Airline Miles Don't Fly Far Anymore

If you feel like your airline miles are worth less and less these days, you're not imagining things...

Frequent-flyer programs are a staple of the modern economy. For many, they're more than just perks – they're part of how we plan vacations, visit family, or even save for future trips.

But airlines have been quietly eroding the value of these programs over the years. And even the government is taking notice...

In September, the Biden administration launched an investigation into how major U.S. airlines like United (UAL), American (AAL), Delta (DAL), and Southwest (LUV) have managed their loyalty programs.

The Department of Transportation ("DOT") wants answers about how air carriers set award prices... why those prices have changed... and whether consumers have been fairly notified.

It's tempting to assume this devaluation is just another consequence of rampant inflation. But as it turns out, that's not exactly what's happening.

Airline-mile devaluation isn't a result of inflation – it's outright currency debasement...

When U.S. inflation spiked, many folks worried it would spiral out of control. The pandemic created a dangerous combination of disrupted supply chains and surging demand, driving prices higher. Once supply caught up, inflation began easing.

The story with airline miles is much worse. These programs function like currencies. But unlike the dollar, they're entirely controlled by the airlines.

So when airlines inflate the number of miles required for a flight, the value of those miles collapses. And that's exactly what they're doing.

You see, the real reason your miles are worth less is profit...

Airlines make billions of dollars by selling miles to banks for their co-branded credit cards... often for as much as 2 cents per mile. Meanwhile, the cost to airlines for those same miles is less than a penny.

This massive margin has become a critical revenue stream for airlines. During the pandemic, United, Delta, and American borrowed around $5 billion each using their loyalty programs as collateral. Southwest sold miles to Chase to shore up cash reserves.

These programs didn't just keep airlines afloat. They were lifelines during the crisis. A similar situation played out during the Great Recession.

And airlines maintain this profitability by, you guessed it... inflating redemption costs. They can sell miles to banks at a premium while offering less value to consumers.

Any meaningful change is likely years away...

Much of the data collected by the DOT will remain confidential. And you can count on airlines resisting regulations.

In the meantime, frequent flyers will continue to see their hard-earned miles lose value.

We've been noticing it around the office, too. Altimetry founder Joel Litman recently commented that a first-class flight on Cathay Pacific from the East Coast to the Philippines cost him 400,000 AAdvantage miles.

Back in 2019, he could have booked that same ticket for 80,000 miles. That's an 80% drop in value – true currency debasement.

No wonder non-airline-specific rewards cards, such as the Capital One Venture X card, are gaining popularity over their more limited counterparts.

For all the longtime frequent flyers out there, it might be time to rethink your approach. These programs have been hailed as one of the greatest marketing innovations in history. They've generated immense value for airlines... at a significant cost to consumers.

To break free from the devaluation of airline miles, you'll have to seek rewards from broader sources.

The DOT's investigation is a step in the right direction. But the future of these programs – and the value of your miles – remains uncertain.

Regards,

Rob Spivey
December 5, 2024