By Eli Schreiber
In our last newsletter we highlighted five things NOT TO DO with your credit card miles and points and introduced the concept of holding on to your credit card miles for too long. Before we explain why you shouldn’t do this, it’s important to understand the relationship between airline miles and credit card points. Equally important is understanding that the rewards industry is becoming increasingly more competitive, bringing with it new opportunities to make money and travel the world (whatever your preference for earning miles and points), but also bringing with it new challenges as well.
We will first explain the relationship between credit card points, like those offered by American Express, and airline miles, like American Airlines Advantage Miles, and the association between the two.
Airlines offer frequent flyers the opportunity to earn miles based on the number of miles flown or the price of the airline ticket. They also sell these miles to partners like credit card companies, e-commerce sites, florists, and rental car companies, amongst others. Credit card companies, in turn, buy these miles from the airlines so that they can incentivize the public to use their specific credit card. And, as we know, credit card companies make money by charging vendors a percentage of every sale. Why this is relevant is understanding that the airlines who sell miles are also the ones who control how the public uses its miles (and in turn how many credit card points are needed for tickets), which makes the rewards industry a very profitable enterprise for them.
Imagine if you were in the business and your product was manufacturing shoes, and not only do you manufacture shoes and sell them to retail shoe vendors (in our example the credit card companies) and individuals (in our example frequent flyers), but as part of your terms and conditions when selling your shoes, you leave yourself the ability to determine what the shoes could be used for and when they could be used. And that if later down the road you decide you hadn’t made enough money when you sold the shoes originally, you can change the price of the shoes so that it affects people retroactively (in our case, changing how many miles are required for a certain tickets, after people have already accrued those miles).
If this isn’t a sweet business model, we don’t know what is.
In fact, a study by IdeaWorks, a company that analyzes the airline industry, estimates that more than 55% of airlines’ revenues results from the sale of frequent flyer miles. So the airlines make the bulk of their money just from selling the miles and make even more money by restricting how they can be used, including limiting how many seats can be purchased with miles, leaving themselves blackout dates for using miles and charging fees for mileage tickets. What this means for the consumer is that since it’s in the airlines’ interest to control and limit the value frequent flyer holders receive when they redeem their airline miles, they make the redemption process to redeem miles quite difficult for the average consumer, thereby eliminating a large percentage of people who would otherwise use their miles for flights.
Let’s take some examples, including one that hits close to home.
EL AL Airlines had two great partnerships that Jewish consumers enjoyed. One was their partnership with the HAS Advantage credit card, so that cardholders could earn points for tickets on EL AL. Additionally, customers who wished to fly EL AL could do so using AA miles. In October of last year, the partnership with AA ended suddenly. And due to a dispute with HAS, for a certain time period, customers who earned HAS points for the sole purpose of transferring them into flights on EL AL were left unable to do so. That dispute has since been resolved, but just last week, EL AL increased the number of miles and points needed for tickets, in some cases requiring 30% more points to book tickets from New York and Toronto to Tel Aviv (besides the $350 in fuel charges they charge as well).
Another example is British Airways’ (BA) partnership with other airlines, which offered consumers the option travel in the domestic U.S. using BA miles, and which required far less miles than other airlines. And BA offered a credit card with a bonus promotion of 50,000 miles that many people were happy to take advantage of.
But on January 28th, 2015, BA made drastic changes to the new British Airways program, increasing mileage ticket prices by as much as 150% on flights from New York to Los Angeles and London, with tickets from Miami and Berlin increasing significantly as well.
And if you think all of the above is unfair, unethical, and perhaps illegal, a Florida congressman agrees with you and has placed the airlines’ habit of devaluing miles under investigation.
This leads us to our final point, eloquently summarized by one savvy travel blogger. Whatever card you have, “redeem early and redeem often…at least once a year…Minimize the amount of miles you have sitting around.”
Because, given the industries’ track record, holding on to your airline miles and credit card points is a bad idea and bad investment!
Eli Schreiber is a partner and director of marketing at Get PEYD and PEYD, LLC.