I’m always fascinated by the business side of miles & points. Loyalty programs can be a huge profit center for airlines, and the more we know about the business side of these programs, the better we can understand the evolution of credit card rewards.
While airlines have SEC filings that reveal some information, for the most part we’ll never learn the real nitty-gritty of how much things cost. For example, a few years ago I published a story about how much airlines pay for partner award tickets. In other words, when you redeem United miles for an ANA first class ticket, how much is United paying ANA? For the most part these reimbursement rates were really low, though that doesn’t come as much of a surprise.
In this post I wanted to discuss a different topic that’s along similar lines. I don’t have any inside information here, but rather am sharing my thoughts based on a development we saw today. I’m sure I’m not the only one who has wondered how much the major credit card issuers pay when we convert one of their points currencies into airline miles or hotel points.
This is all speculation on my part, though I think it’s a fun topic to discuss.
Prices probably vary significantly
My guess is that the major card issuers negotiate these contracts individually with each loyalty program, and the costs vary significantly. This is probably based on a variety of factors, including how close a bank’s relationship is with that program, as this may very well be included as part of a larger contract. For example, we know Amex has a close relationship with Delta and Chase has a close relationship with United.
We also know the banks aren’t gong to be overpaying for miles. For example, Ultimate Rewards points convert at a 1:1 ratio to IHG and United, but one United mile is worth significantly more than one IHG point, so there are clearly different pay scales.
The cost has to be less than the rate at which airlines sell miles
I know this is fairly obvious, but the credit card companies are going to pay less for miles than the price at which the programs sell miles directly to consumers during sales. In other words, AAdvantage sometimes sells miles for 1.6 cents each, LifeMiles sometimes sells miles for 1.4 cents each, and MileagePlus sometimes sells miles for 1.8 cents each.
I think the pricing difference might not be quite as big as we expect (in other words, I don’t think they’re getting a 50% discount for volume), given that margins in the business of selling miles have decreased, as more programs have become competitive in this way.
I would guess that the credit card companies are definitely paying less than 1.8 cents for just about all points currencies. It could be significantly lower in some cases.
The rate has to be more than a penny per point
Nowadays we see cash back cards that offer 2% back with no annual fee, like the Citi® Double Cash Card. We still haven’t seen a credit card introduce true “no strings attached” double airline miles on all purchases. The closest to that is The Blue Business℠ Plus Credit Card from American Express, which offers 2x Membership Rewards points on the first $50,000 spent annually. It’s telling that this is the only card where that’s the case so far.
What this tells me is that credit card companies are paying an average of more than a penny per point, or else we’d see no strings attached double miles cards, given that we see cash back cards with the same value.
Here’s my guess
Today we saw the introduction of the Barclays Arrival Premier Card. The card offers double “miles,” with each mile being redeemable for a cent towards a travel purchase. What’s interesting is that the miles can be converted into airline miles, but not at a 1:1 ratio. Instead, I think the ratios paint a pretty clear picture of how much money banks are paying for airline miles. Here are the transfer ratios of Arrival miles to airline miles:
|Arrival Premier Transfer Partner||Transfer Ratio|
(Premier Points : Partner Points)
|Air Canada Aeroplan||1.7 : 1|
|Air France / KLM Flying Blue||1.4 : 1|
|Aeromexico Club Premier||1.4 : 1|
|China Eastern Airlines Eastern Miles||1.4 : 1|
|Etihad Guest||1.4 : 1|
|EVA Air Infinity MileageLands||1.4 : 1|
|JAL Mileage Bank||1.7 : 1|
|Jet Airways JetPrivilege||1.4 : 1|
|Malaysia Airlines Enrich||1.4 : 1|
|Qantas Frequent Flyer||1.4 : 1|
As you can see, for most currencies it takes 1.4 Arrival miles for one airline mile. Given how exact Barclays got with their conversation rates, I suspect this is reflective of how much they’re paying for miles, given that the alternative is them paying one cent cash back.
This suggests that Barclays is paying somewhere around 1.4 cents per airline mile (clearly Japan Airlines wanted more, which isn’t surprising, since they have a good program). My guess is that this is pretty reflective of the average price paid by their competitors as well
Presumably the price varies by currency, though my guess is that for the most part card issuers are paying somewhere around ~1.3-1.5 cents per airline mile when those points are converted.
That general range makes sense when you consider some of the other cards in the market:
- The Amex EveryDay® Preferred Credit Card from American Express offers 1.5x Membership Rewards points per dollar spent when you make 30 transactions per billing cycle, so if you assume that they’re paying 1.3-1.5 cents per airline mile, that means that they’re offering a return somewhere around 2%
- If you have the Chase Sapphire Reserve® Card you can redeem points for 1.5 cents towards the cost of a travel purchase, or convert them into airline miles, which suggests to me they’re paying just slightly less than 1.5 cents per mile on average, since presumably they’re getting some sort of a commission when people redeem points for hotel stays and certain flights
Again, this is all speculation on my part, but if you average it all out, I’d guess that credit card companies pay an average somewhere around 1.3-1.5 cents per airline mile. I’d bet there are also some outliers, and programs that charge just 1.2 cents, while others charge 1.6 cents.
I’m curious to hear what you guys think? Is this similar to what you’d expect, or do you have a different take?