Randy Petersen's Opening Remarks – March, 12 2013

Randy Petersen's Opening Remarks – March, 12 2013

It’s All About Numbers: 94, 342 and 25

With all the talk of airline mergers, I actually found something much different to write about this month–American Express Membership Rewards. There is little doubt about the success of this program and it measures as the largest single credit card loyalty program in the industry, originating back in 1991.

What’s interesting is some of the information that came out of its fourth quarter financial reports. We know that card volume (spending) was up eight percent. But let’s read the following together:

Membership Rewards Estimates

Membership Rewards, the industry’s largest and most successful customer loyalty program, allows cardmembers to accumulate points each month and redeem them at a future date by choosing offers from hundreds of our merchant partners.

Determining the costs for this program is a multi-step process that uses predictive models to estimate the amount of earned points that will ultimately be redeemed by cardmembers, and then applies an estimated average cost per point that the company will incur for those redemptions.

Following a previously announced review, the company enhanced the ultimate redemption rate (URR) estimation process, refining the predictive model it uses for the U.S. program. These changes increased the global URR assumption to 94 percent from 93 percent and translated to an additional $342 million in the balance sheet reserve for Membership Rewards and a corresponding charge in the fourth quarter.

“Loyalty and reward programs are one of our major competitive advantages,” said Mr. Chenault. “They have been a centerpiece of our marketing efforts and based on their success we have expanded them during the last few years to offer broader opportunities for cardmembers to earn and redeem points. The enhancements we’ve made to our models predict even greater usage of the program in the future and that has traditionally meant closer, more meaningful relationships with our cardmembers.”

For those less initiated, you might assume that the one percent increase in URR is equal to the $342 million change in reserves. Not so much. The Membership Rewards program is rewarding, but not to the tune of the $32.1 trillion in total liability that a different calculator might spit out. There really are two things at play here–the ultimate redemption rate and the weighted-average cost per point. And as you likely can guess, we are talking about the cost of all points previously earned but not yet redeemed by cardmembers in the program. Part of this increase in the URR is because of the growing evolution of Membership Rewards as a virtual currency–such as their pay with points program with Amazon. More utility … more redemption. But costs can and do vary because of updates to partner agreements, the cost increases of airline or other travel redemption choices as the economy recovers and the rise of airfares and hotel rates.

Most interesting to me is the statement that AMEX expects 94 percent of all the currency earned by members will be redeemed. That’s a pretty strong statement if one considers the peanut gallery mumbling on that members of these sorts of loyalty programs can never redeem their miles or points. Of course this estimated percentage of redemption was just 90 percent five years ago so it is certainly on the upswing. And some of this increase is likely due to the somewhat soft economy the past five years–members found having this “virtual currency” more handy to spend when the dollar wasn’t so handy.

Two more things and then I’ll let you get back to traveling.

One of the first posts on FlyerTalk in 1998 was about the ability to “merge” your American AAdvantage miles with your US Airways miles for award redemption since they were partners at the time. Gee, 13 years later and that early prognosis seems to be reality. Yes, the more things change, the more they remain the same.

And finally, I’m a pretty proud guy this month. You’ll all be able to go to http://www.vote.freddieawards.com and cast your vote in the 25th Annual Freddie Awards. It’s a very satisfying feeling that all these years later the Freddie Awards still reign as “the voice of the frequent flyer”. Please exercise your right to vote and tell programs around the globe who you think is doing the best at recognizing your membership in these programs. We expect more than 1.5 million voters this year and are pleased to welcome USA Today as a new sponsor. Not many media brands are as much a part of the road warrior/frequent flyer than USA Today. See you at the polls (Freddie Awards).

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