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Airlines Are Under Heavy Pressure To Devalue Your Mileage Points

Date: May 19, 2021

By Dan Reed, Forbes

Five of America’s largest airlines collectively owe frequent fliers $27.5 billion worth of free air travel, or other products and services that can be paid for with the mileage points earned in their frequent flier programs.

That’s up a record $2.9 billion, or 11.6%, based on the annual reports of Delta, American, United, Southwest and JetBlue. In part that’s thanks to the near-total absence of frequent flier award trips during the Covid-19 pandemic, when few people have been traveling. In a normal year, those carriers’ frequent flier liability totals grow at rates below 4%. It’s also partly the result of frequent fliers still continuing to earn points in loyalty programs even though few people actually flew during the pandemic. In 2019 U.S. consumers earned $12.6 billion worth of mileage points. But instead of that number falling to near-zero mileage points earned, loyalty program members still earned $6.8 billion worth of mileage points in 2020, almost entirely by charging purchases to credit cards linked to their preferred carrier’s loyalty program.

But as odd as it may seem, that’s actually not a good thing for travel consumers. At least that’s what the experts on frequent flier programs are warning us about now.

You see, per General Accepted Accounting Practices airlines must disclose on their balance sheets how much free travel they owe the public should every frequent flier cash in every mile they’ve earned - all in one year. Of course, that’s never going to happen, but since the airlines owe that free travel to their frequent fliers every bit as much as they owe billions of dollars to the banks, other institutions and bond holders from whom they’ve borrowed money, it has to be publicly disclosed.

As a result, most airlines’ balance sheets, which thanks to all the borrowing they had to do just to stay afloat over the past 15 months of pandemic, and all the borrowing they were doing even before the pandemic to pay for new airplanes and other facilities, are now grossly overweighted to the debt side. And the cost of carrying all that debt – including frequent flier liabilities – means that the airlines costs, which are already high because operating even a discount airline ain’t cheep and oil prices are up significantly, are painfully high. And that will making a return to post-pandemic profitability even tougher for them.

So, what’s a poor, heavily indebted airline to do?

Devalue its frequent flier miles.

By increasing the number of miles required for a frequent flier program member to claim a free flight, carriers effectively shrink the size of the future frequent flier liabilities numbers on their balance sheets. But there’s real risk in doing that.

While that will lower airlines’ financial costs some, it also risks undercutting their most loyal customers who have flown hundreds of thousands, or even millions of miles with them over the years. That’s why carriers will be reluctant to be the first to make frequent flier program changes that devalue their members’ miles. No carrier wants to lose even a few percentage points worth of its best customers because it made them angry by devaluing their points. But the pressure to reduce costs and return to acceptable levels of profitability is why most, or all the other airlines quickly will follow the carrier that makes the first move toward frequent flier mileage devaluation.

Meanwhile, for millions of frequent fliers themselves, such a devaluation would mean noticeable shrinkage in the value of the big piles of frequent flyer mileage points upon which they sit. In effect, the “price” of loyalty to XYZ Airlines would go up and the frequent fliers would feel some loss of value.

In truth, carriers have been devaluing their frequent flier miles gradually for many years. They were doing so already before the pandemic arrived, then in April 2020 United devalued its MileagePlus Program miles, and did it again last October. Delta did it in October, and then again in February of this year. In April of this year Southwest devalued its Rapid Reward miles by 6.5%. And there are plenty of experts out there now warning that more such moves are likely, maybe even inevitable, sometime between now and the year’s end, assuming there’s not another surge in the number of Covid-19 cases and deaths in the U.S.

Carriers started their traveler loyalty programs more than 40 years ago by awarding members one mileage point for one mile flown. Over the years they’ve made many adjustments not only in how those points can be spent, but also how they’re earned. Now pretty much all carriers award points based on the dollar amounts members spend for their flights (or how much they charge to credit cards linked to each carrier’s loyalty program). So, while we still call them mileage points, they’re really spending points, or, from the airline’s perspective, revenue points. The more revenue a consumer provides their preferred airline – by actually flying or by charging purchases to their airline-branded, bank-issued credit card -  the more frequent flier points they earn.

Of course, that favors those who buy pricier coach tickets or, especially those who buy long haul international tickets and expensive seats in business or first class. But those same big spenders now stand to feel the most paint if airlines do move devalue frequent flier mileage points.

Upping the number of points required to claim a “free” reward flight is, in effect, a price increase for all frequent flier program members, but especially for those road warrior types who are sitting the largest stashes of points. For example, LendingTree’s ValuePenguin consumer spending research group estimates that the average frequent flier mile on Delta is worth 1.3 cents. Thus a “free” trip that requires 50,000 SkyMiles program points would be worth $650. But if Delta were to require 55,000 miles for that same trip at some point in the future, the “price” of that free trip would rise to $715. Note: ValuePenguin calculates the average value of all five carriers mentioned in this story at between 1 cent (American) and 1.6 cents (JetBlue). If a frequent flier has enough points to claim 10, 20 or more award trips the devaluation of all those points could translate into thousands of dollars worth of free travel that such high mileage frequent fliers won’t get to claim over the long term.

Therefore, if preserving the full current value of the frequent flier points you’ve already earned is your priority, the experts advise that you book your free trips pronto.

However, doing that right now, or at least sometime soon, may not be so desirable. Nor is it likely going to be easy.

First, consumers will have to decide how comfortable they are traveling by air now. Has the CDC’s most recent guidance that those who are fully vaccinated can now go mask-less in most situations changed their attitude toward whatever Covid-19 risk, if any, still remains in the travel process?

Then, even if they are comfortable with the risk profile now, consumers will have to decide where they want to go based on whether or not they can even get there. Remember, plenty of popular foreign destinations – like Canada and parts of Europe - remain, for now, “no go” zones for U.S. citizens. Then, even if a foreign destination is open, and air service exists, what ground and tourist services, accommodations and attractions will and won’t be open once a frequent flier gets there?

 That’s likely to be a rapidly changing situation, and a confusing one, too, since virtually every nation - and some cases even different cities within the same nation – operates under different rules or practices.

And while airlines are busily trying to re-start service to destinations to which they were forced to abandon because of Covid-19, they remain a long way from offering as many available seats to most of their destinations as they did prior to the pandemic. And that means they may have fewer available seats for frequent flier program members to claim when an unusually large percentage of their loyalty program members are trying claim free trips. The law of supply and demand, in that case, does not favor those frequent fliers trying to score “free” seats for a family trip to Hawaii – or many other places - this year.

To be sure, in some cases there may be more seats available on flights than natural demand this year can fill. If so, there may be more available seats than normal for which frequent fliers can cash in their points. That likely will vary by the destinations involved, the days of the week, and the season. It also could depend, to some degree, on how much and how soon business travel demand, which remains historically weak right now, begins to recover.

So perhaps the best advice for travelers seeking to get free trips from their loyalty programs sooner, rather than later in order to preserve the current value of their points – and to give themselves a nice vacation after a long term of pandemic confinement - would be to remain flexible when it comes to flight dates and days of the week, and even when it comes to choosing a destination.

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