Evolution Of Alliances And Award Availability

Before I explain my reasoning too much, let me make a prediction: over the coming years, airlines will begin releasing fewer saver level award seats to members of partner mileage programs than to members of their own mileage programs.

The evolution of airline alliances

The Star Alliance was founded in 1997, and was the first and biggest airline alliance in the world. It’s amazing to think how much things have changed since then, especially when it comes to frequent flyer programs.

~17 years ago frequent flyer programs weren’t nearly the beast they are now. They were a way to generate loyalty, and not massive businesses in and of themselves. I mean, look at the effect of loyalty programs over the past few years — if it weren’t for AAdvantage, American would be out of business.

While each individual airline in an alliance is ultimately running their own business, for the most part they work well together, and are better off with alliances than without them. After all, while we’ve seen airlines change alliances over the years, I don’t think we’ve ever seen an airline leave an alliance in order to become “independent” (well, short of going out of business). The mileage programs are often a different story, though…

Airline award reimbursement costs are low

Last December I shared some insight into how much award tickets booked on a partner airline cost frequent flyer programs. The numbers are shockingly low. Here are a few examples:

  • 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

Historically the reason they’re so low is that they were basically an accounting exercise. The reimbursement between carriers more or less evened out, and once there were “imbalances” airlines started blocking award space, as we’ve seen both United and US Airways do with Lufthansa over the years.

But aside from that, there seemed to be a pretty even exchange, as it was part of a much larger math equation. Keep in mind airlines aren’t just compensating one another for miles redeemed on one another, but also for miles earned on one another (for example, if you credit a United flight to your Lufthansa Miles & More account).

Airlines don’t have much of an incentive to release award space

When you’re being reimbursed $35 for an intra-Asia business class seat, or $300-350 for a transatlantic business class seat, what incentive could the airline possibly have to release award space?

Admittedly the algorithms used to release award space are incredibly complex and are theoretically designed so that you’re mostly only releasing award space for seats that would otherwise go unsold. But in practice that’s far from the truth, as we do see award seats even over peak travel dates where every seat could otherwise be filled.

Really in many cases an airline’s incentive to release award space is genuinely to reward loyalty. Yes, that’s a concept that seems almost foreign today.

Members that accrued lots of miles deserve to redeem them so that they’ll continue to be loyal to the program.

But what about airlines selling miles?

When you factor in that other airlines are selling an almost endless number of miles, at a certain point you’re just allowing people to book cheap premium cabin tickets on your flights. Don’t get me wrong, I love this and am thrilled about it, but from the airlines’ perspectives I find it puzzling. And it’s a trend that increasing sharply the past few years.

Avianca-LifeMiles-100-Bonus

I think we’re slowly seeing a trend whereby airlines will release most of their award space only to their own members and not those of partner programs.

Back in the day Lufthansa management was vocal about expressing their displeasure of what US Airways was doing, selling miles cheap and essentially giving their members free reign over Lufthansa first class cabins, which were at the time readily available on miles.

Lufthansa-First-Class-747-15
Lufthansa first class

In the meantime, Lufthansa only releases first class award space to partner airlines at most 15 days out, when they really can predict whether those seats would otherwise go out empty or not.

Bottom line

Don’t get me wrong, I benefit from this as much as anyone. So I’m pointing this out because it’s a trend I expect we’ll continue to see, and not because I’m saying it’s a change that airlines should make.

Airlines don’t have a direct monetary incentive to release award space, aside from the last minute when they know for sure those seats will otherwise go unsold. So their real incentive to release saver level award space is genuinely to reward their loyal members.

As loyalty programs have continued to evolve and find new and creative ways to monetize, that’s not being accomplished as much as they would hope.

So I don’t want to see it, but I suspect we’ll continue to see more airlines releasing more award space to their own members than to members of partner programs, like Lufthansa Miles & More, Singapore Airlines KrisFlyer, etc.

What do you think?

Comments

  1. Not sure it’s much of a prediction. It’s been reality.

    Witness Air France / KLM with Delta on a grand scale.

  2. @ Greg — Hah, well the prediction is that we’ll see a LOT more of it. But agree, not all that insightful of a prediction, but I think the idea is that this is largely being caused by miles being sold, and that historically the reimbursement costs have been so low.

  3. Can’t resist pointing out Aer Lingus who left OW, mostly due to Ryanair competition in their backyard admittedly – and of course they’ve retained some key partnerships and made new ones (BA, UA etc)

  4. I don’t have a problem with that if they give me an incentive to earn in their program. Even though they eventually devalued, i thought BA was smart to tap into the U.S. market via their relationship with Chase and even today they offer some good redemption values.

    So am a bit surprised we don’t see SQ or LH or AF pushing their mileage programs in the U.S. in a big way.

  5. I like LH’s approach the best – reward only your own members first, then within 2 weeks when inventory becomes distressed, then release to partners so they can enjoy the benefits of alliance-wide loyalty too. But I think requiring Senator+HONCircle to redeem LX F is a bit extreme.

    SQ and AF miles are easily converted from Amex M.R., so that’s not a major problem. LH M&M, on the other hand, is a pain to obtain.

  6. I think being a member won’t be enough if you can transfer points into various programs. Instead I think you’ll see availability increasingly restricted to passengers with status, and a change in the accounting rate when there is an imbalance (which exists currently because US carriers are much more liberal with selling their miles).

  7. I think it’s a tossup between this and YQ, which you’re also seeing proliferate. I don’t know how I feel about that — I understand how this game works, and am one of the biggest beneficiaries of this getup. And it’s not just selling miles — it’s also printing them like they’re part of the US Mint.

    So, the real options are the following: 1) Get shut out of inventory, 2) YQ, or 3) copious amounts of miles. Which one do I like the most? Honestly, I’ll fork over a few hundred $ to not have mileage requirements spiral out of control.

  8. And SWISS already went a step further: Award space in First only for HON-Members, no chance for all other members of their own program! They said, they are able to sell those seats anytime…

  9. While you’re probably right that airlines will make it a bit more difficult to redeem on partners, I’m not so convinced that it will get to the point where they just abandon award redemption on alliance partners altogether.

    For one thing, airlines are clearly making a lot of money by selling their miles in various ways (cash and rewards for credit card spend being the main ones). Fewer people will buy those miles if they can’t redeem them for good awards — and good awards means awards on partners because of their flexibility and additional destinations (not just the better quality of many foreign carriers’ products). So, precisely because the airlines’ costs for partner awards are so low, the airlines have an incentive to keep them available to their members.

    Of course, this logic depends on both airline partners getting something out of the exchange, and when one of them perceives that it’s not getting as much as it should, it withdraws (usually partially, like LH and SQ). The question is, will that behavior will become more prevalent? Or are other members of alliances happy with what they get from award exchanges?

  10. “Really in many cases an airline’s incentive to release award space is genuinely to reward loyalty. Yes, that’s a concept that seems almost foreign today.”
    ***I believe that concept only pertains to the USA, where it is relatively easy to obtain points through cc signups.

    I second Dan on this one. Since it is easier nowadays to transfer UR/MR/SPG points to other frequent flyer programs, eventually I think airlines may restrict their First class products to their highest elite status members. As for business class, I think they’ll still open it to members without status.

    If anything, I hope airlines won’t take the Transaero concept of having to buy an Imperial Class ticket first before being eligible to redeeming one.

  11. NZ is practically useless for Star Alliance now. They never release any J class and most routes you can’t even get Y. Not even on short routes between Australia and New Zealand, never mind USA to NZ!

  12. I would say a fair practice would be to use award miles at the level they were acquired at, not the level they are deflated to when someone saves up enough miles for a trip.

  13. I can see this trend with a lot of longhaul flights, but it completely undermines the concept of an alliance if I can’t connect from “my” airline’s flight to a short (e.g., intra Europe) or medium (e.g., NRT-SE Asia) haul to get to the final destination (not served by “my” airline)

  14. I agree with Dylan and others. Ability to transfer miles from UR/MR/SPG into multiple programs may push airlines to go the route of LX and AF in requiring certain status with an airline to explicitly reward THEIR frequent fliers.

    P.S. At least, LX F can still be redeemed at the same rates. AF F price is rather steep.

  15. This sure would make me not want a CITI AA credit card. Imagine if you could only redeem your AA miles for AA flights. Forget going to Europe. This would really weaken credit card and airline loyalty.

    Unfortunately I could see this come true. Just like I also see fewer and fewer award seats available. The value of a frequent flyer mile is dropping every day.

  16. I would suggest it goes further than airlines not having a monetary incentive to release premium cabin award space and say more directly that airlines now have a direct incentive to monetize their unsold inventory. If an airline can both sell a lower class fare (e.g.) coach, and gain additional, substantial revenue from passengers paying for their upgrade, then why would they choose to release any premium award space to regular customers.

    For example, as has been mentioned above, Air New Zealand. With Plusgrade/Oneup, J awards have disappeared completely apart from AKL-PVG and AKL-NRT. I guess they have done the analysis and figured that this is the route to profitability, with a very small subset (top tier elites) getting access to some limited upgrade space, and some token availability to appease *A.

    And, right on cue, news that CX is considering this approach too!

    http://www.ausbt.com.au/cathay-pacific-mulls-auctions-for-business-first-class-upgrades

    So are we going to see upgrades by auction and for top tier elites only in the future?

  17. Andrew has a good point; if everything goes to the dogs and one cannot get seats on other airlines within the alliance, especially for multi-leg trips, then where is the “alliance”? Yes, we can all see things getting worse in general, but I have trouble believing that I will no longer be able to get decent award space between North America and Bangkok, say, because the Asia carriers are not releasing seats for the NRT-BKK leg to the North American carriers.

  18. Rather than focus on the selling of “cheap” miles by airlines directly to the consumer, why not focus on the far greater problem, which is the selling of copious numbers of miles to credit card companies for next to nothing, said miles then being outright given away.

    Based on my latest attempts to crunch numbers for US Airways, American, and United, not one of them sells miles at a low enough cost to make such a purchase tempting, and I am crunching the numbers using their lowest ever sale prices that they try to tempt me with. The airline you allude to by way of a graphic, is the only one left that selling “cheap” miles.

    United is so bad right now that I can purchase business class tickets on some Asian routes for less than it would cost to book the same route using the supposed “cheap” miles that are being sold. No one in their right mind is going to buy non-cheap miles from American and UA to book partner awards at an alarming rate. If partner awards are being booked at an alarming rate, is because of the godzillion miles being given away via the credit card companies.

  19. @Mark, what United routes to Asia are you finding good deals in Business class? Thanks in advance.

  20. @ Mark: Airlines are not giving miles to banks and credit cards for free. They are charging above cost for that and cost per mile is about 1 Cent. In 2009, AA had to publish a deal where Citibank bought AA miles for 1,000,000,000 USD. That’s no peanuts.

  21. One more thing to add, I thought awards are also like free advertising. If you redeem an award on one partner, you may be more likely to purchase that partner in the future, and you will also likely talk about how much you liked their product.

    Another question. What about non-revs? How do they earn for the airline. Some airlines like Delta/US Airways for example, make it much easier for non-revs to get a ‘free’ seat then a loyal frequent flyer redeeming miles for a ‘free’ seat??? Non-revs, although they have to wait for the last minute, probably have a much much higher chance of getting that unsold seat.

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