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The airlines have successfully squeezed banks a good deal more than that! At this point all the US-domestic carriers are charging their bank partners over 1 US

by 112012123 6y ago

The airlines have successfully squeezed banks a good deal more than that! At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. Source: Have negotiated these deals with airlines

arcticbull 6y ago
These numbers are proprietary so it's really hard to find. Happy to have a better ball-park! Thanks!
thaumasiotes 6y ago
> At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. I had the impression that the value of an airline mile to the consumer was 1 cent. That would make paying more than a cent nonsensical. Did airline miles suddenly become a lot more valuable?
- dannyw 6y ago
  Yes, to banks. Banks pay airlines a premium for the opportunity to market and get customers through FF programs.
  - thaumasiotes 6y ago
    How can offering the customer 1 cent be worth more than 1 cent to the bank? They can just give you ordinary cash back.
    - smm2000 6y ago
      Giving cash back creates wrong incentives and you sign up different audience than if you offer airline miles. Airline miles are in demand for people who travel often (affluent) in comparison to people who wants to get $150 after signing up for cc (poor). That said there are offers to get cash for signing up. Some time ago First Republic Bank was giving $300 for cc sign up for Google employees (aka rich people).
      - thaumasiotes 6y ago
        Airline miles are cash back. They're just a larger hassle under a different name.
        rightbyte 6y ago
        I guess kickback is the proper term?
        arcticbull 6y ago
        Rebate is the term haha
    - arcticbull 6y ago
      Points are different in a few ways. (1) They work because the bank and airline partners are able to offer you something of high perceived value (a vacation, even in business or first class) for very low marginal cost. (2) This means that (in my most recent redemption) the bank pays the airline $462 in rewards, that cost the airline $400 to deliver, and provides to you with $2500 in value. (3) Points are great because people don't consider them "cash" but instead something they don't mind parting with. More of a rebate. So the economics of it are that the bank collects $0.018 in interchange for every dollar spent on a card, converts that to a point that costs them $0.007 to deliver, which the airline services for $0.006 by disposing of inventory that would otherwise go unsold. The airline wins again because they've created a secondary market for unsold inventory that they can sell to leisure travelers without undercutting the amount they can sell the same inventory for to business travelers. It's a very nuanced and successful way of motivating people who have a choice to make the choice you want them to make. On the other hand, $0.01 in cash back costs the bank $0.01, and then if you redeem for travel the airline gets paid $0.01, and you get $0.01 in value.
      - hakfoo 6y ago
        But conversely the value of points have to be discounted by the risk of loss of utility or future devaluation. When the credit card says $200 in cash-back rewards, there's a lot less room to play games. 20,000 miles might buy a ticket today, but only an upgrade tomorrow. And that even assumes the ticket you wanted was available through the program you decided to back.
- lotsofpulp 6y ago
  It’s 1 cent if you’re lucky. I’d probably value an airline mile (or hotel point) at $0.003 or less, based on my usage patterns and comparing the USD price versus the point/mile price.
  - arcticbull 6y ago
    It varies a lot depending on the program. $0.003 for you as a customer is way too low, since you can redeem them for actual goods on their websites for usually $0.007. That's still way too low if you actually want to fly anywhere. Benchmark value of points when redeeming for economy is between $0.01 and $0.015. When redeeming for business its $0.03-0.06. When redeeming for first, its $0.10-$0.20 In general rule of thumb is Alaska miles are worth $0.02, American are worth $0.013, United are worth around $0.013, Delta are worth $0.01 (since you can redeem them for $0.01 as cash towards paid tickets if you have one of their credit cards). Hotel points are different, Hilton, IHG and Club Carlson are around $0.005, Marriott are worth around $0.009, and Hyatt are worth $0.016. But I digress, that's value to the end user. We're debating what the credit card company pays the airline for it.
    - lotsofpulp 6y ago
      I’ve searched United flights for many years, and have never found one at over $0.01. Plus the usual taxes and fees, end it’s worth less. If a flight is $500, the miles are always >= 50,000, at least on United. Hilton’s points are worth far below $0.01. I don’t know what they go buy, but it’s usually $0.005 at best, if not worse whenever I have searched it.
      - NovemberWhiskey 6y ago
        If you're booking economy flights, you're probably not getting good value. International business and first class flights are often 2x or 3x the number of miles, but usually 5x to 15x the number of dollars.
      - ValentineC 6y ago
        One of the few good things about redeeming Hilton and Marriott hotel points is the 5th night free benefit [1][2], which bumps the value of one's hotel points by around 20–25% in some cases. [1] https://hiltonhonors3.hilton.com/en/promotions/5th-night-free-example.html https://hiltonhonors3.hilton.com/en/promotions/5th-night-fre... [2] https://www.marriott.com/loyalty/redeem/hotels/free-nights.mi https://www.marriott.com/loyalty/redeem/hotels/free-nights.m...

arcticbull 6y ago

These numbers are proprietary so it's really hard to find. Happy to have a better ball-park! Thanks!

thaumasiotes 6y ago

> At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. I had the impression that the value of an airline mile to the consumer was 1 cent. That would make paying more than a cent nonsensical. Did airline miles suddenly become a lot more valuable?

dannyw 6y ago
Yes, to banks. Banks pay airlines a premium for the opportunity to market and get customers through FF programs.
- thaumasiotes 6y ago
  How can offering the customer 1 cent be worth more than 1 cent to the bank? They can just give you ordinary cash back.
  - smm2000 6y ago
    Giving cash back creates wrong incentives and you sign up different audience than if you offer airline miles. Airline miles are in demand for people who travel often (affluent) in comparison to people who wants to get $150 after signing up for cc (poor). That said there are offers to get cash for signing up. Some time ago First Republic Bank was giving $300 for cc sign up for Google employees (aka rich people).
    - thaumasiotes 6y ago
      Airline miles are cash back. They're just a larger hassle under a different name.
      - rightbyte 6y ago
        I guess kickback is the proper term?
        arcticbull 6y ago
        Rebate is the term haha
  - arcticbull 6y ago
    Points are different in a few ways. (1) They work because the bank and airline partners are able to offer you something of high perceived value (a vacation, even in business or first class) for very low marginal cost. (2) This means that (in my most recent redemption) the bank pays the airline $462 in rewards, that cost the airline $400 to deliver, and provides to you with $2500 in value. (3) Points are great because people don't consider them "cash" but instead something they don't mind parting with. More of a rebate. So the economics of it are that the bank collects $0.018 in interchange for every dollar spent on a card, converts that to a point that costs them $0.007 to deliver, which the airline services for $0.006 by disposing of inventory that would otherwise go unsold. The airline wins again because they've created a secondary market for unsold inventory that they can sell to leisure travelers without undercutting the amount they can sell the same inventory for to business travelers. It's a very nuanced and successful way of motivating people who have a choice to make the choice you want them to make. On the other hand, $0.01 in cash back costs the bank $0.01, and then if you redeem for travel the airline gets paid $0.01, and you get $0.01 in value.
    - hakfoo 6y ago
      But conversely the value of points have to be discounted by the risk of loss of utility or future devaluation. When the credit card says $200 in cash-back rewards, there's a lot less room to play games. 20,000 miles might buy a ticket today, but only an upgrade tomorrow. And that even assumes the ticket you wanted was available through the program you decided to back.
lotsofpulp 6y ago
It’s 1 cent if you’re lucky. I’d probably value an airline mile (or hotel point) at $0.003 or less, based on my usage patterns and comparing the USD price versus the point/mile price.
- arcticbull 6y ago
  It varies a lot depending on the program. $0.003 for you as a customer is way too low, since you can redeem them for actual goods on their websites for usually $0.007. That's still way too low if you actually want to fly anywhere. Benchmark value of points when redeeming for economy is between $0.01 and $0.015. When redeeming for business its $0.03-0.06. When redeeming for first, its $0.10-$0.20 In general rule of thumb is Alaska miles are worth $0.02, American are worth $0.013, United are worth around $0.013, Delta are worth $0.01 (since you can redeem them for $0.01 as cash towards paid tickets if you have one of their credit cards). Hotel points are different, Hilton, IHG and Club Carlson are around $0.005, Marriott are worth around $0.009, and Hyatt are worth $0.016. But I digress, that's value to the end user. We're debating what the credit card company pays the airline for it.
  - lotsofpulp 6y ago
    I’ve searched United flights for many years, and have never found one at over $0.01. Plus the usual taxes and fees, end it’s worth less. If a flight is $500, the miles are always >= 50,000, at least on United. Hilton’s points are worth far below $0.01. I don’t know what they go buy, but it’s usually $0.005 at best, if not worse whenever I have searched it.
    - NovemberWhiskey 6y ago
      If you're booking economy flights, you're probably not getting good value. International business and first class flights are often 2x or 3x the number of miles, but usually 5x to 15x the number of dollars.
    - ValentineC 6y ago
      One of the few good things about redeeming Hilton and Marriott hotel points is the 5th night free benefit [1][2], which bumps the value of one's hotel points by around 20–25% in some cases. [1] https://hiltonhonors3.hilton.com/en/promotions/5th-night-free-example.html https://hiltonhonors3.hilton.com/en/promotions/5th-night-fre... [2] https://www.marriott.com/loyalty/redeem/hotels/free-nights.mi https://www.marriott.com/loyalty/redeem/hotels/free-nights.m...