How Much Do Award Tickets Cost Airlines?

Last month I posed the question as to how much airlines compensate one another for award tickets. We’ve seen several massive award chart devaluations lately, and possibly the most painful was United’s, whereby they created a new prohibitively expensive award chart for travel on their Star Alliance partners. In some cases first and business class redemptions on partner airlines went up by almost 100%, which begs the question of what it truly costs an airline to purchase space on a partner carrier, and what impact that might have on award pricing.

United isn’t the first carrier to do something like this. Singapore Airlines, for example, also has separate award charts for travel on their own metal vs. travel on Star Alliance partners.

So how much do airlines really compensate one another for award tickets? How much does US Airways pay Turkish for a transatlantic business class seat, versus what United pays Lufthansa for a transatlantic first class seat, etc.?

While I don’t have the formula, I can share some general information that I’ve been able to get my hands on, and I think in some cases the amounts might really surprise you.

Before I share some data points, there are a few things to keep in mind:

A lot of award ticket expenses are just accounting exercises.

  • Keep in mind that with most award tickets, money isn’t actually changing hands.
  • For the most part airlines are hoping to roughly come out even at the end of their accounting periods with partner carriers.
  • This is why a while back US Airways started blocking Lufthansa award space — there was too much of an imbalance of payments to the point that they felt it necessary to start cutting off Lufthansa award space.

Airlines seem to be compensated for award seats on a per segment basis.

  • When you book a paid ticket with connections, typically the fare is still only being charged between the origin and destination, and then revenue is being allocated per segment.
  • Interestingly airlines seem to charge one another for award segments on a per segment basis.
  • For example, on a paid ticket it might cost the same to fly Washington > Los Angeles > San Francisco as it would cost to fly Washington > San Francisco directly.
  • On award tickets airlines are charging one another on a per segment basis, so the cost for such an award would be the cumulative total of the Washington > Los Angeles and Los Angeles > San Francisco tickets.

Reimbursements vary by carrier, even in the same regions.

  • This raises a lot of questions as to how these prices are set, but it would appear that generally airlines don’t charge each other the same amounts for the same types of awards.
  • They seem to mostly be in the same range, but for example Lufthansa isn’t charging the same for a business class award from Chicago to Frankfurt as LOT is charging for a business class award for Chicago to Warsaw.

Given all that, any guesses as to how much airlines compensate one another for award tickets?

I have some Star Alliance data points, which I’ll round a bit:

  • Singapore > Bangkok in Singapore Airlines business class: ~$35
  • Frankfurt > Vienna in Austrian business class: ~$50
  • Istanbul > Tokyo in Turkish business class: ~$250
  • Tokyo > Bangkok in Thai first class: ~$250
  • Vienna > Bangkok in Austrian business class: ~$300
  • Washington > Brussels in Brussels Airlines Business Class: ~$300
  • Warsaw > New York in LOT business class: ~$350
  • New York > Tokyo in ANA first class: ~$450
  • Los Angeles > Frankfurt in Lufthansa first class: ~$1,000

Damn, those are low amounts!

Lufthansa’s reimbursement amounts seem in line with what I was expecting, but other than that the premium cabin reimbursement amounts are lower than what a coach fare would cost in virtually all markets.

$450 for first class on ANA between New York and Tokyo? No wonder they hardly release any award space!

And this raises an interesting question, in my opinion — why the hell would airlines release any award space to partner airlines, other than to “play nice?”

ANA-First-Class
An ANA longhaul first class redemption is costing partners less than $500!

About lucky

Ben Schlappig (aka Lucky) is a travel consultant, blogger, and avid points collector. He travels about 400,000 miles a year, primarily using miles and points to fund his first class experiences. He chronicles his adventures, along with industry news, here at One Mile At A Time.

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Comments

  1. That seems ridiculously low and just goes to show how the airlines are all just trying to screw us by raising redemption costs. What a money maker!

  2. I think the airlines are now finally running the airline like a business. –They have great computer systems to max load and can raise prices as they fill up — but if a seat goes empty —it is lost profit — so what ever they receive from partners falls to bottom line as no real additional cost other than the additional fuel required for baggage ( if they charge for baggage it is additional plus revenue )and passenger weight — short haul $35 n $50 is not going to add a lot unless the nbrs are huge — but $1000 sure does ,can not quantify the loyalty and good will they earn from the passenger — must put into it all the money earned from selling points on credit cards that fill those empty seats

  3. And this raises an interesting question, in my opinion — why the hell would airlines release any award space to partner airlines, other than to “play nice?”

    Because if award space is going to be unsold anyways (and if your revenue management department has a clue, it will be), $450 > $0 and empty seat.

    The problem is when people decide to have 8 bottles of Dom, spa treatments, and are lining the pockets of their coat with cigars from the LH FCT…

  4. I had the same question as you! If first class on ANA is roughly $450, why release the space at all? I mean, two bottles of Dom Perignon cost more than that!

  5. DO U GUYS DRINK 2 BOTTLES!! OR 8 BOTTLES — AT 2 BOTTLES THEY STILL MAKE SOME MONEY AS I WOULD THINK IN BULK they pay $100 or so BUT IF ANYONE IS LIKE “eponymous coward” described at 8 bottles a flight– need to raise the price –lol!

    Bottom line the airlines make money off f.f. they are far from stupid

  6. Wow! Far lower than I imagined. But this raises the question as to whether ‘paid BIS’ miles should be given priority over cc or bought miles. Surely at these rates the airline is giving something back to it’s more loyal customers vs churners who do less for the bottom line?

  7. “why the hell would airlines release any award space to partner airlines…?”

    I think this is why you see NZ no longer releasing any transpac J space…with Plusgrade, they get to sell a Premium Economy seat before taking in a similar amount of cash as they would for a *A redemption via the auction upgrade (i.e. ~$600 based on the FT results thread).

  8. Sure, these numbers seem low, but this is only one half of the transaction (airline to airline).
    In light of these, it’s even more difficult to understand why some airlines (e.g., UA) have jacked up partner mileage redemption rates so high. If NYC>TYO is really only costing UA $450 out of pocket, why on earth are they now trying to charge 110k one way?!?! (other than: because they think they can)
    That’s a valuation of only 0.4cpp – seems like they should prefer that we redeem for that, rather than worthless merchandise or lounge memberships or whatever that likely costs them more on a cpp basis. I think there must be more going on here.

  9. These prices are really no different than those a non-revenue / staff passenger will pay on these routes, the difference being that staff go on a standby / space available basis.

    Given how much money the airlines make from their frequent flyer programs, and given that yield management will never give away a seat that they think they can sell, this sounds like an excellent business model to me.

    What is more astounding is the amount that revenue passengers are willing to pay for premium cabin seats, given the airline’s actual valuation of that seat. The marginal cost of your frequent flyer Dom Perignon is more than covered by the CEO sitting next to you, whose company’s travel policy mandates his First Class seat, and who is paying $10,000 for the equivalent of your $450 seat.

    And it also reiterates my argument that the valuation that bloggers put on these miles (2.1 cents or whatever) is completely arbitrary: they have no intrinsic value at all, and whatever price a customer values them at, is far from the actual worth…

  10. I have been told by an insider at United that the prices do NOT vary that much between partners and it’s universally about 50% of the cost of the ticket. Ben knows who I am speaking about at United as well.

  11. A colleague of mine who worked in revenue management in an *A airline also supported the 50% of rack rate figure. These rates quoted above are unrealistically low.

  12. Couple of days ago I was flying JFK-YVR-HKG-BKK on CX F (AA award). When I landed in HKG an agent met me to tell me that my HKG-BKK plane has been downgraded so there was no F cabin. He had $1500HKD (~$190USD) in cash in hand for me as downgrade compensation.

    Since this was all done in advance of my arrival I’m assuming CX knew that I was on an award flight and determined this was an appropriate amount to give me. Based on that one would think that AA is paying much more than $500 for the entire trip to CX.

  13. Lucky, unless I missed it, I didn’t see you say where you’re getting this data? It’s meaningless without citing your source!

  14. @Eugene — It is likely that the HKG-BKK compensation was paid out pursuant to law and not because of compensation agreements between AA and CX.

    Most posters are forgetting that UA spends almost NOTHING if MileagePlus miles are redeemed for travel on UA metal. These are seats that would otherwise have gone empty (which is to say filled by a non-rev). $500 for a partner F redemption is not a lot, to be sure, and especially small in comparison to what the tickets would cost if paying revenue prices for them. However, $25 is not a lot either, but it’s those baggage fees (levied on all non-elite/premium passengers) that make legacy airlines profitable (at least those that are profitable). The compensation rates are low, but they are significant enough to make or break a quarter. This alleged 50% of the cost of the ticket nonsense is not even fathomable–partner redemptions would have ended (or been otherwise gutted) long long ago if that were true.

  15. @Matt

    I wasn’t aware of any laws in HKG for this type of stuff but I guess it’s possible. They did refer to it as goodwill compensation.

  16. BTW, re Star Alliance awards, some are going down significantly. I’m actually waiting to cash in PVG – AUK. Business class goes down 20k (from 100k to 80k) if I read the charts correctly.

  17. I wonder if the alliance has a clause that prevents the airlines from charging different amounts of miles for different partners.

    In other words, it’s clear Lufthansa’s pricing to partners is the reason United jacked up award prices.

    But United may not have been allowed to raise just the Lufthansa award price. So it had to raise all of them.

  18. Also note LOT doesn’t impose big YQ on its own award tickets through Miles & More, while Lufthansa does.

    That’s probably the explanation for the differences given the Chicago to Frankfurt / Warsaw example.

  19. Lucky, I didn’t mean tell us exactly who it was, I just thought you’d be able to say “my anonymous source in the accounting department at one of the big three US airlines” or something like that…

  20. @Andrew, I think it would be problematic for Ben to say any more about his source than he already has. I have a guess based on… well, I don’t even want to say what I base my guess on for fear of causing the source any issues, whether or not I am close. we obviously want to encourage such information sharing, and discussing the source excessively would discourage that.

    I for one feel that Ben’s credibility is high enough that he would only put this info out there from a credible source and having seen some documentation. Lucky isn’t the two M initial blogs, yet or ever hopefully, blowing deals by screaming ‘Amazing Deal!’ and putting the program name out for Google to search. Although I do think the constant devaluation talk encourages programs at the margin to cut further, and should be met by more forceful advocation of alternative providers.

  21. Your valuations are completely wrong. If the airlines are truly keeping swaps in near equilibrium then the dollar value is irrelevant it always nets out to approximately zero. However the Valuation helps with ratio of the value of one flight to another different flight type. A cross US flight may be one unit. US to Europe two units. The reason why you would have partner space is to make more options for your frequent fliers thus making your program more attractive. Partner blocking makes your program less attractive and theoretically hurts cash sales as people move their loyalty to better alliances.

  22. As a random example of how to mess up your own bottom line, if you are an airline: last night Cathay Pacific they showed J availability for 8 reward seats departing SYD-HKG the following morning, less than 12 hours later! You would need to be already packed and have your taxi to the airport booked to make that last-minute flight! So I guess that flight flew with at least 8 Business seats empty. If those seats had been up 24-48 hours earlier I’m guessing most of them would have been taken up.

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