Airlines Make More Money Selling Miles Than Seats (expressnews.com)

An anonymous reader shares a report: Does your wallet contain an airline-branded credit card? If so, your daily Starbucks visits, iTunes selections and dining habits serve a critical role in keeping the U.S. airline industry fat and happy. For carriers such as American Airlines, riding Citigroup Inc. plastic, or Delta, on American Express Co., these programs are a cash cow, a golden goose -- or any other fiscal livestock you care to conjure. Each mile fetches an airline anywhere from 1.5 cents to 2.5 cents, and the big banks amass those miles by the billions (alternative source), doling them out to cardholders each month. For the banks, people who pay annual fees for those cards in order to accumulate miles are the closest thing to a sure bet. These consumers typically have higher-than-average incomes and spend more on their cards, generating merchant fees for the banks. They also tend to maintain high credit scores, which means they pay their bills on time and banks experience fewer defaults. The airline-miles business, formally known as loyalty programs, has become a high-margin enterprise that's grown in size and value amid airline consolidation, with carriers keen to expand credit card rolls and see loyalty members spend more.

Comments

Speaking of airlines

[Anonymous Coward]

@United overbook #flight3411 and decided to force random passengers off the plane. Here's how they did it:

https://twitter.com/JayseDavid/status/851223662976004096

Re:Speaking of airlines

[bugs2squash]

You're usually pretty safe from being bumped once you're actually on the plane though. Silly people, imagining that once they've paid for something they have any kind of rights.

Re:Speaking of airlines

[swillden]

You're usually pretty safe from being bumped once you're actually on the plane though.

"Pretty safe", yes, but you've never been completely safe. That said, the FAA has some well-defined requirements about how they have to treat people who've been involuntarily bumped, which includes a hefty cash payment (equal, I believe, to the full round-trip fare) plus a seat on the next available flight (on any airline, in any class at or above the class you paid for). I've flown over a million miles, and I've been involuntarily bumped exactly once. I got a $600 check and a first class seat on another flight, on another airline, 30 minutes later. The seat they bought me was on a direct flight, so I actually got home before I would have if I hadn't been bumped. Oh, and they still gave me mileage credit for the flight they bumped me off of. All in all, I was quite happy with the arrangement.

Silly people, imagining that once they've paid for something they have any kind of rights.

You do have rights, but they don't include the right to refuse to exit the plane when the airline tells you to. Whatever the reason, whether it's a good one or not, if the flight attendants or captain tell you to get off, you get off or the police will be dragging you off. If they kicked you off involuntarily, and not as a result of anything you did, you do have a right to compensation and transportation.

Re:Speaking of airlines

[Raenex]

That's fucking bullshit man. Retweeting.

Good job, anonymous Twitteratee. You are such a hero.

Re:Speaking of airlines

[jittles]

"Pretty safe", yes, but you've never been completely safe. That said, the FAA has some well-defined requirements about how they have to treat people who've been involuntarily bumped, which includes a hefty cash payment (equal, I believe, to the full round-trip fare) plus a seat on the next available flight (on any airline, in any class at or above the class you paid for).

How the heck is it even possible to get involuntarily bumped? Either you have a boarding pass with a seat assignment or you don't. Once you do, you have a seat. So this means they had to have taken someone who didn't have a seat and given that person a seat while forcing somebody else who already had a seat to give up that seat. That's completely idiotic. Just reassign the person who didn't have a seat before. They didn't check in early enough to get a seat, which was their decision. Why should people who spent the extra effort to check in and get their seat assignment have to suffer so that people who couldn't be bothered can take their seats?

The only even semi-plausible situation that could explain this would be if the equipment changed to a smaller plane, but even then, they should have known about the reduction in seats prior to boarding.

Because of several reasons. First of all, federal law allows the airline to overbook. Secondly, the plane is property of the airline. Third, the airplane itself is on property that is typically covered by federal law. You're also incorrectly assuming that United assigns seats based upon check-in. You pick your seat assignment when you book the ticket, or the airline picks one for you. They followed Federal law. The passenger was told that he needed to deplane. He refused. Once he did that, he was in violation of local and federal laws (federal because it was at an airport). He's lucky that he was not thrown in jail for trespass. It does not matter that he paid for a seat. Once his permission to be aboard the flight was revoked, he was required by law to deplane. The law also requires the airline to compensate him. They would have cut him a check and, as the GP says, probably booked him on a competing airline for free and given him a mileage credit. I've flown hundreds of thousands of miles and have never seen someone act this way, or seen someone be involuntarily bumped. I have had a schedule change screw me over in a similar way as this particular passenger. In that case, I was not given cash, but I did receive a new flight on a different airline and mileage credit for a flight that I would not have normally received miles for (it was an award flight that I had purchased with miles). The airlines will take care of you, they're required to. And even if there were no other flights that day, the passenger could have driven to Louisville the same day if he absolutely required it. People have been making a big deal about him being a doctor and his patients needing him. Well, what if he didn't show up for work because of a weather delay? There is no difference. His patients would have had to see an on-call doctor either way. The man should not feel entitled to fly just because he thinks he is more important than every other passenger on the plane.

Re:Speaking of airlines

[swillden]

How the heck is it even possible to get involuntarily bumped?

There are lots of possibilities. In my case, they had screwed up and assigned two passengers the same seat. Another thing that can happen is when they bump a "normal" passenger in favor of a high-status passenger. I was diamond medallion on Delta for a while, and one of the perks that comes with that status is that the airline guarantees that they will sell you a seat on any flight, even if it's already excessively overbooked, and (implicitly) even if that means they have to get someone else off. This usually works out fine, because the high-status last-minute purchaser is paying full fare for the ticket and there are plenty of people who are willing to be bought off the plane for significantly less than that. But in rare cases complying with their commitment to the high-status passenger could require them to involuntarily bump someone.

In the case currently getting so much press, there was apparently a crew for another flight that immediately needed to get to the destination to crew another aircraft, due to some other snafu, so the airline decided to take some passengers off to make room for them, rather than canceling or further delaying another flight. Apparently they were unable to buy anyone off -- or possibly with all the passengers on board there was just no time to go through that process -- so they picked some passengers at random. The only other option I can think of would have been to get on the PA and announce an increasing sequence of cash payments until they got their four volunteers. From a financial perspective there's no point in offering more than the FAA's regulations define for involuntarily bumped passengers, though, so if they were already sure they wouldn't get a volunteer without going above that level (which they could know if they'd already had to offer high paymetns to buy people off even before the emergency need for four more seats cropped up), then from a strictly financial point of view it was best just to pick four.

Given the national PR that ensued after a bumped passenger refused to debark and ended up having to be hauled off by the police, that was a bad decision, but that's hindsight. What usually happens is what happened in my case, nothing much.

Re:Speaking of airlines

[jittles]

It does not matter that he paid for a seat.The man should not feel entitled to fly just because he thinks he is more important than every other passenger on the plane.

You should go and read this again. A medical doctor, flying to a patient for surgery, with a paid ticket, an assigned seat, sitting in that assigned seat after boarding that aircraft, is not entitled to fly? Congratulations, you just made my top 10 of /. dumbest posters.

Why don't you try reading the federal laws regarding air transportation? And why don't you read property laws? The airline is allowed to ask him to disembark from a plane for any reason at any time it is safe for him to deplane. He was asked to deplane. He refused and was therefore trespassing. Had he been flying Delta that exact same weekend there is a high probability he would not have been able to fly either. So what would his patient(s) have done? If you have a problem with the booking practices of airlines then you need to complain to your federal representatives.

Re:Speaking of airlines

[slew]

"Pretty safe", yes, but you've never been completely safe. That said, the FAA has some well-defined requirements about how they have to treat people who've been involuntarily bumped, which includes a hefty cash payment (equal, I believe, to the full round-trip fare) plus a seat on the next available flight (on any airline, in any class at or above the class you paid for).

How the heck is it even possible to get involuntarily bumped? Either you have a boarding pass with a seat assignment or you don't. Once you do, you have a seat. So this means they had to have taken someone who didn't have a seat and given that person a seat while forcing somebody else who already had a seat to give up that seat. That's completely idiotic. Just reassign the person who didn't have a seat before. They didn't check in early enough to get a seat, which was their decision. Why should people who spent the extra effort to check in and get their seat assignment have to suffer so that people who couldn't be bothered can take their seats?

The only even semi-plausible situation that could explain this would be if the equipment changed to a smaller plane, but even then, they should have known about the reduction in seats prior to boarding.

AFAIK, you can legally be "bumped" for any reason (including if you have a boarding pass or are even on the plane). Airlines are allowed to make pretty much any decisions (takeoff-weight limitations, allowing frequent fliers or connecting passengers priority, or net revenue concerns) as long as they provide the legally obligated compensation to the person who was denied carriage. The FAA requires passengers follow crew member instructions at all times including disembarking the plane when requested.

As to whether any of this is "idiotic" or causes people to "suffer", or hurts PR, those are other questions, but the practice of arbitrary denied boarding is certainly legal.

Re:Speaking of airlines

[Dorianny]

I say bravo to this brave guy for bringing to people's attention this completely OUTRAGES Federal law that forces Police officers to treat Airline customers like criminals at the Airlines whim. Everyone should contact their representatives to remind them that they still represent us (in theory at least)

I only use 'cash back' credit cards

[sodul]

With cash back I get a very concrete view of what I'm getting back with real dollars and there is no blackout period or any of that BS. I only take the plane when I really need to though, with the trip back to europe every other year to visit family, and do road trips for most vacations.

Re:I only use 'cash back' credit cards

[dgatwood]

With cash back I get a very concrete view of what I'm getting back with real dollars and there is no blackout period or any of that BS. I only take the plane when I really need to though, with the trip back to europe every other year to visit family, and do road trips for most vacations.

That's really the only smart choice. Those airline cards were barely worth it when they were free. Once the airlines realized that there were enough suckers who would pay an annual fee for them, they became worthless junk.

With airline mileage cards, you get the equivalent of 1–1.5 cents per dollar spent. There are plenty of cash-back cards that pay that (and some that pay even more on various categories), and as you said, no blackout periods when paying with real dollars, so unless your travel plans are flexible, you'll probably find that you keep building up miles and aren't ever able to spend them. The only real benefit is that you get back 2% on airline travel. For that extra .5%, you pay $100 in annual fees. So for the airline mile cards to actually be worth more than you're spending in fees, you would have to spend a whopping $20,000 on airline travel every year. And if you make the kind of money where you can afford to spend that much money on airline flights, you don't care about getting cash back anyway.

Given how bad a deal the airline cards are, it is no real surprise, then, that the airlines are complaining about not enough people getting their cards. If they were free, they would be worth it for the extra half percent on airline ticket purchases. With a fee, they're a complete joke. (The high-end airline cards at least give you access to the airlines' special first-class lounge, which might be a benefit for some people if they would otherwise have done that, but the $99 cards are basically worthless.)

Right now, IMO, the best deal is Amazon's card. It pays 3% back on Amazon purchases (5% if you're a Prime member, which means your Prime membership becomes free at $5,000 in annual Amazon purchases), 2% on gas stations and supermarkets, and 1% everywhere else. For most people, this averages out to significantly more money than the airline cards, and there's no annual fee, so there's no downside if you find a better deal in a given month (e.g. when Citi or Chase gives 5% on one of those categories for a quarter).

Re: I only use 'cash back' credit cards

[SScorpio]

Citi Double Cash. No annual fee, 2% back on everything.

Store cards will give better deals, just only use each card at the store it's from.

Re:I only use 'cash back' credit cards

[Anubis IV]

Likewise. People always point out that the miles are a cheaper way to fly than paying with money, but that presupposes you'll fly in the first place. If that's true for you, then great, that's money (maybe) saved. If not, then why not enjoy the fact that a trip not taken is cheaper than either using miles or using cash?

When we got married, my wife was big on points rewards cards that offered watches, tech toys, and other such things. She pointed to a few things she bought with her points over the course of several years. When I asked how many of those things she would have bought in cash, had they handed her the cash instead, she said she wouldn't have bought any of them. When I showed her the prices should would have paid had she bought those things herself, she realized she wasn't actually getting a great deal at all (e.g. she thought the Apple TV 3rd gen was $100+ at retail, when it was actually $69 at the time). When I pointed to the cash rewards I had gotten from my card over that same period of time, she immediately switched cards.

Cash is fungible. I can apply it however I want, I can change my mind about how I want to use it, and I can accrue interest on it too. Points? Not so much. Miles? Not so much. When using those systems I'm tied to those rewards, and my currency in those systems is out of my control and subject to capricious rules designed to ensure that I get as little benefit as possible.

Paywall

[belgianpainter]

Here's the non-paywalled article from a week and a half ago https://www.bloomberg.com/news...

Colour me unsuprised.

[mjwx]

Risking a downmod but...

Being familiar with the financial services industry, this is hardly a shock to me. Those addled to credit cards always balk when I ask "Who is paying for your bonuses/rewards/cashback" and then act with utter denial when I say "You are". They refuse to believe that banks (and other FS institutions) simply dont give things out for free, because there is no overt fee, they think no fee exists.

Well let me screw your tiny little minds.

Long ago, banks figured out fees turned customers off. So they took the fees off the card user and put them onto the merchants who accept the cards. Then some bright spark came up with the idea of adding in rewards to get you to use your credit card more. Because of this, merchants are at a competitive disadvantage if they dont accept credit cards and a financial disadvantage if they do, damned if you do and damned if you dont.

So here's how it works.
1. Bank encourages you to use your card.
2. Bank charges merchant to accept card (or the merchant doesn't get paid).
3. Merchant has to take it sans lube and raises prices to compensate.
4. Bank passes on a pittance of what they took from the merchant back to the user.
5. Card user thinks they're winning because they never saw steps 2 and 3.

Your average rewards programme sees up to 3% returned to the user, usually less than half a percent. Meanwhile they're taking 3-6% from the merchant, the more "reward" you get, the more you're paying for it via price increases. Visa and Mastercard take up to 3 or 4%, premium cards like AMEX and higher end Visa/Mastercards take 5 or 6%

Its a negative feedback loop, however some will defend it to the death because they dont see its coming out of their pockets. I almost have to admire the Machiavellian brilliance of getting people to defend being ripped off.

"Points" cards are the golden goose of this rip-off system as points dont have to have any real monetary value, redemption values can be arbitrarily changed and they can be expired.

Now here in the UK, the EU imposed a maximum limit that banks can charge merchants... so rewards programmes are hard to come by over here, however it means we're only paying 1-2% extra for credit card purchases.

Re:Colour me unsuprised.

[phantomfive]

For an individual consumer, the best strategy is *still* to try to maximize whatever reward payback from the cards.

Re:Colour me unsuprised.

[bluefoxlucid]

The cardholder doesn't pay; everyone pays. The cardholder with the highest-merchant-fee card is not paying that merchant fee; it's averaged across all transactions, including cash (0% fee) transactions. That means cash holders pay the largest mark-up and get nothing; while high-merchant-fee rewards cards with no cardholder fees pay the same mark-up (read: no additional cost over just paying cash) and get the maximum return (read: what's purchased by those merchant fees is paid for mostly by all other consumers).

Everyone pays into the system. The guy with the best rewards comes out ahead; the guy with cash comes out behind; and the guy closest to the average-fee rewards card essentially gets a wash.

Re:Colour me unsuprised.

[esperto]

no, for an individual consumer, the best strategy is to, whenever possible, ask for a discount at least equivalent to the fees charged by the card to pay in cash, this way you recoup all the fees and not only the peanuts the bank throws back at you.

Re:Colour me unsuprised.

[swillden]

no, for an individual consumer, the best strategy is to, whenever possible, ask for a discount at least equivalent to the fees charged by the card to pay in cash, this way you recoup all the fees and not only the peanuts the bank throws back at you.

Yeah, walk up to the cashier in your local grocery store and ask for a cash discount. Good luck with that.

In places where you're talking to the owner, or at least a very empowered (and smart) manager or employee, you might be able to get them to knock 3-5% off for a cash payment, but it's rare. Everywhere else... get the best rewards card you can, and use it as much as possible.

I actually had the "cash discount" discussion last month when I bought a car (actually bought out my leased car). The dealership's policy is to accept plastic for purchases up $4K, so I offered to pay $4K with the card and the remaining thousand or so with cash. Once they said okay, I offered to pay cash if they knocked an additional $150 off the price, since that is about what they were going to pay in card fees. They refused. They also refused to knock $100 off. So, I paid with the card and got my 2% (a little under $80) discount that way. Unfortunately I noticed later that there was a promotion on my Discover card that I could have used to get 5% back, so I could have gotten $200 back (and they'd have undoubtedly been soaked for a bit more than that).

Re:Colour me unsuprised.

[AthanasiusKircher]

In places where you're talking to the owner, or at least a very empowered (and smart) manager or employee, you might be able to get them to knock 3-5% off for a cash payment, but it's rare.

It's also important to note that handling cash is not free. Let me say that again: handling cash is NOT free.

Somehow, I think all the pro-cash anti-card people think that every business magically ends up with just the right set of bills every day to pay its employees and start the next with a full cash register set to give change, etc.

In the real world, most businesses have to deal with banks a lot to process cash: they need to stock enough cash for change for customers, they need to transport cash back and forth from the bank (which might have security implications, perhaps even armored transport or security services for large-volume businesses), they might need to pay for extra security (electronic systems, safes, even actual guards on-site), etc., etc.

So, while a business may pay a 2-3% processing fee for card purchases, handling cash frequently costs ~1% of their transactions too (sometimes significantly more if additional security is required). Cards are still usually pricier, particularly for small transactions and for smaller businesses, but if you go in expecting a major discount for paying in cash, it might not actually be worth their while.

All-in-all, if you're getting a couple percent back from all (or most) purchases from your card, everything probably roughly balances out for customers who use cards -- with you pocketing a tiny percentage, and the credit card company getting the other percentage point or whatever that would likely be lost in the cost of handling cash. The main place where "cash only" businesses actually carries a BIG difference for an owner is where there's tax cheating going on.

(Actually, I'd imagine right now that a lot of small businesses hate having to deal with both -- it would probably be a lot easier to only offer one or the other, but right now they still have the costs associated with both, unless they want to alienate customers.)

Re:Colour me unsuprised.

[AthanasiusKircher]

Everyone pays into the system. The guy with the best rewards comes out ahead; the guy with cash comes out behind; and the guy closest to the average-fee rewards card essentially gets a wash.

Well, you're of course assuming a case where a card user NEVER carries a balance and pays off immediately every month. It's always important to remember that more than 1/3 of American households carry credit card debt from month-to-month. (After the recession, it was closer to 45%.) And of those households who have credit card debt, the average debt is over $15,000. At the average interest rate for credit cards, that translates to over $2500 just IN INTEREST every year.

So, for a lot of people, the guy with the reward card is never going to make enough money in rewards even to pay off the amount of interest he'll get charged. Even if you only carry a balance "during emergencies" for a few months here and there, the interest and fees can really add up.

So yeah, if you have the discipline basically to NEVER carry a balance on your cards, then your description is true. For a significant percentage of Americans, they'd likely be better off not dealing with the temptation of credit cards at all.

Re:A question (from someone witout a credit card)

[raburton]

Cheaper? That seems to imply you're paying for them in the first place. In the UK credit cards are generally free. Sure there are a few offered for a fee, in return for something you probably don't want (like travel insurance that doesn't cover winter sports, or all the world, and costs more than a regular policy to upgrade it, or some other pointless benefits), but they aren't popular. In fact credit cards with cashback are pretty common here. I get 1% of everything back on my card. I don't know how that compares in value terms to airmiles, but they wouldn't be as popular here. I think people here fly less with big carriers that use airmiles. Most of the time when I fly it's not too far and I take a budget airline for £20-30 a flight.
Paying for banking services never really caught on in the UK. There have been an increase in paid current accounts in the UK in recent years, but they have had to offer perks that genuinely offset the fee to get people to take them, as cashback again. I do have a paid current account, I pay £5 a month and get I get back (for example, last month) £37 in much higher than normal rate of interest and cashback on my direct debits, as cash straight back into the account every month. It's a no-brainer, as you America's would say. But paying to collect points is not popular here.

the announcements make it very clear

[nimbius]

flight attendants: "for those of you in economy class, please step forward and use the bone saw to remove your legs at the knee for storage in the overhead compartment. Pretzel dust and warm pepsi will be provided once in flight, along with the entertainment of a partially eaten magazine about our CEO's latest hunting trip in the alps. Those of you in our platinum, rhodium, saphire card club, or other rare and exotic metals often associated with conflict mining, please proceed to the front of the aircraft and take your seat stolen from the lobby of an upscale motel. You will be permitted to eat with a real fork, provided you've prostrated yourself accordingly to the TSA and said your daily supplication to the holy terror alert list. "

Read the flyertalk.com thread

[Anonymous Coward]

If you want to know real inside angles on that even, read the flyertalk.com thread.

That thread is almost certainly being monitored by United Airlines. Back when I was flying on United a whole lot, they started an internet ad campaign that featured stylized persons that were supposed to be waving to a bunch of planes flying off. I posted that it looked like a bunch of Nazis giving the "Heil Hitler" salute to the Luftwaffe on its way to bomb London (and it did look just like that...), and within thirty minutes that internet ad campaign disappeared.

All tools have a purpose

[SuperKendall]

Why would anyone be dumb enough to pay a premium for a card that gets miles?

I got two premium cards (one personal, one business) for Southwest Airlines that essentially got me a companion pass for $200.

That meant my wife could fly with me for free, anywhere, for the next two years...

I assure you I got WAY more than $200 of value from that perk. Not to mention I had, just for obtaining the cards, over 100k miles to use for toking flights as well.

It's not like you have to keep the cards and pay the annual fee. You can cancel after the first year.

These cards are a win / win

[mtmiller100]

I have been using a "rewards" card for a few years now. I pay $89 a year for the privilege. I use this card for just about everything, from groceries to monthly bills. I pay my balance in-full every month, so with the 3-week grace period, I'm only paying a couple dollars interest each month. The bank makes money off of it. I get much more than the $89 + a few bucks interest out of it. I usually rack up about $800 in rewards every year, plus I am insulated from fraudulent purchases (twice last year, "my card" was used in the Cayman Islands to buy gas). So, they're paying me about $650 a year (in rewards, which I can use against my balance) to use their card, AND I get fraud protection. If they're making some money too, I'm fine with that.

Re:Not exactly

[Dayze!Confused]

Banks purchase these miles in bundles of billions, giving the airlines a nice fat line to pad their paperwork with. If miles expire, or otherwise go unused then that is money in the bank for the airlines. Not every person who has points is savvy with how to use them. You can get 3-4c/mi if you like international business class. Most aim for about a 2c/mi redemption rate.

I'm flying international business round trip on JAL to SE Asia for 140,000mi, or about $1400. A round trip economy ticket is about the same price, whereas the business ticket would run somewhere around $4000. I do have to be more flexible in my timing of vacations, but I'm willing to work with that to have 6ft of legroom and lay flat seating.