Which type of points are you earning?

Discussion in 'General Discussion | Miles/Points' started by Wandering Aramean, Jun 12, 2014.  |  Print Topic

  1. Wandering Aramean
    Original Member

    Wandering Aramean Gold Member

    Messages:
    28,231
    Likes Received:
    61,782
    Status Points:
    20,020
    And, more pointedly, do you know the difference between the two types of points as the program operators see them??

    [​IMG]

    At a recent industry conference I sat in a session where the execs discussed the types of points in their programs and all but split them into "good" points and "bad" points. Well, they did split them, though they used different names to do so. And they really, really, really want to issue more "good" points than not. Which means points from partners, not from air travel.

    They also believe that shifting the numbers in this manner leads to better yields within the programs and potentially better rewards and higher valuations on the points. We'll see how that plays out over time. I'm betting yes for everything other than travel awards.

    Not particularly groundbreaking information, but it was interesting to see them put the details out so bluntly.
     
    Newscience and IDGflygirl like this.
  2. YULtide

    YULtide Gold Member

    Messages:
    2,747
    Likes Received:
    10,556
    Status Points:
    10,520
    I think you mean "When they have more money they can increase the CEO's bonus."
     
    Newscience likes this.
  3. eponymous_coward
    Original Member

    eponymous_coward Gold Member

    Messages:
    1,901
    Likes Received:
    2,975
    Status Points:
    1,470
    Some of both. (I don't exploit MS for reasons I'm not going to go into- I do outright buy some discounted miles.)
     
  4. Jimgotkp
    Original Member

    Jimgotkp Gold Member

    Messages:
    12,834
    Likes Received:
    80,011
    Status Points:
    16,495
    What I'm curious about is whether or not the transfer rates from AMEX/Chase/etc. to the various frequent flier programs will change due to many of them going into revenue-based earning rates, specifically the US carriers.
     
    IDGflygirl likes this.
  5. Counsellor
    Original Member

    Counsellor Gold Member

    Messages:
    1,221
    Likes Received:
    1,620
    Status Points:
    1,120
    Seems a tad strange if I'm reading it correctly.

    It looks as though they have two "liability" levels, the program miles (PM) at 0.6 cents each and the commercial miles (CM) at 1.5 cents each.

    OK, I can accept the idea that there's greater breakage on PM than CM, since PM are awarded automatically to the member when he flies, whether he's (still) actively collecting miles or not, while CM are probably more often (if not almost always) sought after by folks who are actively collecting and managing them, and intend to redeem them.

    But is the 1.5 cents a realistic assessment? Is a CM really 2.5 times more likely to be redeemed than a PM? And if a CM really does carry a 1.5 cent liability, this would mean the airlines *must* be selling them to credit card companies and realtors etc. for more than 1.5 cents apiece (and "accepted wisdom" was that they were sold for a penny or less apiece -- apparently "accepted wisdom" was wrong).

    Did the seminar/conference discuss these points? If so, what can you share?

    (Or maybe these were Hong Kong dollars? :D)
     
  6. Wandering Aramean
    Original Member

    Wandering Aramean Gold Member

    Messages:
    28,231
    Likes Received:
    61,782
    Status Points:
    20,020
    Yes, they have two different levels, but those numbers are the value to the program, not the cost. I forget exactly what APM stands for but in that formula it is supposed to be higher, not lower, to add value to the program.

    The points carry a common liability but the CMs (a/k/a "good" points) are worth more to the company because they get paid to distribute them. The PMs (a/k/a "bad" points) are a cost center, taking away from the internal accounting balances as the airlines pay themselves internally for the points being issued.
     
    Last edited: Jun 13, 2014
    eponymous_coward and Counsellor like this.
  7. Counsellor
    Original Member

    Counsellor Gold Member

    Messages:
    1,221
    Likes Received:
    1,620
    Status Points:
    1,120
    I suppose both types of points could carry the same liability on the books for accounting purposes, but I would have hoped any company capable of programming a revenue management paradigm would have at least tried to see which of the two types of miles is more likely to actually cost the company. Admittedly, individual points don't have fingerprints or a birth certificate, but American keeps the AAdvantage accounts and could check (if they wanted to) the source of the points in the account being used for the redemption (e.g., 40% PM/60% CM or 100% PM, etc.). That way they could more accurately project redemption rates, and thus actual likely liability. If they don't do that at least on a random basis, they're passing up some important data points.

    I'd prefer to think (hope?) they're smarter than that.

    I thought the APM stood for Average Per Mile for that mix. That's how it seems to calculate.

    If this isn't liability per point, why is it expressed in dollars per point? Did they say? I wouldn't think it would be the administrative cost per point, since the CM can't cost that much more to administer than the program miles. If anything, since most of the bookkeeping (figuring out which frequent flyer account gets how many points) is done by the commercial bulk purchaser, the administrative cost should be lower for CM than for PM. Nor could it be Average Profit per Mile, since they can't be selling CM at a price higher than 1.5 cents per mile, so the profit couldn't be as high as that.

    However, I can see why the airlines like CM, since they create actual positive cash flow up front (and cost nothing to produce), while PM do not directly increase cash flow but do increase liability (a "cost center" in economic terms, as you say).

    Obviously this is a change in perspective from the "original understanding" where the points were intended to generate increased general cash flow by encouraging loyalty and thus more tickets being sold. In that respect, they were like any other advertising effort. Indeed, as I understood it, the cost of issuing the points, administering the program, and redeeming the points through tickets was borne by the advertising and promotions budget when the program was first begun.

    When issuing and selling the miles to other (commercial) entities became widespread, the frequent flyer programs began being looked on as a source of direct cash flow -- a profit center -- in and of itself, rather than a part of the advertising program, and indeed were frequently spun off as a separate entity for accounting purposes (and sometimes for legal purposes as well). As a separate entity, the frequent flyer program would now see PM as a cost unredeemed by increased cash flow for the FF program (even though the airline itself might still see the PM as being an advertising cost).

    Indeed, if I were running the frequent flyer program, for accounting purposes at least I'd demand the airline "buy" the PM from me in order to keep my books straight, and I'm sure the airline would insist on not being charged the same price per PM as the frequent flyer program charges for CM. That being the case, I'd strongly suspect that they do indeed have the historical cost/liability of PM separately calculated.

    Fascinating!

    And I suppose the perspective would be slightly different depending on whether you were part of airline operations (and "buying" the PM), or were part of the frequent flyer program entity (and selling and redeeming both the PM and the CM). Seth, did you have a feel for where these executives were located within the organization?
     
  8. Wandering Aramean
    Original Member

    Wandering Aramean Gold Member

    Messages:
    28,231
    Likes Received:
    61,782
    Status Points:
    20,020
    They're the people running the loyalty program. And they were presenting to their peers from other programs.

    They do account for the cost of the airline "buying" the points from the program for the PMs. That is a cost against the company overall while the CMs are a revenue sources. Ultimately that's why they want to distribute more CMs and fewer PMs overall.

    As for the numbers in the two bar charts, APM may very well be average per mile. But on that side it would be the average value available towards redemption, not the average liability towards the program.
     
    Last edited: Jun 13, 2014
    Counsellor likes this.
  9. HaveMilesWillTravel
    Original Member

    HaveMilesWillTravel Gold Member

    Messages:
    12,506
    Likes Received:
    20,199
    Status Points:
    16,520
    Aha! So you observed the copy machine in action! :)
     
  10. mattsteg
    Original Member

    mattsteg Gold Member

    Messages:
    3,278
    Likes Received:
    5,543
    Status Points:
    4,170
    Seems like they're just starting from the baseline of:
    1) give whatever we need out in PMs to drive maximum profit through incentivized behavior. If the product is in scarce enough supply and high enough demand...there's not much benefit.
    2) sell miles and make income that way. grow this business - there's more room to grow than with PMs. Fewer miles in circulation means you can make the miles more valuable.
    3) the more income you can get per mile, the more attractive you can make your value proposition to grow the business.


    There's certainly more complexity on the PM side that is glossed over...but this isn't revolutionary. The details that are glossed over are really where the interesting value judgments regarding who to award how much happen.
     
  11. kiwi
    Original Member

    kiwi Gold Member

    Messages:
    16,851
    Likes Received:
    27,973
    Status Points:
    20,020
    Perhaps I'm misinterpreting, but isn't the graphic simply saying the price (not cost) to the FFP is lower with internally generated miles than externally purchased miles?
     
    Counsellor likes this.
  12. HaveMilesWillTravel
    Original Member

    HaveMilesWillTravel Gold Member

    Messages:
    12,506
    Likes Received:
    20,199
    Status Points:
    16,520
    I have miles/points of both types in many programs. And I generally need both types to make it worth my while and achieve my goals. That links the two together. If it becomes too hard to earn PMs then I lose interest in the program and as a consequence in its CMs and vice versa. An example here is UA/Delta with their PM earnings change. I may now less interested in earning UA miles via my credit card.

    Or if redemption becomes too costly, then I lose interest in both CMs and PMs, which also results in loss of product revenue that would have caused me to earn PMs. The example here is Hilton with their devaluation. Awards have become too costly, so I am no longer using my Amex card and have significantly reduced my Hilton spend.
     
    Counsellor likes this.
  13. Counsellor
    Original Member

    Counsellor Gold Member

    Messages:
    1,221
    Likes Received:
    1,620
    Status Points:
    1,120
    But how could it be value toward redemption? For redemption purposes, a mile is a mile, totally fungible. If I redeem 25,000 miles for a ticket that would have cost me $500, the redemption value per mile is 2 cents, whether I got the miles from flying BIS, or from a credit card offer and MS.

    And the seat that is redeemed costs the airline (by whatever metric they use) the same amount no matter the source of the miles.

    I could see an argument that the accounting liability that should be booked for issuance of a PM mile is less than the liability for a CM mile (which would imply greater breakage for PM than CM and is consistent with the figures in the chart), and that the profit in selling a CM mile is greater than the profit in issuing a PM mile (but that only means they're selling a CM mile for more than it's costing the airline to redeem the average CM mile, and the gain to the airline on a CM mile can't be 1.5 cents under any accounting principle that I can envision).

    Curiouser and curiouser, to quote Alice.
     

Share This Page