption passengers at X price, another for Y price. This would become a
long reply if I explained in detail, but I suggest you search for "Revenue
Management" or "Yield Management", as it is very interesting to see how
airlines do their pricing. 3\. Yes. Absolutely! Even after being in the
industry (I worked with Revenue Management for a Latin American airline), I
still love a good mileage program. I even choose my banks over it.

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dvdhsu
I think this industry won't last for very long. Mile-earning cards are
dependent on merchants paying high fees. In most of the developed world,
interchange fees have been capped (e.g. 40bp in the EU). Once that happens,
these rewards credit cards disappear overnight (which is what happened in the
UK shortly after the IC regulation).

Eventually, I think the US will have its own cap on interchange fees. Credit
card rewards will then cease to exist. It's fundamentally inefficient.

(But perhaps lobbyists are more powerful here than in the EU / Australia?)

~~~
gommm
I don't think that will happen for multiple reasons: 1\. Australia and UK
still have mile earning credit cards. In fact, in my experience, countries
that cap the maximum amount of late fees and interests tend to have lower mile
earning possibilities through credit cards than countries that cap the
interchange fees. 2\. Lobbies in the US are powerful and consumer protection
in the US are traditionally less strong. 3\. A move to reduce credit card
rewards would likely be unpopular (it's very easy for lobbyist to spin any
move to cap interchange fees as politicians taking away the rewards from
credit cards)

I believe that credit card rewards are a form of tax on people who mismanage
their money to benefit the ones who are good at managing their expenses and
money. It's subsidized by all people paying interest on their balance, paying
late fees and the interchange fees.

I was going to say that it's a tax on the poor to benefit the rich but I know
people with high income that never seem to manage to pay their credit card
balance in full and I believe it's really those people that generate revenue
for the banks.

~~~
peferron
Credit card rewards are also indirectly subsidized by people who pay with cash
or debit cards, since merchants effectively charge these people more than the
people who pay with credit cards.

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jbuzbee
If you use these airline cards thoughtfully, they're a great deal for the
consumer. Last year United offered both myself and my wife 50K miles to sign
up with no annual fee for the first year. Then they threw in some club passes
and more miles when we added each other, spent some amount, etc. We ended up
each getting 55K miles or so. Then United had a mileage sale for tickets to
Australia - 60K miles per roundtrip ticket. Combined with the miles we already
had, we ended up with two free round-trip tickets from the US to Australia. Of
course we never carried a balance on the cards and cancelled them before the
yearly fee came in. Now we'll wait a year and sign up again.

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rdl
I've never found the airline credit cards to be the best deal for purchases. I
can get 1.5-2% cash back on some cards (even higher on certain types of
purchases), but the best value is either Chase Sapphire Reserve (essentially
3% back on travel/dining, and potentially more if you redeem for miles), or
SPG Amex (2.2-3%, minimum, and sometimes higher).

Airline cards are worth it for status, and for the bonus for on-airline
purchases, but not for general purchases.

~~~
ubernostrum
_Airline cards are worth it for status_

Of the big three US airlines -- American, Delta and United -- no credit card
that I'm aware of grants automatic elite status in the frequent-flyer program.

There are cards available which, if you hit a spend threshold, will convert
some of the redeemable miles into status-qualifying miles, and this can
_assist_ with reaching status, but the thresholds are set high enough that
this is out of reach of many people.

The closest any card that I'm aware of comes to automatic status is the Delta
Reserve Amex; if you spend $60,000 on the card in a calendar year, it converts
enough redeemable miles into Delta MQMs to award the lowest tier of status in
Delta's frequent-flyer program. But the cost of this is spending $60,000 each
year on the card, and all you get in return is near-worthless Silver Medallion
status.

In general, the airlines have learned their lesson on this one: redeemable
miles are an inflationary currency they can give away by the millions and not
have to worry since they can adjust the redemption charts any time they like.
But genuine elite status in the frequent-flyer program is more expensive to
give away, and they've worked to make that hard to get.

\--

For those unfamiliar with the world of airline programs, the general idea is
(again, in terms of the US big three -- America, Delta and United):

* Elite status is what gets you things like free first-class upgrades, access to the fancy lounges, etc.

* There are two classes of miles you can earn. Redeemable miles are simply what the name implies: you can exchange them for a ticket to fly. Redeemable miles are handed out like candy.

* Qualifying miles ("Elite-Qualifying Miles" or "EQM" on AA, "Medallion-Qualifying Miles" or "MQM" on Delta, "Premier-Qualifying Miles" or "PQM" on United) are how you get to elite status. Within the frequent-flyer community they are often referred to as "BIS" miles, short for "Butt-In-Seat", as actually purchasing a ticket with cash and flying is the primary way they can be earned. There _are_ other ways to earn them, but not many and the amount you can earn is usually too limited to be a viable way to earn/maintain status.

* All three now also impose a requirement of qualifying _dollars_ ; remember I said the airlines learned their lesson? There is now a minimum dollar amount per year you must spend on tickets in order to obtain each level of status, and that amount is weighted by fare class to prevent hitting the threshold from super-discounted fares.

* Airline-branded credit cards which earn miles will only earn you redeemable miles. Some high-end cards (as mentioned above) convert fixed quantities of redeemable miles to qualifying if you spend a _lot_ of money on the card. Most cards will also either get you a credit toward a qualifying-dollar threshold, or waive the qualifying-dollar threshold, which can make qualifying for status easier.

* Airline-branded credit cards can give you some perks which resemble those of elite status -- priority boarding, free checked bag, etc. -- but this is not the same as having status and many of the nicer benefits are not available in return for simply holding a credit card; you must actually fly enough to achieve the upper status tiers.

* Low-level status (AAdvantage Gold, Delta Silver Medallion, or United Premier Silver) is close to worthless. Your upgrade privileges -- for both first-class and for extra-legroom economy seats -- are largely theoretical at this level, the additional redeemable miles earned are not enough on their own to justify maintaining the status, and the other benefits typically are all available to credit-card holders.

~~~
js2
Nice summary; thanks for taking the time to write this.

I'll never qualify for a first class upgrade, but I am willing to spend
redeemable miles to do so if it's say a vaction trip with my spouse. It's a
wholly different flying experience.

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jph
TLDR: Airlines make large profits from the credit card loyalty programs; the
specifics are typically hidden from outsiders.

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spoonie

        Beyond the cash, carriers reap something else from the cards: These deals remain lucrative in both good times and bad, as they are immune to economic cycles. That’s because of the addictive nature of miles, a dubious commodity that tens of millions of Americans, particularly those who fly for their jobs, will probably never quit.
    
        “In a recession, that [bank] business will go down, but it should provide a very high cushion to the airline,” DeNardi said in an interview. “That’s the real benefit here: It speaks to downside protection for the industry better than anything else.”
    

So they earn money by selling miles to the CC companies who give the miles to
customers who spend. So if spending goes down won't there be fewer miles to
buy?

Or is the point that general spending with CCs isn't correlated with people
buying airfares?

~~~
ubernostrum
Indenting to get fake-blockquote style makes your comment completely
unreadable on mobile, and in this case also on desktop without a lot of
annoying horizontal scrolling. Please consider not doing it. If you need to
indicate a quote, you can always do paragraphs _in italics_ , or use quotation
marks, or just _say_ you're quoting and indicate where the quote ends.

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itchyjunk
Heh, I just bought a ticket from SLC -> CHI for around a $100. AA had a nice
little add(?) showing it would cost me $0 (minus tax and other fees) if I got
their card. I was just thinking how crazy that was.

I've personally never found the use for a credit card from a specific airline
to be useful for a casual traveler. I generally like to shop around for the
cheapest price between all available carriers. There is no incentive for me to
stick with a single carrier to get those miles simply because I can't afford
to travel that much.

I also don't have those credit cards from walmart, Khols or <insert business
name here> though. When I first came to USA, someone told me having multiple
cc can lower your credit score and credit score is life. So I am still scared
of credit cards.

~~~
derefr
> When I first came to USA, someone told me having multiple cc can lower your
> credit score and credit score is life.

That's strictly the opposite of true.

Now, _carrying a balance on_ multiple credit cards, or paying multiple cards
_late_ , is worse than the equivalent with a single card. And _applying_ for
lots of credit cards _quickly_ can hurt you.

But just _having_ multiple credit cards, that get paid off every month—or
don't carry a balance at all— _helps_ your credit score: the "positive side"
of your credit score is computed as (effectively) the amount of money that
people are currently contractually obligated to give you if you ask (i.e. the
limit of all your credit accounts + loans + equities added together.) If you
can get more companies to extend you credit, that has the same positive
benefit as getting your limit raised on a card you already have.

~~~
ctchocula
I'm not sure that the "don't carry a balance at all" helps your credit score.
I've heard some places say that a utilization of 1%-9% and the balance being
paid at end of each billing cycle will help increase one's credit score more
than 0%.

> On the other hand, using a low percentage of your available credit can have
> a positive impact. In some cases, a low credit utilization ratio will have a
> more positive impact on your FICO Scores than not using any of your
> available credit at all. [1]

[1] [http://www.myfico.com/CreditEducation/Amounts-
Owed.aspx](http://www.myfico.com/CreditEducation/Amounts-Owed.aspx)

~~~
MrFoof
FICO score in excess of 820 here.

The difference in credit score if I were to have a small balance at a
statement is literally < 1% of my score. I've done it as an experiment (having
a non-$0 balance on statements to show utilization, not carrying a recurring
balance and paying interest), and the difference has been typically 2 or 3
points. In my case, that's a fraction of a percent improvement.

That is not a meaningful difference that would affect interest rates I could
get from a lender. I would get the same rates at 828 as I would with 825 as I
would with 790 as I would with 770. There is no meaningful positive difference
that having a non-zero utilization provides to your FICO score.

------
infosample
“These deals remain lucrative in both good times and bad, as they are immune
to economic cycles.” So were tech stocks and real estate until they weren't.
This time is different because loses will only affect banks, no big deal.

------
reacharavindh
At the end of the day, it is the merchant that pays upto 4% of their
transaction as fees to these banks, and that money travels through several
pockets before some hits the consumer back. I know I'm about to move out of
the US. So I signed up for several high rewards credit cards and racked up
their signing bonuses and travel rewards. The hit on credit score is not
bothering me either :-) Essentially free money to me for using credit cards
for stuff I would have done anyway. ~$3500 in free money so far and counting..

Oh and I pay those bills in full on time. So no fees to them. Feels good to
score against the banks :-)

~~~
MrFoof
> _Oh and I pay those bills in full on time. So no fees to them. Feels good to
> score against the banks :-)_

It's weird, but the reality is the rewards from credit cards can be
ridiculous, whether percent-cash back, miles (for heavy travelers) or signup
bonuses. For those unaware, there are people who try to maximize the signup
bonuses in particular through a process called "churning", mostly to travel
for near or at no cost at all. There's very detailed guides on how to maximize
the signup bonuses.

I don't churn, but I do try to maximize what I can get back for things I buy
anyways.

* One card gives me 6% cash back at grocery stores. I do eat food after all (I cook 99% of my meals, and rarely eat out). I also use them as my pharmacy. 6% off food and medication -- two things I can't live without -- is pretty good. There is a fee for this card, but the cash back puts me at +$285 back a year after the annual fee.

* Amazon gives me 5% back off what I get through them. Sure, I'll take another 5% off.

* One gives me 5% off gasoline. I tend to need gasoline at the moment. Sure, I'll take that!

* Two have rotating 5% categories, that tend not to overlap. So sometimes I can get 5% off something I needed anyways. Great!

* One gives me 2% back that goes into my IRA. If I had kids, I could put it in their 529 instead. Automatic planning for the future on anything where I'd normally get just 1% instead. Sweet!

* This year I moved and planned on getting a new dishwasher, washer and dryer. So I searched for cards with a cash-back on spend signup bonus. Found one that best matched, which was $300 back if I spent $3000 in the first 90 days... plus 1% cash back on the card. Got $334 back in total on money I was going to spend anyways, which was a 10% discount. Sure thing!

I realize merchants pay higher fees to give me these rewards. If these huge
rewards go away, that won't bother me. I'll still use the cards with lower
rewards, because something is better than nothing, the issuers fight harder
than my bank would if I used debit and things happened, and I haven't ever
paid a cent in interest on a credit card.

~~~
nommm-nommm
I know what each card you mentioned is except the gas one. Which card gives
you 5% on gas?

Also, with the Fidelity card you can, if you choose, open up a cash management
account (totally free) and get that 2% in cash without any restrictions at
all.

~~~
skuhn
PenFed has a card that does 5% on gas (although there are more strings
attached now versus the card I have) [1]. Additionally it has no foreign
transaction fee. It's well worth becoming a member if you will ever want to
finance a car, their rates are typically very good.

Otherwise, the only card that I regularly use that isn't on the parent
comment's list is from Golden1 [2]. 3% on restaurants and grocery.

Both of these are a little more work than usual to sign up for (especially
Golden1) and their websites are pretty basic, but as they're both credit
unions their terms are a bit friendlier. The cash back is immediately credited
to your account each month, and their phone support is typically quite
helpful.

I have the 2% Fidelity card deposit into a Fidelity Cash Management account,
which is just a checking account with no restrictions or fees. It refunds ATM
fees, which has been huge for me.

[1] [https://www.penfed.org/affinity-cash-
rewards/](https://www.penfed.org/affinity-cash-rewards/)

[2]
[https://www.golden1.com/CreditCards/Cards#tabs-2](https://www.golden1.com/CreditCards/Cards#tabs-2)

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formula_ninguna
It's rather simple -- don't use credit cards, don't borrow money.

~~~
hueving
Sure, if you like leaving money on the table that's a simple thing to do.

~~~
formula_ninguna
I'll tell you a secret -- you can keep your money in a bank and have a _debit_
card.

~~~
kinkrtyavimoodh
The parent isn't talking about not using banks. They are saying that using
debit cards (or cash) to do transactions when you could be doing the same
transaction on a credit card and getting free points is akin to leaving money
on the table.

This year I made several hundred dollars worth of points for which I did not
have to alter my spending behavior at all. I am buying plane tickets and
staying in motels and filling gas and renting cars and eating out and blah
blah, credit card or not, points or not. It's ridiculous to not want to get
back 1-3% of that money as long as you have even a bit of control on your
spend. If you actually have a decently paying job so that you don't have to
rely on credit cards to borrow money that you can't return, it's perfectly
rational to have credit cards and pay the points game.

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gozur88
The credit card company is probably getting the miles at a steep discount, but
I wonder how many people actually use their miles before they expire.

~~~
ubernostrum
Airlines don't really use expiration as a way to control this anymore; while
they haven't all moved to non-expiring setups, it's usually easy enough to
keep current that it won't matter (i.e., in many cases miles expire based on a
period of inactivity on the frequent-flyer account, but adding miles through
card usage counts as activity).

The way they prevent it being too large a loss is by periodically devaluing,
so that the cost in miles/points to purchase a ticket goes up over time.

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danielfoster
The other great thing here for airlines is that they can devalue the miles at
any time, which they do on a regular basis.

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tiatia
Collecting miles is an art. (See Flyertalk). In my experience:

\- You can collect the miles but it is very difficult to use them. I think I
had this problem with AA, if I remember right. They were rated last in a
Frequent Flyer Miles Ranking I once saw.

\- It is easy to use the miles (Lufthansa, can use for every flight, even pay
taxes with miles) but they don't give you the miles. Lufthansa was #1 in the
ranking. I flew something like 100k miles and they credited 10k miles based on
Booking Class and cross carrier miles crediting (Star Alliance).

------
tiatia
Also, sometimes the employer pays for the miles.

If you get reimbursed for your flights, some airlines give you much more miles
if you buy a ticket (Economy has many sub classes) that is slightly more
expensive (e.g. 100 Dollar more, double miles). This is a "nice" way to
collect miles and have somebody else pay for it.

