Frequent flier miles are actually a virtual currency

Frequent flier miles are actually a virtual currency

Frequent flier miles are actually a virtual currency 1706 2560 Joe Bleasdale

Frequent flier miles, one of the greatest loyalty myths of all time.

Everybody thinks miles and points are about loyalty and there’s an element of loyalty, but there is more to it. The marketing strategy cannot be called anything but successful. Fly x times and earn a “free” flight. Seems like a good deal given most people would have taken the flight anyway.

Here’s how it actually works:

Every time you take a flight, the ticket is split into a number of components. If you look at the breakdown of a ticket it’ll look something like this:

I looked at an example flight to JFK in the future for this example.

The first line of the breakdown “1 adult” is known as the fare element. Every other item is taxes and fees tacked on. YQ – carrier imposed surcharge, is basically extra profit that the airline can add or adjust across it’s extremely wide range of tickets as a separate element without needing to reprice fares themselves. To use a technical term, a modifier or wild card. I will aim to write another post about YQ because thats a big subject in it’s own right.

Included in the fare element is a value for the points you would earn for that trip. Whether you are a member of a frequent flier program or not, the airline has to account for the points it may end up liable for when they sell the fare. The value built into the fare will be higher than the value you can redeem the points for. Let’s say for example the value they account for each point is 2 cents (it almost certainly isn’t, but this is an example).

When you have built up a nice balance of points, you redeem them for a ticket or an upgrade. The value at which you are allowed to redeem the points is different to the value you earned them at. Let’s say the average redemption value is 1 cent. The airline or point’s issuer, get’s to keep the spread between the two value’s. That’s how the money is made. It get’s even more complex when you look at how the point’s based credit cards work but thats a story for another day.

The bottom line is, these points that people treat as throwaway actually have real value attached to them. Airlines have to account for this value and they do so with something called deferred revenue. Buried deep on the balance sheet of the airline will be a line for deferred revenue, and as part of that there will be a value for how much liability their outstanding points are worth.

Points have a value. Do not waste them. You paid for them, so make sure you maximise their redemption value.

Let’s plan your next trip…