Inflation of frequent flyer points

[Mattg]

Frequent flyer points are often considered to be like a "currency". Points have value in the sense that they can be earned and redeemed for items of value. Some frequent flyer currencies can even be exchanged on the "forex" market at pegged exchange rates, such as Velocity points and KrisFlyer miles. Further, many of us (myself included) keep a balance of frequent flyer points that we treat like a bank account, saving up points in the hope of one day using them for a dream trip. Of course, we don't earn any interest on those points - and money in a bank account doesn't expire if we don't earn or redeem a dollar every 18 months - but for all intents and purposes there are many similarities between frequent flyer points and money.

As somebody who's interested in economics, I was thinking about the massive influx of frequent flyer points into the market lately. Both Qantas and Virgin (and many other programs around the world, for that matter) routinely offer tens or even hundreds of thousands of points as credit card sign-up bonuses, incentives to take out insurance policies, etc. A notable recent example is Virgin Australia and their current "billion points giveaway" promotion.

Perhaps it's just the economist in me, but as somebody with a large balance of Qantas Frequent Flyer points in the "bank" I find this trend rather concerning. If the RBA announced tomorrow that they were going to print a billion dollars, there would be outrage because seigniorage (aka. printing money) often leads to inflation and devalues that currency. Everyone that already holds currency ends up paying what's known as an "inflation tax" as the currency they already hold becomes less valuable. Printing too much money (or points) eventually leads to hyperinflation.

The airlines seem very good at "printing" points which they can then onsell to banks etc. But they aren't nearly as good at increasing the supply of redemption opportunities. The number of award seats available is roughly the same now as 5-10 years ago, but the number of points in circulation has dramatically increased leading to higher demand that is not being met by supply. There is no way that there would be enough award seats available if everyone tried to redeem their points for flights at once. The end result is one or more of the following outcomes:

1. Some people would give up trying to redeem their points for flights/upgrades and instead redeem their points for toasters, gift cards etc. where they get much less value from each of their points. These points are effectively worth less when redeemed. Inflation has occurred.
2. Airlines increase the cost of an award flight so that supply better equals demand. Inflation has occurred.
3. Others would simply let their points expire, meaning they get no value from them at all. Hyperinflation has occurred.

To an extent, all of the above outcomes are already happening.

Does anyone agree with me? Or am I over-thinking this?

 

[I love to travel]

There maybe one more factor to add into the equation albeit not so much for aussie airlines, but those airlines that actively sell miles to make profit. Only reason AA was profitable last quarter

 

[lovetravellingoz]

As somebody who's interested in economics, I was thinking about the massive influx of frequent flyer points into the market lately.

Why do you think it it has increased massively only lately? Has it, or are you just more alert to, and adept at, collecting, point opportunities?

Credit card sign on bonii has come and gone over the years. ie When the Earth Card first came out I churned it for my wife and I three times over in 3 months for the points, before they amended the terms.

Amex has in the last few years switched a lot of promos from points to cashback. That has in my case massively decreased the points I make. ie I would averaged over 500K or more per year for many years.


PS: Overall I think that there has been steady growth, rather than massive growth. In addition the ways that FF points can now be spent has greatly diversified. Once upon a time it was basically just for flights, but is now for many things including gadgets, gift cards, cash off your credit card etc et...

 

[Melburnian1]

Mattg, I share your view but apart from broad statements as to how many FF seats overall (not by route) are claimed to have been redeemed in say the past year, the airlines guard this data jealously.

Any of us with long memories remember how some (not including me) "lost" substantial numbers of accrued points overnight when Ansett Australia ceased operating.

A large percentage of FF accumulators may save points for a 'dream trip' but that's of little benefit if they cannot 'purchase' a J seat to Europe (although bearing in mind that many people throughout the world will still never be able to afford to travel to another nation, or fly or use a renowned train, we should be grateful for a Y seat.)

 

[dfcatch]

There maybe one more factor to add into the equation albeit not so much for aussie airlines, but those airlines that actively sell miles to make profit. Only reason AA was profitable last quarter

Oh QF is well and truly in this bucket too.

The last two years they have made roughly $1.4b in annual billings.

As far as AA goes - in 2016 American reported GAAP pre-tax earnings of $4.3b.
The AAdvantage program was responsible for around 55% of EBIT in 2016.

AA total billings (which differs from EBIT due to timing of revenue-recognition) for 2016 was around $2.5b, and is forecast to reach $3b by end 2018.

As far as program inflation goes - or too many points being issue and not enough seats to redeem.... whilst it's not a "non-issue" (excuse the double-negative), it's not as big an issue as it once was - thanks to the ability to redeem toasters.

 

[theblank]

If the RBA announced tomorrow that they were going to print a billion dollars, there would be outrage because seigniorage (aka. printing money) often leads to inflation and devalues that currency..

I dont think that is the same. The airline sells a service (flights) and they do so directly be selling tickets or points that can be redeemed. Points are essentially prepayments for flights.

 

[Denali]

I think if you frequent the FFer forums, it feels like the market is overwhelmed with a sea of points, making redemption near impossible but most of the supermarket/fuel/mortgage point players are people like my sister. She collect her points for a $50 Coles voucher or new BBQ tools or luggage from the estore.

As a newbie and self funded flyer, in regards to redemptions, Ive learnt to be flexible. If USA doesnt work, go to Europe instead. If Copenhagen doesnt work, go to Edinburgh instead. Theres usually a Plan B for us.

 

[drron]

As well as AA selling more and more points in recent years there has been a corresponding decrease in premium cabin awards over the same time.i used to be able to get 2 AA f awards on AA long haul flights just about any time.now very limited.try getting an award in F on their 3 class transcon flights.i have found absolutely no availability about a year back when looking.
As a consequence I ignore any emails advising AA's next sale of points.

 

[oz_mark]

I think people generally underestimate how many points get used on Gift Vouchers, and other things in the Qantas store....The points are not all going on flights...

 

[Denali]

I think people generally underestimate how many points get used on Gift Vouchers, and other things in the Qantas store....The points are not all going on flights...

We we amassed our first bulk of points, we bought 2 x Bose headphones (still have them, I use mine daily) and was very excited about the deal.

Once I got more into points, I realised these equated to a SYD>LAX>SYD J upgrade and got miserly with points and wouldnt use them unless they were "worthy" or value spent on upgrades.

Now I realise its not hard to earn another 50, 80K points so I spend points on domestic flights more freely and even used points to donate sleeping bags to a charity.

 

[JohnK]

I tend to agree with Mattg'a summation. Too easy to get cheap frequent flyer points which make existing points balances less valuable.

And yes some people think it's a game but to many it's not a game. Earning frequent flyer points should be reward for travelling a lot but now all it is now is a frequent churner program and reward availability has not increased in line with demand. July and September are 2 months I've noticed where reward availability dries up months in advance.

 

[Matt_01]

It definitely seems easier to earn points if you are willing to churn CC and turn points hoarding into a sport. I hoard points, use CC to pay business expenses, take advantage of any bonus points offers etc. I could not be bothered in CC churn, I have considered it but the effort in remembering which direct debit is just to time consuming.

I somewhat hat agree with JohnK in regard to balances being less valuable and rewards availability. Over the past 12 months both VA and QF have put up points redemption rates and there has also been a wider FF points devaluation across international programs/ carriers, most like to reduce balance sheet liabilities.

Although it seems easier to earn points I have not experienced any difference when redeeming points likely due QF WP1 and VA WP status which until recently can only be attained through BIS travel. Personally I disagree with the current trend in giving out SCs as part of CC sign up and shopping spend but that seems to be getting traction.

With current and projected travel I will most likely retain my current status across both AU FF programs for at least next the couple of years. Over the next couple of years I plan on redeeming all my points for family F and J redemptions before I start falling down the status ladder.

Any points left over will most likely be used to replace worn out luggage.

 

[Melburnian1]

...July and September are 2 months I've noticed where reward availability dries up months in advance.

School holidays, JohnK. Higher demand from families ('VFR") and interstate holidays.

 

[DaveB]

Have been flying on rewards for over 10 years now and even with no status, actually find redeeming for premium reward seats has never been easier.

Think this is due to a number of factors including ME airline growth creating competition, airlines better understanding value of FF schemes and airlines increasingly using reward seating availability to manage flight loads.

Started using QF again for international bookings purely because of EK and QR availability.

Upcoming trip to YYZ, made four major changes to reward bookings involving DL, VA, SQ, EY and CX. Took three attempts to get daughter home from YYZ one week before Xmas last year with two of the three premium class bookings made the prior day.

 

[Danger]

As well as AA selling more and more points in recent years there has been a corresponding decrease in premium cabin awards over the same time.i used to be able to get 2 AA f awards on AA long haul flights just about any time.now very limited.try getting an award in F on their 3 class transcon flights.i have found absolutely no availability about a year back when looking.
As a consequence I ignore any emails advising AA's next sale of points.

Just How Far Has American AAdvantage Fallen? - View from the Wing

Very sad.

 

[Deleted member 29185]

I'm not sure why it matters.

Some people fly because they have to, others fly because they want to. The commonality between the two is the comfort. Some are lucky enough to have others that are prepared to pay for their comfort and some need to be proactive about it. Nobody would pay more for premium seats if comfort were not the motive and these range of products would be worthless if enough people didn't aspire to the comfort. Whether the comfort is actually worth it in the long run is subjective. Many will say yes, many will say no. I see the advent of these CC point hauls of being a means to lure in people to believe there is still something special about flying. Airlines cannot, or will not, provide the experience of yesteryear (and by that I mean the service over the hard product) in Y, so they have created a higher tier product(s) which may cater for that desire. CC coy's have simply negotiated a way to bring that experience to the masses (well, those in the know anyway).

 

[oldies on tour]

I've certainly noticed the deals offering generous FF points for credit card sign up but have no knowledge of how that affects the pool of points out in the market place. The issue for us is that my husband has accumulated enough points over a few years for us to treat ourselves to a RTW trip in business class, however, when I've tried to find seat availability it is non existent, even trying to book a year ahead (which is not ideal - who knows their circumstances in a years time). The leg between USA and Aus being the hardest. So we have those points just sitting there and now don't direct our points to Qantas anymore, we send them to another FF program. I believe people with higher status with Qantas get better access to FF seat availability, so there's not much hope for us.

 

[coyote25]

I remember first hoarding points for a QF Oneworld Y Award which cost 140k points and being worried the redemption cost would go up. This was back in 2004!

Now the co payment / fines cost has gone up but the 140k Y / 280 k J / 420k F OW awards are still available and I've used them 4 times (once at J) and while it has always taken a bit of planning I've always ended up were I wanted to be.

Now normal awards can be tricky especially on popular routes at holiday timings but I plan international trips a long way out so no problems there.

I agree it is likely the points out there have increased but so have the non flight options and I'm always amazed at how many people I know just use them for non flight purchases. I guess this is how the supply is matching the increased demand, well that and the inflation of co payments and higher points requirements for some flights / routes.

I think it is still more or less in balance (supply / demand) at least for those who do their home work.

Happy flying.

 

[yohy?!]

there probably is some risk in the fact that points can be "printed" at will, airlines then have the ability to adjust their accounting of this liability as they wish (ie their assumption of points never to be redeemed)

 

[Le Clair]

I don't think you are overthinking this at all. However, with the new RBA "interchange fee" limit coming in July, one of the principal generators of FF points will be limited to some extent. On the topic of limited redemption opportunities, however, I must disagree. In the past 6 months, I have booked no less than 6 separate trips on 4 different Oneworld airlines in both PE and J on EXACTLY the dates I wanted and for EXACTLY the flights I wanted without there seeming to be any lack of availability - even multiple seats on the same flights! Asia, Europe, USA - all no problem at all.