What the past few weeks have taught us about hotel loyalty programs

The past few weeks have been horrible on the hotel loyalty program front. I don’t mean just horrible when looking at it with a microscope, but rather horrible on a global, long-term scale. I’d say that the across the board devaluations we’ve seen with hotel loyalty programs are almost unprecedented. Admittedly some changes are worse than others, though to recap, here’s what we’ve seen in the past few weeks (in order of crappiness, in my opinion):

• Hilton has literally destroyed their award chart for high end redemptions by adding three new hotel categories and introducing seasonal pricing
• Marriott has added a new hotel category, and 36% of properties went up in price
• Over the past couple of months Wyndham has more than doubled the cost for redemptions at their top end properties
• Starwood just announced their 2013 hotel category changes, whereby less than 50 properties went down in price while over 200 properties went up in price, and also increased the cost of cash & points by 20-25%
• Priority Club introduced a nine category award chart, which resulted in many aspirational properties going up in price

The only major program where we haven’t seen a devaluation lately is Hyatt. In December they announced their 2013 hotel category changes, whereby seven properties went up in price and 10 properties went down in price — a net positive for us!

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As a result of these devaluations I’ve been getting the same questions over and over. The first one is why this is happening, and the second is whether or not it makes sense to be loyal to hotel programs anymore. So I figured I’d share my thoughts.

This isn’t a coincidence

I think it goes without saying all of these devaluations aren’t a coincidence. That’s not to say that they wouldn’t have all eventually happened, but we’re seeing a bit of a domino effect here, whereby one program started with a devaluation, the next one caught on, etc. For example, Hilton announced their devaluation on Tuesday, and on Wednesday morning Starwood published their 2013 category changes, which were overwhelmingly negative. It would have happened either way, but I’m sure the folks at Starwood were doing the happy dance and put the finishing touches on the category changes, since they knew any negative changes would be overshadowed by what Hilton did.

But while the Starwood and Priority Club changes could simply be considered a “yearly adjustment,” the changes we’re seeing with Hilton, Marriott, and Wyndham are a lot more than that. These aren’t reasonable year-to-year adjustments, but radical program changes. We’ve seen hotel rates and occupancy as high as they’ve been in years, and I’m sure that plays a large part in these devaluations.

What makes airlines and hotel loyalty programs different

While I won’t try to justify any of these program changes, I think it’s worth understanding why airline and hotel loyalty programs fundamentally differ.

In a vast majority of the cases, airlines own their loyalty programs, and while they’re viewed as a separate business for account purposes, they’re the same company. If you use MileagePlus miles to book the last first class seat on a United flight an hour before departure and that seat would have otherwise gone out empty, the cost of them releasing that award seat is whatever the marginal cost is, which is next to nothing. Admittedly it gets a bit more complicated when you’re redeeming for travel on partner airlines, since there is a compensation structure set up there, but keep in mind that the reimbursement is probably quite low, given that airlines typically release award seats on flights that they forecast will have empty seats.

Hotels are a different beast. For the most part the major chains simply have a management contract for a hotel and don’t actually own it. They’re getting paid a portion of revenue for slapping their name on the hotel and providing management services, marketing, and loyalty programs, but that’s the extent of it. There are of course exceptions, but most chains don’t own a majority of their hotels.

If you redeem points for a stay at a hotel, the loyalty program reimburses the hotel for it. If the hotel isn’t close to full then the reimbursement rate is very low. If the hotel is quite full, though (typically over 90%), the loyalty program reimburses the hotel at or close to the average daily rate. So let’s be clear about what that means. If you redeem 22,000 Hyatt Gold Passport points at the Park Hyatt Sydney and it’s 95% full, chances are that Gold Passport is paying the hotel somewhere around $800 for the night. That means you redeeming those points is costing Gold Passport about 3.6 cents per point, which is crazy expensive.

And unlike with airlines, hotel loyalty programs don’t have capacity controls on redemptions most of the time. As long as a standard room is available you can redeem points for it. Most programs introduced the “no blackout dates” policy during the recession, when hotel occupancy levels were quite low, meaning the loyalty programs where just reimbursing the hotels at a little bit over the marginal cost. Now that the hotel industry has largely recovered, I’m sure you can imagine how much money loyalty programs are forking over to high end hotels in peak season.

So hotel loyalty programs are in a unique situation. They have no control over how many free nights are redeemed, and even if a hotel room would have otherwise gone empty, they’re still paying the hotels huge amounts for those rooms. So to some degree these changes are a reflection of the costs incurred by the loyalty programs in reimbursing the hotels. What we’re seeing is low end redemptions get cheaper (whereby the loyalty program typically only has to reimburse the hotels at a little over the marginal cost), while high end redemptions are getting more expensive.

Why you shouldn’t give up on hotel loyalty programs, but should consider not being loyal

There’s some truth to the saying “if it sounds too good to be true it probably is.” I think Hilton is the perfect example. They have relationships with both American Express and Citi, and are clearly as interested in making money from selling points to credit card companies as they are in managing hotels.

This is a chain that gives you Gold status in their program (which gets you free internet and breakfast/club lounge access) just for having a credit card with a $95 annual fee, and gives you Diamond status for just $40,000 of spend on a credit card per year. At the same time they increase the requirements to earn status for those actually putting in the nights and stays required to earn status “the hard way.” For example, earning Gold status used to take 16 stays or 36 nights, and now instead takes 20 stays or 40 nights. So they’re basically saying they value someone that pays a $95 annual fee more than someone that spends 36 nights with them a year.

So what lesson can we take away from this? Loyalty is a two way street, so being loyal the “hard” way probably doesn’t make sense. That’s why I’m not totally leaving Hilton after this change. If I can use Gold status for a handful of stays a year when it’s convenient for $95 per year, that’s a steal. I pity the fool that actually spends 40 nights per year with them to get the same benefits (and I realize many of you outside the US don’t have the same opportunities, and I feel horrible for you!).

Most hotel credit cards come with an annual free night certificate. Keep the credit cards, don’t put any spend on them, utilize the annual free night at expensive properties that more than justify the annual fee, and call it a day.

But sleep around a bit. If you’re looking for a quick overnight or don’t care about elite benefits, use Priceline. If you want to be treated well with a hotel stay and want extra benefits, branch out and stay at a non-chain hotel and use American Express Fine Hotels + Resorts® or Virtuoso.

Why these changes make me feel better about Hyatt

I’ve been giving Hyatt a hard time lately for their lack of interesting promotions and lack of innovation. Back in the day, before they had a co-branded credit card, they were by far the best when it comes to promotions. They’d consistently offer a “faster free nights” promotion, whereby you earned one free night at any hotel after two stays. Yes, two $70 stays at a Hyatt Place would earn one free night at the Park Hyatt Paris, for example. And while that was amazing in every way, it obviously wasn’t sustainable long term.

But despite giving them a hard time for their lack of promotions, I’ve also been vocal about saying that Gold Passport is also one of the few loyalty programs I trust. The VP of Gold Passport, Jeff Zidell, is one of the most honest people in the “loyalty program industry,” if there is such a thing. And I think it’s reflected in the execution of their program. I find that Gold Passport consistently under promises and over delivers when it comes to elite benefits.

More than anything else, though, I can appreciate that they’re trying to run a sustainable program, and balance their short term financial interests with the interests of those actually loyal to the program. So as much as I’d like to cry out and whine that their promotions aren’t very exciting at the moment, I can also appreciate that they’re not massively devaluing their award chart. It’s one of the few programs where I have faith that they won’t overnight increase the redemption costs to the point that you’re left dumbfounded.

Are airline programs next?

Complete speculation on my part, but if I were a betting man I’d speculate that 2014 will be a bad year for airline loyalty programs. Assuming the American and US Airways merger goes through, we’ll go from seeing six legacy carriers a few years ago, to three. The fewer carriers, the less of a need to be super-generous to frequent flyers, as travel will be driven more by which airline best serves your preferred market than elite benefits.

I assume later in the year we’ll see what the new “combined” loyalty program looks like for American and US Airways, and I’d be willing to bet that’ll come with a new award chart. Nothing outrageously horrible, I suspect, but as is the case with any merger (or at least with Delta/Northwest and United/Continental), they’ll take the worst from both programs, including the most expensive redemption rates from both programs when constructing their award chart, and I suspect we’ll see the competition match.

I’m always a fan of earning and burning rather than “saving” points, and I think the past few weeks has been a perfect reflection of why that’s a good strategy on the hotel front.