United Q1 Analyst Call Discusses Realigning Mileage Plus Benefits Bidirectionally

In the Q1 conference call, there is an exchange that should make us all leery of what may happen to the Mileage Plus program. It appears to me the business model is to take from the customer and not give back.

http://seekingalpha.com/article/2163...pt?part=single

"Michael Linenberg - Deutsche Bank AG, Research Division
Okay, good. And then just one other question here. And I guess maybe this would be for you, Jim, as well. You look at how Delta is sort of rethinking their frequent flyer plan and then basically now sort of changing, tying the miles there on -- basically tied to revenue paid. And it's not unique. I mean, I think, JetBlue, Virgin America, Southwest, they're also along those lines. Is that something that you may be looking at or studying? Is that something that makes sense given your network, your customer base? Any thoughts on that would be great.

Jeffery A. Smisek - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Finance Committee

This is Jeff. Clearly, frequent flyer -- or our frequent flyer program is evolving and as are others. And what we're trying to do is better align the benefits that we deliver to our customers through the frequent flyer program with the benefits that the customers deliver to us from their flying, including the profitability of their flying. And I believe that you will see evolution of our program over time. We can't talk about specifics at this point in time, but clearly, this is an evolving process. And frequent flyer -- our frequent flyer program is becoming much more sophisticated and is better aligning the benefits bidirectionally."

It would be foolish for Mileage Plus, the major asset of United, to mimic everything that Delta does. Increasing the RDM & PQM earnings rate further for high level fares like P, Z, D, C, A, & F is one method of creating further rewards for these customers, but the awarding of a distance based mileage plan keeps the program familiar for both elites and general members.

 

This is not following Delta so much as following market trends. Delta isn't the only program doing it and I expect that others will come along in the not-too-distant future.

Familiar doesn't necessarily mean it is good for the company or the customers; it just means familiar. And it is foolish to believe that maintaining the status quo all the time is good business.

 

I have said for years that US-based programs would follow their European counterparts. It's going to happen. Zero to minimal miles earned on cheaper fares with higher bonuses for the expensive fares. It's a natural progression from having too many airlines in the business who are trying to attract your business to a business model where you are rewarded for paying higher fares to the few carriers that are in the skies now.

I'm honestly surprised the US-based programs have held out this long. DL tried a few years ago to award no miles on their LUT fares. That quickly backfired. With the changes evolving for 2015 and beyond I think we'll see a return to a similar model. Maybe not directly stating zero miles for low fares but something along those lines.

-Rob

 

All that is well and good but the commodity that is traded in the airline business is distance. One pays a fee and the airline helps one cross a given distance. Currently, there is "familiar" loyalty program that makes sense: It says that if you pay a fee to cross a certain distance, you will be awarded at least the number of miles equivalent to that distance...there is some proportionality. The DL system takes that proportionality out of the equation almost completely. Such a total loss of "familiarity" usually means that the consumer is being soaked.

I am one of those who read from Smisek's hedging statement that UA will, in fact, "mimic everything that Delta does". A wholesale migration to a DL-style revenue-based system will mark the end of the FF road for me...

 

Spot on. A flyer does in fact make payment based upon the distance flown and should be rewarded in such manner. Delta is attempting an inverted system of requiring flyers to achieve their status based upon distance traveled, yet they shall only provide mileage earning based upon dollars spent. This system is far too complex for those in the everyday world to comprehend given their normal familiarity with respect to frequent flyer programs.

United is not delivering a product that is on par with Delta, yet its management seems to think it can follow the example of Delta. If United flyers wanted Delta and the SkyPesos program, then they would fly Delta! If the airline loyalty programs are all mimicking each other in a race to the bottom, what is the point of loyalty? Both United and Continental were well run operations and had their respective strengths. The merged UA-CO has combined the management preferences of the smaller airline along with the cost cutting and bean counting of the larger airline. It does not have to be like this. Bring back the best of both airlines and make a truly world class airline.

 

Why is that? It wouldn't take me very long to find a $800 coach ticket that would take me to and from Europe during the offseason (a very long distance) and a $1000 coach ticket round-trip of less than 1000 miles.

That $1000 ticket is likely quite profitable for the airline. The $500 less so. Why is rewarding buying cheap long distance fares more than buying expensive short distance fares something an airline should encourage and subsidize by economic incentive? Almost every other business rebates customers based on what they spend when it comes to loyalty programs; you spend more, you get more. I spend more on my credit card, I get more rebates (cash or points). I buy more coffee and get my punch card punched, I get to trade in the punch card for free coffee faster. The current system rewards you for filling otherwise empty seats on flights halfway around the world, at times of slack demand, more than a business traveler schlepping DCA-LGA during peak travel times. Why should an airline provide outsized rewards for marginally profitable (at best) behavior as opposed to truly profitable behavior? If anything, selling that longhaul seat to someone on Kayak or Expedia who is NOT an elite is a better economic decision for the airline than handing a 1K or EXP 100% bonus RDM and other benefits (with costs attached) for a mileage run.

Also: so, how is it WN has survived all these years never rewarding their travelers for "distance", if this is some time-honored distinction? Even under Rapid Rewards 1.0, what was rewarded were flight segments, not distances. Why have VX and B6 done OK without awarding mileage-based rebates?

Yes, it's a come down for those of us who know how to "work the system", that the airlines are catching on to how to figure out who their best customers are (in terms of revenue) and rewarding them accordingly. Oh well.

 

With utmost respect, the $1000 domestic ticket is not properly priced, rather it is rigged as extremely unbeneficial to the consumer at great benefit to the airline. An $800 - $1000 offseason ticket to Europe seems much more reasonably priced, while the domestic ticket should be priced at no more than $500. I have fond memories of buying an off season UA W fare to LHR for $600 and upgrading with a SWU.

 

Why? If nobody wants to buy those tickets, you get empty seats. Enough of those and it's a self-correcting problem, through price cuts or bankruptcy. Are you suggesting government regulation of airfare prices as opposed to market pricing? I don't see it as unbeneficial: I either buy the ticket or use another means of travel. Do airlines not have a right to make a profit from their operations, and price their goods and services as they see fit?

Out of curiosity, how much of a profit or loss did UAL post that year you flew in business class for $600?

 

With the way things are going at United right now, the last thing they should do is to alienate any more of their customers. Regardless of the fare they are paying, an existing customer bought in to Mileage Plus is cheaper to acquire and likely to purchase a higher fare than a customer who doesn't care about a mileage program and buys purely on price. And with the reputation United has built itself these past few years, the high revenue customer is only picking United right now if they are either hub-captive, corporate-contract-captive, or MileagePlus-captive.

 

You don't seem to have a problem with hotel programs being essentially revenue based. They don't give you points based on the height of the property or some other somewhat arbitrary measure.

Mind you, I personally much prefer to be credited by distance as it's advantageous to me.

 

What commodity does a hotel programme trade? Nights, stays, money. That was clear from the get go, and it is why I am sticking with HHONORS. They allow one to reach elite based on ALL the commodities that they trade!

MileagePlus or Skymiles will have nothing to do with miles and that would do it for me...

Sent from my DROID4 GLOBAL using milepoint

 

Uh, you can get status with UA and DL based on credit card spend as well as miles flown...

 

In the year I flew, the LHR $600 fares United did in fact make a profit. With respect to pricing, I am in fact an advocate of competitive markets and dislike micromanagement and government overregulation. The problem with the US airline industry now is that the market has evolved into an oligopoly via mergers and the US airlines seem to be on a race to the bottom.

Correct. Hilton HHonors awards status either based upon revenue or a number of stays or total nights. This provides their elites with a variety of methods for qualification and enables a broad range of members to qualify for status.

 

If this were really true then fares would be priced on distance traveled. And we all know that's not the case.

The commodity traded is transportation. You pay some amount and you get from A to B. The distance between A and B is relatively immaterial to the price you'll pay.

Distance also is only loosely related to the award costs in most programs. Why is NYC-HNL a 35k r/t Y award while NYC-DUB is a 60k award? The latter is shorter. BA & NH are closest to pricing awards strictly based on distance flown.

You do realize that a $500 r/t domestic transcon doesn't cover the costs of operating the flight, right? Ditto a $1000 TATL from the east coast.

 

The frequent flyer programs aren't being diluted by people flying too many discount flights....but rather superfluous ways of accumulating miles by simply not flying ala credit card bonuses. Rather than smack down frequent flyers, the airlines should better think how to generate enough revenue to properly cover the liability all the miles they're selling away have on them.

 

Hate to break it to you, but the airlines make money on those deals; they make far less on passengers who earn the points flying. And they've admitted such. If they could only distribute points via 3rd party partners and not for customers flying they'd be ecstatic. They want to shift in that direction. I listened to the head of one of the programs stand on a stage and give a 30 minute presentation to his colleagues to this effect just last week.

 

Status shmatus. I can get my status with my credit card or have it as lifetime member in the case of United. And I care less and less about it. I was talking about redeemable miles and points. Those that have the potential to save me a lot of dollars, not give me a free breakfast worth a few bucks in the lounge.

 

It's also evolved into a profitable industry in recent years. You seem to begrudge them that with comments implying that their pricing is unreasonable. Do you think that the environment of the 1980's-2000's, with airlines regularly breaking contracts and hosing workers and vendors is something we want to go back to, just so we can get some Chateaubriand on JFK-DEN?

Go look at operating margins for airlines compared with, say, software companies sometime. It's pretty eye-opening. Warren Buffett's comment about shooting down the Wright Brothers and saving us from a tremendous waste of capital actually does have some basis in fact.

I might also point out that Southwest has, uniquely among the four majors of AA, DL, UA and WN, never gone through Chapter 11 or had a lucrative frequent flyer program of the sort you seem to want, that gets you to Europe in business class for $600. It's understandable to want that. It is possibly less understandable that an airline wouldn't want to reward customers in line with the revenue they generate.

 

You'd have a point if this were a discussion in a vacuum. It ain't. The FF programs were created after a lot of thought, and the underlying principle was simple: "How do we make more money by establishing a class of loyal customers who would fly exclusively with us, in exchange for ______?"

In short, what the airlines are now fighting is a beast of their own creation.

You can speculate all you want as an "academic exercise", but in the real world the airlines have a culture of their own creation to change...

Makes sense?

 

And in a vastly different market. The economic conditions surrounding airlines have changed dramatically in the past 30ish years. The programs have not evolved quite as quickly but they are catching up in a hurry as the companies behind them realize the programs are very bad at doing what they were supposed to do today.

This is neither an academic exercise nor is it being done in a vacuum. It is a very real shift in the operation of these organizations in response to changes which have occurred. And, in many cases, the changes are long overdue.

 

Taking competition off the playing field by way of mergers for the airlines has eased the way for them to eliminate or put less flights on some routes, cut costs by retiring aircraft, and eliminate many jobs and hubs along the way, all the while using fuller aircraft as reasons to increase fares, and when one raises their fares, others soon follow. When one starts charging baggage fees, others soon follow. When one sees the need to charge or increase fuel surcharges, others....... And when one sees a way to tighten up their FF plan to it's advantage in raising it's bottom line at the expense of the their customers....!

It would really be great if one would take the bold step of deciding to do something completely different, and COMPETITIVE, and on its own, as a way to attract customers, but with the lack of competition in today's environment, why should they? And when you look at the base fares that airlines charge for the flights, of course it's tough to make a profit nowadays. Example being a $1,000 TATL from NY to London may be made up of a base fare of only $600/700 for a RT economy ticket with the balance being taxes, landing fees, both government's C&I and security fees, fuel surcharge and other charges that they're forced to pass on to the consumers. Yet if they raised their base fares much more they run the risks of losing some business by doing so, so they're stuck between the sh-t and the sweat and looking for other ways to increase profitability.

Two examples of my giving away my ancientness to show how fares were long ago:

In the 1960's while working in NYC I frequently flew to Miami to visit family. Airfares at that time were often no more then $150/200 all in, no other taxes, surcharges, baggage fees, fuel surcharges or anything else, nada. That for a trip of over 900 miles each way. And it included a full airline meal in coach, such as it was then.

In 1968 I took my first TATL flight. Booked throught a TA, it was JFK-MAD on IB, then MAD to Palma de Mallorca, again on IB, followed by Mallorca to AMS, AMS to LHR on BOAC, and finally LHR to JFK on TWA. It was a three week vacation and all cities included hotels (3*+) for several days, and rental cars in both Madrid and Palma. Total cost including all taxes and anything else at the time was $442.00. While in Palma I first met the young lady who a year later would be my wife, so I cancelled the Palma-AMS segment to spend a few extra days with her, instead going from Palma to London for the final few days of my trip. The cancelled segment of both airline and hotel portion did not cost anything extra at the time, with no penalty fees for doing so.

Someone once told me around that time that airfares were then based on approximately 2.5 cents per mile before taxes, but I can't remember who or where I heard that, so I can't point to the source of the info, be it right or wrong. But looking back at those times, that may be in part why some of the airlines I flew then, no longer are with us. Thinking of EA, NA, NE, and Braniff, all long since gone.

Contrast the above with the current fares, taxes, and fees, all of which of were also impacted by the tragedy of 9/11 and increased fuel, wages, aircraft costs, security fees, and inflation over the years, and it's not hard to see why the airlines have to struggle to make a profit in current times, but the lack of competition along the way makes those changes even harder for their customers.

 

I definitely do understand the need of for-profit companies to adjust or perish, as evidenced in my constantly making precisely your argument in the case of so-called "devaluations" that happen from time to time. There are, however, several problems with that argument here: (1) No plausible case has been made that the traditional model of the loyalty program is no longer adequate, meaning it is no longer making airlines money; (2) even if the purported "change" were necessary, there is no evidence that the revenue-based system is the way to go, especially from the consumer's perspective and in the spirit of the intent of so-called "loyalty" programs; and (c) it is unclear why you seem to be endorsing or arguing for a system that clearly soaks the consumer on the basis that it is "a change that is overdue", again, when no case for any kind of change other than that it is "overdue" has been made.

There may well be a need to change FF programs, but I do not believe that a change that (a) disproportionately benefits the the companies at the expense of the consumers, (b) completely removes any semblance of equivalence between the commodity traded (yes, it is distance and not "transportation", whatever that is) and revenue, and, in fact, (c) becomes all about money and nothing about "loyalty", is an "overdue" change. That is why it will be time for me to leave it all when (that is right... listening to $mi$ek, it is no longer "if" but "when") UA adopts it.

 

Take your head out of the sand. The airlines make money selling the miles to partners, not by giving them away to passengers for flying. They account for the miles in those two categories with a different cost basis in many cases and those distributed for flying are at a higher cost than those from partners. As redemption costs go up in their internal accounting side the airlines have to adjust the value of the points being used to pay for those awards. Shifting the cost basis of the points does that. And the airlines can see the bigger financial picture here. The idea that "they are all making money today" belies the nuance of the way the programs operate.

Perhaps, but yield-based is even more complicated, both for the airlines and the consumers. And so we are stuck with price which is a reasonable stand-in.

Very few other industries allow for earning of credit towards awards at a steady rate regardless of the dollars spent on the purchase; most are much closer to a percentage rebate. Hotels are the same, as noted above. You attempted to ignore that fact by bringing up elite status earning but that's not what Delta has changed. And FF programs used to be much more aligned with dollars spent for their earning metrics, even if distance was used as the proxy. That market has changed and the programs have not kept pace. You don't have to like it, but the change is coming.

What about it have I "endorsed" other than saying I believe it is smart business for the airlines? I think it sucks for me personally because I don't spend much on airfare. For people who do spend a lot of money this is arguably better. I'm not in that pool but I can certainly respect that some might be.

And yet for your hotel stays you are quite keen to be rewarded in points per dollar spent. That makes no sense at all.

Also, I'd love to understand why you believe that distance is the best metric rather than transportation to a place. Do you actually buy plane tickets to ensure that you move 1000 miles rather than to get to a specific place? Is a flight from NYC to Chicago the same as one to Atlanta? Both are within 30 miles range of each other.

 

http://www.westegg.com/inflation/

Were there any $30 airfares MIA-JFK back in the day?

I submit that given that $200 airfare is the equivalent of $1300+ in today's dollars, they could easily afford to give you a dinner. Personally, I'd rather have dinner at sea level and a significantly cheaper advanced fare with less flexibility. So I am not sure we have actually lost anything here. The entire point of having government-issued rights to fly routes with government-guaranteed prices was airlines competing on service (since they could not compete on price).

Also, you ignore some pretty significant competitive things in the past 40+ years. Yes, no more Chateaubriand on DEN-JFK. But there's lie flat seats and IFE that wasn't there then either.

 

...says one with his buried deeply where the "sun don't shine". I did not read the rest. of your post. Be civil if you wish to have a discourse.

Ciao, mate...