Why Aren’t More Airlines Discounting Awards?

With flight loads down a minimum of 50% even after schedule reductions, why aren’t airlines discounting frequent flyer awards?

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Airlines Flying Half-Empty Aircraft

It’s no secret that airplanes are flying half-empty (no one views them as half-full right now for those concerned.) That’s an optimistic estimate from many carriers, some are even lower. Those rates are even after the schedule reductions that exceed 70% for most carriers.

While some flights get attention for operating full, many are flying nearly empty. There’s plenty of capacity even with reduced capacity. The marginal amount of savings by fueling for a couple of fewer passengers is minimal; a few more award redemption passengers would cost next to nothing.

All Leisure Travel

Some feel very strongly that no travel should occur at all unless it is imperative and serves an essential worker. Others believe the country should get back to normal and don’t trust the stats and figures released by the medical community. That debate should take place… elsewhere. The truth of the matter is that regardless of your feelings for or against, leisure travel is taking place. Airlines continue to serve leisure-only customers and no one is calling for the complete shut down of transportation. For the most part, those that do not believe leisure travel should take place aren’t traveling themselves so they are safe from the potential risk.

Business travel has all but ceased. American Airlines and Allegiant both acknowledged as much in their earnings call. All the seats that carriers are selling right now are to leisure travelers. Leisure flyers tend to have flexibility in their dates, routes, and even origin and destination. Carriers could discount award flights on just the flights with the most open seats to produce maximum value for shareholders while they deliver value to customers.

Businesses rarely utilize frequent flyer miles to offset costs of business travel so adjusting the cost of redemption will keep carrier’s premium routes price protected (as business comes back to life over time.)

Miles are Liabilities

On the airline balance sheets, frequent flyer miles are liabilities. In fact, according to Award Wallet, there are 10 trillion (yes, trillion) frequent flyer miles in circulation worth an estimated $165 bn. While 20% will expire or go to waste without ever being used, that still means that $132bn will be used as those miles are redeemed. That’s more than double the market cap for American, United, Delta, Southwest, Alaska, Allegiant, Spirit, and JetBlue combined.

Publicly traded airlines establish a liability value for their miles. In 2015, American Airlines had 853 billion Advantage miles in circulation which it valued at a $2.45 bn or 0.0028¢/point. That’s a balance sheet valuation but not the true cost. American stated in 2015 that the marginal cost of a 25,000 point redemption was less than $35 or 0.0014¢/point (half.) For stockholders, that equates to a 2:1 value at a minimum and likely even higher as some of the associated cost would cover meals and other benefits that are not currently offered.

Benefits of Reduced-Price Awards

If an airline as large as American were to offer reduced cost awards across the board, three positive effects would occur. The first is a reduction of liabilities. Some of the marginal cost is reduced as mentioned before with reduced services, but likewise, the cost is even lower because there is no lost opportunity cost for seats that would otherwise be sold to paying customers. Liabilities are reduced (like wiping away debt from your finances) improving the balance sheet.

Second, airlines would likely sell more miles to customers who may be short of an award and to banks in large quantities as more customers sign up for credit cards and use them. That grows top-line revenue up to a 90% margin against future costs. Today, it serves as an immediate cash injection to struggling airlines.

Third, it makes for great press. Airlines are spending as much as twice on their usual ad buys to promote their business, however, reducing the cost of frequent flyer awards doesn’t require costly ads – travel bloggers will rave about it for them. Members that receive emails will also feel that their carrier of choice is delivering value to them and that their miles have even more value than they did before.

Why Aren’t They Discounting Frequent Flyer Awards Aggressively?

Carriers may want to protect the cost of an award to prevent price erosion in the future. If carriers see the coronavirus crisis as temporary, aggressive frequent flyer award discounts do not help especially when travelers book well into the future. In the near term, it may be negligible. Other businesses reflect this too. For example, while restaurants struggle to keep their doors open, the price of a pizza didn’t drop 50%, Chipotle hasn’t slashed its prices either. There are differences, of course, every time an airplane door closes, inventory dies, unlike ingredients in a burrito which can be served the next day.

Some are discounting here and there. However, it’s clearly not having a large effect on getting customers into seats. It’s very hard to sell checked bags, food and beverage, and seat assignments if the seat goes unsold. While targeted, limited discounts may fill some seats, a massive promotion would help to fill more.

It’s not the right time to encourage leisure travel. Airlines need leisure travelers to keep flying right now, but it may not be prudent to promote that given the sensitivity of the topic.

Conclusion

Leisure travel is taking place regardless of advisability. Airlines have a unique opportunity to obtain more ancillary revenue, reduce liabilities, and sell more miles for inventory that is rotting anyway. They also have the rare chance to surprise and delight customers that have already demonstrated a financial commitment to the brand and willingness to fly the brand. Whether it’s price protection, stubbornness, or a perceived gamble on the public relations outcome of such an initiative, I think their hesitation is ill-advised.

What do you think? Should airlines encourage flying for leisure customers by offering award discounts?