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One way normal credit card companies makes money is this way: They charge the merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the custome
by vmarsy 10y ago
One way normal credit card companies makes money is this way: They charge the merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the customer. They make profit on the difference.
With a deal with an airline, the company doesn't have to do the 1-2% cashback, instead they give 0 to the customer. The airline company will give them miles though. Now the airline company can say to the credit card company: "look these thousands of customers you have them only thanks to me, so let's split your profits from the merchant 50/50 (or at least give me that 1% cashback you don't have to pay the customer), plus at some point I'll have to actually offer a plane ticket to those customers who earn enough miles"
What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. (Plus the money the credit card company give them is today, whereas the plane ticket might be in one year or more, so the present discounted value of that ticket is even less)
[1] https://thepointsguy.com/2017/04/april-2017-monthly-valuations/ https://thepointsguy.com/2017/04/april-2017-monthly-valuatio...
- fizixer 10y agoSo in the end: - more customers - buying more useless stuff (to collect miles) that they would otherwise won't buy. - making outrageous travel plans (using those miles) that they otherwise won't make (e.g., fly to europe over the weekend if you're feeling bored; or world tour for honeymoon). on top of the usual: - annual fee - interest on credit card (missed monthly payments and/or lower-than-full payments)
- kalleboo 10y agoAnd of course a bunch of those miles will expire, or some customers will never reach enough miles to make a flight. And at least in the past some airlines have had pretty high fees for redemption flights ("fuel surcharge") that might even cover most of the cost
- zwily 10y agoHaven't most programs switched to miles not expiring? I know Delta has.
- jessriedel 10y ago> Consumer website estimate that in the best of case, a mile is equal to $0.01, Can you give a source for this? I've definitely gotten much better value out of my miles than this (though not always). And I'm talking about normal coach fare, not wasting miles on first class tickets that only seems like a good deal because the list price is so exorbitant.
- balls187 10y agoDelta charges $0.035 a mile. http://www.delta.com/buygftxfer/displayBuyMiles.action http://www.delta.com/buygftxfer/displayBuyMiles.action
- jessriedel 10y agoWhat they sell miles for only gives you a soft upper bound on what miles are worth.
- vmarsy 10y agoI added a link to my original post, it varies by companies, delta is estimated at $0.012 apparently those days.
- jessriedel 10y agoI don't think "~1%" is a fair summary of that link, especially not "in the best case". You're trying to breakdown what happens to a 4% fee, and many of the airlines have miles valued at >2% at that link. I also don't know where you're getting that 7 miles/dollar number from.
- vmarsy 10y agoThe 7 miles per dollar comes from the delta Amex marketing flyer sitting on my pile of mail, but I didn't look at the fine print, I got curious and looked into details : actually it's only 1 mile per dollar for usual purchases, you get one additional mile on "delta purchases", then you can get 5 extra more on money spent on flights itself. So yeah on average it's close to 1 mile per dollar, I can't edit the original post. So the math makes more sense with those numbers :)
- deleted 10y ago[deleted]
- mysterypie 10y agoThis is a great explanation -- so clear. Now the article makes sense. Business magazines never seem to give straightforward explanations like the above, especially with topics like currency exchange, trade balances, or inflation. I suspect that business authors make processes sound mysterious and complicated to cover up the fact that they don't understand it themselves.
- Fomite 10y agoAnd tech magazines rarely give a straightforward explanation of why memory speed is important when talking about DDR5. This is likely because they presume most of the readers reading a Bloomberg article about whether or not airlines are undervalued due to the revenue stream of their loyalty programs are passingly familiar with many of the core concepts.
- rando832 10y ago> What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. Your math is way off. If it's 7 miles per dollar spent on the card, that is 7% back by your math, compared to 1-2% cashback, this conflicts with "they're also saving money there." With that math, you're saying that it's a great deal for the consumer. Perhaps the other things you mentioned still add up to being in the airlines favor, but whats really going on?
- nunez 10y agoMost cards give you two miles per dollar spent, not seven. If you did get seven, then that carrier would value those miles even less than they currently do
- vmarsy 10y agoYep my bad for the 7 miles, see my reply to jessriedel below
- true_religion 10y agoThe marginal cost of a single passenger is fairly low to an airline. That's why they have blackout days, and restriction on where you can actually fly with earned credit-card miles... in order to make sure the cost of your flight is always to their benefit or at worst break even.