Have you ever wondered how much airlines are reimbursed when you redeem miles for a first or business class ticket? I want to address that in this post, because it’s probably not as much as you’d expect.
The fascinating economics of airline award seats
It goes without saying that airline loyalty programs have evolved over the decades. When American AAdvantage was founded well over 40 years ago, the intent was to reward travelers in order to encourage loyalty. So making award seats available for travelers was simply a cost of doing business, as those seats went directly to American’s best customers.
That concept has changed significantly over the years:
- Nowadays we have airline alliances and partnerships, so often it’s possible to redeem your miles with one airline loyalty program for travel on dozens of airlines
- Many airlines have gotten into the business of selling miles, which can be lucrative
- Nowadays a majority of miles are issued through non-flying means, and many people rack up oodles of miles using credit cards; this includes both airline co-branded credit cards and transferable points currencies
- For airlines in the United States, loyalty programs have largely become the most lucrative, high-margin aspects of their businesses
So I’m sure I’m not the only one who has wondered “if I transfer my Amex points to Air Canada Aeroplan for a redemption in Lufthansa first class, how much money changes hands?”
Basics of airline award ticket reimbursement
When you redeem United MileagePlus miles for travel on United, that comes down to an internal accounting exercise. In this post I’m focused specifically on redeeming miles for travel on a partner airline, which is often how you get the best value when redeeming miles (like redeeming United MileagePlus miles for travel on Austrian, for example).
Let me provide some general guidelines about what I’ve been able to figure out with award ticket reimbursement. I should mention that policies differ between airlines, so there’s no “one size fits all” answer. This won’t always be the case, but generally speaking:
- Airline reimbursement rates for awards are on a per segment basis, regardless of whether you’re booking a segment individually or as part of a larger itinerary
- Award reimbursement rates are generally negotiated individually between airlines; in other words, not all Star Alliance airlines will pay the same amount for the same redemption, and for that matter, the cost can be very different between airlines
- Airline award ticket reimbursement is largely (but not always) an accounting exercise — airlines generally hope that there will be some parity with redemptions between airlines, so hopefully at the end of an accounting cycle just a small check is written
How much airlines pay for award tickets
Back in 2013, I shared some Star Alliance award ticket reimbursement rates that I had gotten my hands on. Here’s what those amounts look like, each for one-way travel on a single segment:
- Singapore to Bangkok in Singapore Airlines business class costs ~$35
- Frankfurt to Vienna in Austrian business class costs ~$50
- Istanbul to Tokyo in Turkish business class costs ~$250
- Tokyo to Bangkok in Thai first class costs ~$250
- Vienna to Bangkok in Austrian business class costs ~$300
- Washington to Brussels in Brussels Airlines business class costs ~$300
- Warsaw to New York in LOT Polish business class costs ~$350
- New York to Tokyo in All Nippon Airways first class costs ~$450
- Los Angeles to Frankfurt in Lufthansa first class costs ~$1,000
Obviously there’s some variability based on the program you’re booking through, and I also imagine that prices have changed quite a bit in the past decade and change. However, this should give you a general sense of what a massive discount these tickets can be for airlines. Yes, prices are definitely higher now to account for inflation (maybe some awards are twice as expensive now), but the concept hasn’t changed.
Chances are that these prices are way lower than you would have expected. There’s also probably more price variability than you’d expect — for example, you wouldn’t think a Los Angeles to Frankfurt award flight in Lufthansa first class would cost more than twice as much as a New York to Tokyo award flight in All Nippon Airways first class.
For those curious, when an airline passes on carrier imposed surcharges (often referred to as fuel surcharges) on award tickets, those typically don’t actually go to the operating carrier, but they’re kept by the frequent flyer program. However, in some cases those airlines may also have higher reimbursement rates for awards. It all depends.
Why do airlines bother releasing award seats to partners?
With how low airline award reimbursement rates are in many cases, you may be wondering why airlines even bother making award seats available to partner airlines. After all, airlines are often getting paid less for business or first class awards than they’d charge for revenue tickets in economy.
What’s the logic? First of all, it’s worth keeping in mind that many airlines have changed how they go about releasing award seats to partner programs:
- Air France first class awards and SWISS first class awards aren’t available to anyone through a partner frequent flyer program, and are even restricted to select elite tiers
- Emirates first class awards aren’t available to most partner programs, and Lufthansa first class awards are available to partner programs at most several days before departure
- Singapore Airlines only makes most long haul first and business class awards available to members of its own KrisFlyer program
- Airlines are increasingly restricting award availability to members of their own programs, and not making them available to members of partner programs; you’ll notice this on airlines like Cathay Pacific, Etihad Airways, Qatar Airways, and many more
- We now sometimes see airlines release non-saver award availability to partners at higher award costs (this is common with Alaska Mileage Plan), and in those situations, frequent flyer programs are paying a lot more for access to more award seats, and the pricing reflects that
This all makes sense, as presumably airlines see limited upside to being generous to members of partner programs, rather than to members of their own program.
Still, why do other airlines pretty regularly make award seats available to partner programs?
- Generally airlines only make saver award seats available in situations where they don’t anticipate flights being full, and in most cases the reimbursement rates are still higher than the marginal cost of carrying an additional passenger
- Presumably many airlines just do it out of goodwill, and to honor the spirit of the major alliances, since they expect the same reciprocity from other airlines
- Some airlines view award passengers from other airlines as potential future customers who could pay for tickets; for example, I’m sure an American frequent flyer who flies Qatar Airways Qsuites may be inclined to book the airline on a future business trip
- I imagine some airlines just haven’t put much thought into it, and/or don’t want to invest in systems that allow them to better differentiate award availability
Bottom line
Airline loyalty programs are massive businesses, and in particular I find the economics of award tickets to be interesting. This is especially true when you consider how many miles are earned either through credit cards, or by just buying them outright from a loyalty program when there’s a sale.
The economics of acquiring miles makes a lot more sense when you consider the low costs associated with redemptions (in most cases). The bigger question is why the reimbursement rates continue to be so low.
If anyone in the know would like to (anonymously) share any updated numbers, by all means reach out! Lastly, while the concept is a bit different, if you’re curious about how hotels are paid for award stays, see this post.
What’s your take on airline reimbursement rates for awards?
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