Airlines Offer Deals as They Try to Sell More Miles to Consumers

For many U.S. airline customers, earning miles by flying is more challenging than ever. Nearly every airline allots them based on how much a customer spends, rather than how far the passenger flies, so a cheap ticket to Tokyo nets thousands of miles fewer than it once did.

Still, in some ways, it has never been easier to acquire miles. Often, consumers earn them as a bonus for buying things, whether that’s points with credit card purchases or extra miles for staying at hotels, booking car rentals, buying flowers, or signing up for Match.com. Consumers can earn hundreds of thousands of miles this way, and airlines capture margins as high as 90 percent, according to a recent report from Stifel analyst Joseph DeNardi.

Selling miles to companies that use them to reward customers long has been a profitable business. That’s still the key place airlines make money with their frequent flyer programs, but carriers increasingly sell miles at attractive rates directly to consumers.

For years, flyers have topped off accounts by buying extra miles. However, until a few years ago, most U.S. airlines charged outrageous prices, knowing passengers would overpay for the last 3,000 miles they needed for their Hawaii trip. U.S. airlines might charge 3 cents per mile, about twice what sophisticated frequent flyers think they’re worth.

“We like to say frequent fliers will pay anything to fly for free,” Rob MacLean, CEO of Points.com, a company that helps airlines sell miles to consumers, said in March at an investor conference.

Many airlines now sell miles to consumers at fair — and sometimes even attractive — rates. Usually, airlines still expect passengers to buy miles to top off accounts, but some programs in the Americas have been so aggressive that they allow customers to buy 150,000 or more miles per year— enough to book a long-haul business class ticket at attractive rates. In some cases, usually during promotions, airlines charge consumers only slightly more per mile than they charge credit card issuers.

And while airlines say little about the economics of their programs, it’s likely carriers are selling more miles to consumers than when they kept prices high.

“It’s consistent with trends across the industry to monetize virtually everything,” said Gary Leff, a miles expert and blogger.

Promotions Are Key

The most sophisticated frequent flyers assign a value to each mile. It depends on the program, but, to consumers, most U.S. airline points are worth between 1.5 cents and 2 cents per mile, according to The Points Guy.

Valuing points can be challenging because one person night redeem 12,500 miles for a ticket that costs $500, for a value of 4 cents per mile, while another might use the same number of miles for an $80 one-way fare. The second person is getting less than .6 cents in value for each mile.

But the 1.5-2 cents valuation is a helpful benchmark. And until recently, few programs were selling miles to consumers for anything near what frequent flyers thought they were worth.

The first U.S. airline to lower its prices was US Airways, roughly a decade ago, Leff said. In 2009, US Airways charged 2.5 cents per mile, but the airline started having promotions where it sold twice the miles for the same price, reducing the fee to 1.25 cents. At times, it was possible to buy enough miles for a business class roundtrip to Europe for a little more than $1,000. Some frequent flyers bought as many miles as they could.

Until US Airways was absorbed by American, the airline held so many promotions that Leff said bloggers joked, “US Airways used to sell miles the way JoS. A. Bank sold suits — buy one, get seven free.”

Over time, US Airways became less generous, increasing its non-sale miles price, while also changing how many miles consumers needed for many free flights. Today, American’s regular price is about 3 cents per mile.

But like US Airways, American is bullish on sales. Through April 13, American is offering as many as 115,000 bonus miles to flyers who spend $4,400 on 150,000 miles. For most frequent flyers, that’s not a great deal — it comes out to 1.66 cents per mile — but at least it’s a fair one, and an enterprising frequent flyer might redeem the miles for more than $4,400 in value. (The Points Guy says American miles are worth 1.5 cents per mile.)

Discounts are now an industry-wide phenomenon in the United States, with both United and Alaska Airlines regularly having sales. Sometimes, airlines tie discounts to ticket sales, so a traveler might be able to buy extra miles for an already-booked itinerary. Other times, anyone can buy miles at cheaper rates.

“It feels like there’s always an airline selling miles at a big discount,” said Zach Honig, editor-in-chief of The Points Guy. “Airlines often announce another promotion just days or a few weeks after one ends.”

In the Americas, the new leader in discounting is Lifemiles, the company that administers the frequent flyer program for Avianca, the South American airline. In February, Avianca offered a bonus that allowed savvy passengers to buy miles for as little as 1.375 cents per mile, according to Ben Schlappig, an aviation blogger.

Avianca is a member of the Star Alliance, so flyers could use the miles on many of the world’s best-known carriers, including United, Lufthansa, ANA and Air China. By smartly redeeming them, Schlappig estimated passengers could fly in first class from Los Angeles to Tokyo on ANA for $2,500 roundtrip. The fare is often more than $15,000.

Profitable Model

The operating models of frequent flyer programs are closely guarded secrets, and representatives from American, Alaska and Avianca’s Lifemiles declined to comment for this story.

Still, the basic strategy of selling miles is generally understood.

Both Stifel’s DeNardi and Points.com’s MacLean say it costs big U.S. airlines like American, Delta and United about .8 cents to produce a mile, mainly because of the costs the carriers incur when passengers redeem them. Sometimes, they hold award seats on their own airlines, while other times they buy seats from partner airlines.

DeNardi estimates credit card companies buy miles for 1.5 to 2.25 cents each, while Points.com’s MacLean told analysts banks pay closer to 1.25 cents. Merchants like hotels and Flowers.com pay more for miles, often between 1.5 and 2 cents, MacLean said.

“They are able to make something for .8 of a cent, and on average, sell it for 1.8 cents,” MacLean said. “It’s an amazing margin they are deriving out of selling that frequent flyer mile.”

To the public, margins can be higher. MacLean said some Points.com partner airlines still sell miles to consumers for 3 cents or more per mile, without discounts. Usually, those people are topping off accounts, he said.

“We sell well north of half a billion dollars of miles annually to individual members of these programs which people think seems crazy,” MacLean told Skift in a recent interview. “Aren’t these supposed to be free miles? … [But] we find a really interesting opportunity with the industry to allow folks like you and I to top off our accounts where we may have enough miles to take our family of three to Hawaii in the dead of winter.”

One of Points.com’s partner airlines is United, which regularly charges 3.5 cents per mile to consumers. But it, too, is discounting heavily, and it now has a promotion that gives passengers extra miles. Some travelers are getting up to a 75 percent bonus. 

Leff said he has discussed the basic economics of selling miles with a senior executive at one of the programs. That airline executive is OK with customers who buy a hundreds thousand or more miles and use them to redeem free flights in business and first class that might otherwise cost $5,000 or more, Leff said. Even on those transactions, the airline makes a profit, according to the executive.

“He basically says, ‘We have done the math — we make money selling miles at a higher price than it costs to redeem the miles,” Leff said. “That’s even true knowing that the miles are going to be used for more expensive awards.”

The deals can be rich for sophisticated consumers, but both Leff and Honig recommend travelers be careful before buying miles.

One problem is availability. Most airlines make a significant number of seats available for awards, but it’s off during periods of weak demand. No matter how much customers pay for miles, they may not be able to use them during holidays and at the height of the summer travel season.

Worse, airlines can — and do — change the rules of their frequent flyer programs at any time, and miles banked in accounts almost always lose value over time. If travelers buy miles at attractive rates, they should try to redeem them immediately, Leff and Honig said. Otherwise, a redemption that costs 80,000 miles now might cost 100,000 next year.

“If you’re not booking immediately, I definitely recommend at least having a specific redemption in mind,” Honig said. “Since miles can be devalued at any moment — sometimes without any notice at all — it doesn’t make sense to purchase miles just to boost the balance of your account.”