Sunday, April 9, 2017

Airline miles as the coin of the realm

CBS News Sunday Morning had a segment today called, "Card games: Getting to the point with travel rewards."

As you correctly guessed, it focused on the primary benefit that makes airline credit cards appealing - miles that can eventually be used for free travel.

The cardholder at the center of the story said that he and his wife had about 40 cards and had traveled the world with their 6 kids thanks to all the miles they rack up. Not exactly what I would describe as your average consumer.

That aside, Brian Kelly, also known as The Points Guy, that got my attention. He said, “You are literally throwing money away if you’re not getting miles and points.”

This blog post is not an endorsement or a criticism of anyone or of airline credit cards. Personally, I don't have one. I kind of feel sheepish admitting that. I don't have a reason other than I've never applied for one. Maybe I should stop just smiling and saying, "No thanks," to those enthusiastic young people at airport gates offering cards.

What I really find interesting in all of this is the business model.

Not just for the banks, of course, but for the airlines, too. Airlines love these cards maybe more than the consumers who use them.

How can that be, you ask? Wouldn't they be worried about losing money on all those free flights people will take?

No, not at all.

The reality is, as Bloomberg reported recently, airlines sell miles to banks so banks can use them to entice new customers to spend more and more on the cards.

In many ways, the Big Three U.S. airlines have organized themselves into two distinct businesses. There’s the traditional activity—the one with jets—which involves pricing seats for as much as possible, collecting a bag fee, and selling some food and drinks while keeping a close eye on costs. The other business is the sale of miles—mostly to the big banks, but also to companies that range from car rental firms to hotels to magazine peddlers.

Banks love them, too.

For the banks, people who pay annual fees for those cards to accumulate miles are the closest thing to a sure bet. These consumers typically have higher-than-average incomes and spend more on their cards, which generates merchant fees for the banks. They also tend to maintain high credit scores, which means they pay their bills on time and banks experience fewer defaults. 

Everyone's a winner.

2 comments:

  1. Nice post.Thank you so much for sharing this information.

    ReplyDelete
    Replies
    1. Glad that you liked it, and thanks for your kind words!

      Delete