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DansDeals Forum => Up In The Air => Topic started by: churnbabychurn on March 15, 2019, 03:28:04 PM

Title: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 15, 2019, 03:28:04 PM
The podcast dropped..
 | 3/16/16 Credit card miles and points: Swiping for rewards, buying and selling miles, is it Assur and a Chillul Hashem or a great way for a side Parnassah?

http://podcast.headlinesbook.com/e/31616-credit-card-miles-and-points-swiping-for-rewards-buying-and-selling-miles-is-it-assur-and-a-chillul-hashem-or-a-great-way-for-a-side-parnassah/
Dans first comment "entire AA profit margin is due to them selling FF miles"? Wow going to see how/if they report that...
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: chff on March 15, 2019, 03:35:30 PM
Dans first comment "entire AA profit margin is due to them selling FF miles"? Wow going to see how/if they report that...
Every SEC filings, see Gary's posts
Title: Re: PSA: Don't swipe recklessly for others
Post by: ExGingi on March 17, 2019, 02:41:43 PM
Listening now to the podcast - re airline fare mistake. Matthew once wrote about it, when the passenger makes a mistake the airline will charge you in full so don't feel bad when they make a mistake - https://liveandletsfly.boardingarea.com/2017/05/21/mistake-fare-stories/
If airlines wouldn't abuse the systems by using YQ/YR, there would be less "mistake fares". They are just eating the fruit of their own abuses.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: churnbabychurn on March 17, 2019, 03:12:47 PM
Every SEC filings, see Gary's posts

From 10k

Loyalty  Revenue American  currently  operates  the  loyalty  program,  AAdvantage.  This  program  awards  mileage  credits  to  passengers  who  fly  on  American,  any oneworld  airline  or  other  partner  airlines,  or  by  using  the  services  of  other  program  participants,  such  as  the  Citi  and  Barclaycard  US  co-branded credit  cards,  hotels  and  car  rental  companies.  Mileage  credits  can  be  redeemed  for  travel  on  American  and  other  participating  partner  airlines,  as well  as  other  non-air  travel  awards  such  as  hotels  and  rental  cars.  For  mileage  credits  earned  by  AAdvantage  loyalty  program  members,  American applies  the  deferred  revenue  method  in  accordance  with  the  New  Revenue  Standard. Mileage  credits  earned  through  travel For  mileage  credits  earned  through  travel,  American  applies  a  relative  selling  price  approach  whereby  the  total  amount  collected  from  each passenger  ticket  sale  is  allocated  between  the  air  transportation  and  the  mileage  credits  earned.  The  portion  of  each  passenger  ticket  sale attributable  to  mileage  credits  earned  is  initially  deferred  and  then  recognized  in  passenger  revenue  when  mileage  credits  are  redeemed  and transportation  is  provided.  The  estimated  selling  price  of  mileage  credits  is  determined  using  an  equivalent  ticket  value  approach,  which  uses historical  data,  including  award  redemption  patterns  by  geographic  region  and  class  of  service,  as  well  as  similar  fares  as  those  used  to  settle award  redemptions.  The  estimated  selling  price  of  miles  is  adjusted  for  an  estimate  of  miles  that  will  not  be  redeemed  based  on  historical redemption  patterns. Mileage  credits  sold  to  co-branded  credit  cards  and  other  partners American  sells  mileage  credits  to  participating  airline  partners  and  non-airline  business  partners  including  Americanís  co-branded  credit  card partners,  under  contracts  with  terms  extending  generally  for  one  to  nine  years.  Consideration  received  from  the  sale  of  mileage  credits  is  variable and  payment  terms  typically  are  within  30  days  subsequent  to  the  month  of  mileage  sale.  Sales  of  mileage  credits  to  non-airline  business  partners are  comprised  of  two  components,  transportation  and  marketing.  American  allocates  the  consideration  received  from  these  sales  of  mileage credits  based  on  the  relative  selling  price  of  each  product  or  service  delivered. Americanís  most  significant  partner  agreements  are  its  co-branded  credit  card  agreements  with  Citi  and  Barclaycard  US  that  American  entered into  in  2016.  American  identified  the  following  revenue  elements  in  these  co-branded  credit  card  agreements:  the  transportation  component;  and the  use  of  intellectual  property,  including  the  American  brand  and  access  to  loyalty  program  member  lists,  which  is  the  predominant  element  in  the agreements,  as  well  as  advertising  (collectively,  the  marketing  component).  Accordingly,  American  recognizes  the  marketing  component  in  other revenue  in  the  period  of  the  mileage  sale  following  the  sales-based  royalty  method.
The  transportation  component  represents  the  estimated  selling  price  of  future  travel  awards  and  is  determined  using  the  same  equivalent  ticket value  approach  described  above.  The  portion  of  each  mileage  credit  sold  attributable  to  transportation  is  initially  deferred  and  then  recognized  in passenger  revenue  when  mileage  credits  are  redeemed  and  transportation  is  provided. For  the  portion  of  Americanís  outstanding  mileage  credits  that  it  estimates  will  not  be  redeemed,  American  recognizes  the  associated  value proportionally  as  the  remaining  mileage  credits  are  redeemed.  Americanís  estimates  are  based  on  analysis  of  historical  redemptions. Cargo  Revenue Cargo  revenue  is  recognized  when  American  provides  the  transportation. Other  Revenue Other  revenue  includes  revenue  associated  with  Americanís  loyalty  program,  which  is  comprised  principally  of  the  marketing  component  of mileage  sales  to  co-branded  credit  card  and  other  partners  and  other  marketing  related  payments.  For  the  years  ended  December  31,  2018,  2017 and  2016,  loyalty  revenue  included  in  other  revenue  was  $2.4  billion,  $2.1  billion  and  $1.9  billion,  respectively.  The  accounting  and  recognition  for the  loyalty  program  marketing  services  are  discussed  above  in  ďLoyalty  Revenue.Ē  The  remaining  amounts  included  within  other  revenue  relate  to airport  clubs,  advertising  and  vacation-related  services. Contract  Balances Americanís  significant  contract  liabilities  are  comprised  of  (1)  outstanding  loyalty  program  mileage  credits  that  may  be  redeemed  for  future travel  and  other  non-air  travel  awards,  reported  as  loyalty  program  liability  on  Americanís  consolidated  balance  sheet  and  (2)  ticket  sales  for transportation  that  has  not  yet  been  provided,  reported  as  air  traffic  liability  on  Americanís  consolidated  balance  sheet.

Loyalty  program  liability December  31,  2018 December  31,  2017 (in  millions) $ Air  traffic  liability 8,539 4,339 $ 8,822 4,042 Total $ 12,878 $ 12,864
The  balance  of  the  loyalty  program  liability  fluctuates  based  on  seasonal  patterns,  which  impact  the  volume  of  mileage  credits  issued  through travel  or  sold  to  co-branded  credit  card  and  other  partners  (deferral  of  revenue)  and  mileage  credits  redeemed  (recognition  of  revenue).  Changes  in loyalty  program  liability  are  as  follows  (in  millions): Balance  at  December  31,  2017 $ Deferral  of  revenue Recognition  of  revenue  (1) 8,822 3,083 (3,366) Balance  at  December  31,  2018  (2) (1) $ 8,539 Principally  relates  to  revenue  recognized  from  the  redemption  of  mileage  credits  for  both  air  and  non-air  travel  awards.  Mileage  credits  are combined  in  one  homogenous  pool  and  are  not  separately  identifiable.  As  such,  the  revenue  is  comprised  of  miles  that  were  part  of  the loyalty  program  deferred  revenue  balance  at  the  beginning  of  the  period,  as  well  as  miles  that  were  issued  during  the  period. (2) Mileage  credits  can  be  redeemed  at  any  time  and  do  not  expire  as  long  as  that  AAdvantage  member  has  any  type  of  qualifying  activity  at least  every  18  months.  As  of  December  31,  2018,  Americanís  current  loyalty  program  liability  was  $3.3  billion  and  represents  Americanís current  estimate  of  revenue  expected  to  be  recognized  in  the  next  twelve  months  based  on  historical  trends,  with  the  balance  reflected  in long-term  loyalty  program  liability  expected  to  be  recognized  as  revenue  in  periods  thereafter. The  air  traffic  liability  principally  represents  tickets  sold  for  future  travel  on  American  and  partner  airlines,  as  well  as  estimated  future  refunds and  exchanges  of  tickets  sold  for  past  travel.  The  balance  in  Americanís  air  traffic  liability  also fluctuates  with  seasonal  travel  patterns.  The  contract  duration  of  passenger  tickets  is  one  year.  Accordingly,  any  revenue  associated  with  tickets sold  for  future  travel  will  be  recognized  within  twelve  months.  For  2018,  $3.1  billion  of  revenue  was  recognized  in  passenger  revenue  that  was included  in  Americanís  air  traffic  liability  at  December  31,  2017. With  respect  to  contract  receivables,  reflected  as  accounts  receivable,  net  on  the  accompanying  consolidated  balance  sheet,  these  primarily include  receivables  for  tickets  sold  to  individual  passengers  through  the  use  of  major  credit  cards.  These  receivables  are  short-term,  mostly settled  within  seven  days  after  sale.  Bad  debt  losses,  which  have  been  minimal  in  the  past,  have  been  considered  in  establishing  allowances  for doubtful  accounts.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: churnbabychurn on March 17, 2019, 03:23:42 PM
From 10k

Loyalty  Revenue American  currently  operates  the  loyalty  program,  AAdvantage.  This  program  awards  mileage  credits  to  passengers  who  fly  on  American,  any oneworld  airline  or  other  partner  airlines,  or  by  using  the  services  of  other  program  participants,  such  as  the  Citi  and  Barclaycard  US  co-branded credit  cards,  hotels  and  car  rental  companies.  Mileage  credits  can  be  redeemed  for  travel  on  American  and  other  participating  partner  airlines,  as well  as  other  non-air  travel  awards  such  as  hotels  and  rental  cars.  For  mileage  credits  earned  by  AAdvantage  loyalty  program  members,  American applies  the  deferred  revenue  method  in  accordance  with  the  New  Revenue  Standard. Mileage  credits  earned  through  travel For  mileage  credits  earned  through  travel,  American  applies  a  relative  selling  price  approach  whereby  the  total  amount  collected  from  each passenger  ticket  sale  is  allocated  between  the  air  transportation  and  the  mileage  credits  earned.  The  portion  of  each  passenger  ticket  sale attributable  to  mileage  credits  earned  is  initially  deferred  and  then  recognized  in  passenger  revenue  when  mileage  credits  are  redeemed  and transportation  is  provided.  The  estimated  selling  price  of  mileage  credits  is  determined  using  an  equivalent  ticket  value  approach,  which  uses historical  data,  including  award  redemption  patterns  by  geographic  region  and  class  of  service,  as  well  as  similar  fares  as  those  used  to  settle award  redemptions.  The  estimated  selling  price  of  miles  is  adjusted  for  an  estimate  of  miles  that  will  not  be  redeemed  based  on  historical redemption  patterns. Mileage  credits  sold  to  co-branded  credit  cards  and  other  partners American  sells  mileage  credits  to  participating  airline  partners  and  non-airline  business  partners  including  Americanís  co-branded  credit  card partners,  under  contracts  with  terms  extending  generally  for  one  to  nine  years.  Consideration  received  from  the  sale  of  mileage  credits  is  variable and  payment  terms  typically  are  within  30  days  subsequent  to  the  month  of  mileage  sale.  Sales  of  mileage  credits  to  non-airline  business  partners are  comprised  of  two  components,  transportation  and  marketing.  American  allocates  the  consideration  received  from  these  sales  of  mileage credits  based  on  the  relative  selling  price  of  each  product  or  service  delivered. Americanís  most  significant  partner  agreements  are  its  co-branded  credit  card  agreements  with  Citi  and  Barclaycard  US  that  American  entered into  in  2016.  American  identified  the  following  revenue  elements  in  these  co-branded  credit  card  agreements:  the  transportation  component;  and the  use  of  intellectual  property,  including  the  American  brand  and  access  to  loyalty  program  member  lists,  which  is  the  predominant  element  in  the agreements,  as  well  as  advertising  (collectively,  the  marketing  component).  Accordingly,  American  recognizes  the  marketing  component  in  other revenue  in  the  period  of  the  mileage  sale  following  the  sales-based  royalty  method.
The  transportation  component  represents  the  estimated  selling  price  of  future  travel  awards  and  is  determined  using  the  same  equivalent  ticket value  approach  described  above.  The  portion  of  each  mileage  credit  sold  attributable  to  transportation  is  initially  deferred  and  then  recognized  in passenger  revenue  when  mileage  credits  are  redeemed  and  transportation  is  provided. For  the  portion  of  Americanís  outstanding  mileage  credits  that  it  estimates  will  not  be  redeemed,  American  recognizes  the  associated  value proportionally  as  the  remaining  mileage  credits  are  redeemed.  Americanís  estimates  are  based  on  analysis  of  historical  redemptions. Cargo  Revenue Cargo  revenue  is  recognized  when  American  provides  the  transportation. Other  Revenue Other  revenue  includes  revenue  associated  with  Americanís  loyalty  program,  which  is  comprised  principally  of  the  marketing  component  of mileage  sales  to  co-branded  credit  card  and  other  partners  and  other  marketing  related  payments.  For  the  years  ended  December  31,  2018,  2017 and  2016,  loyalty  revenue  included  in  other  revenue  was  $2.4  billion,  $2.1  billion  and  $1.9  billion,  respectively.  The  accounting  and  recognition  for the  loyalty  program  marketing  services  are  discussed  above  in  ďLoyalty  Revenue.Ē  The  remaining  amounts  included  within  other  revenue  relate  to airport  clubs,  advertising  and  vacation-related  services. Contract  Balances Americanís  significant  contract  liabilities  are  comprised  of  (1)  outstanding  loyalty  program  mileage  credits  that  may  be  redeemed  for  future travel  and  other  non-air  travel  awards,  reported  as  loyalty  program  liability  on  Americanís  consolidated  balance  sheet  and  (2)  ticket  sales  for transportation  that  has  not  yet  been  provided,  reported  as  air  traffic  liability  on  Americanís  consolidated  balance  sheet.

Loyalty  program  liability December  31,  2018 December  31,  2017 (in  millions) $ Air  traffic  liability 8,539 4,339 $ 8,822 4,042 Total $ 12,878 $ 12,864
The  balance  of  the  loyalty  program  liability  fluctuates  based  on  seasonal  patterns,  which  impact  the  volume  of  mileage  credits  issued  through travel  or  sold  to  co-branded  credit  card  and  other  partners  (deferral  of  revenue)  and  mileage  credits  redeemed  (recognition  of  revenue).  Changes  in loyalty  program  liability  are  as  follows  (in  millions): Balance  at  December  31,  2017 $ Deferral  of  revenue Recognition  of  revenue  (1) 8,822 3,083 (3,366) Balance  at  December  31,  2018  (2) (1) $ 8,539 Principally  relates  to  revenue  recognized  from  the  redemption  of  mileage  credits  for  both  air  and  non-air  travel  awards.  Mileage  credits  are combined  in  one  homogenous  pool  and  are  not  separately  identifiable.  As  such,  the  revenue  is  comprised  of  miles  that  were  part  of  the loyalty  program  deferred  revenue  balance  at  the  beginning  of  the  period,  as  well  as  miles  that  were  issued  during  the  period. (2) Mileage  credits  can  be  redeemed  at  any  time  and  do  not  expire  as  long  as  that  AAdvantage  member  has  any  type  of  qualifying  activity  at least  every  18  months.  As  of  December  31,  2018,  Americanís  current  loyalty  program  liability  was  $3.3  billion  and  represents  Americanís current  estimate  of  revenue  expected  to  be  recognized  in  the  next  twelve  months  based  on  historical  trends,  with  the  balance  reflected  in long-term  loyalty  program  liability  expected  to  be  recognized  as  revenue  in  periods  thereafter. The  air  traffic  liability  principally  represents  tickets  sold  for  future  travel  on  American  and  partner  airlines,  as  well  as  estimated  future  refunds and  exchanges  of  tickets  sold  for  past  travel.  The  balance  in  Americanís  air  traffic  liability  also fluctuates  with  seasonal  travel  patterns.  The  contract  duration  of  passenger  tickets  is  one  year.  Accordingly,  any  revenue  associated  with  tickets sold  for  future  travel  will  be  recognized  within  twelve  months.  For  2018,  $3.1  billion  of  revenue  was  recognized  in  passenger  revenue  that  was included  in  Americanís  air  traffic  liability  at  December  31,  2017. With  respect  to  contract  receivables,  reflected  as  accounts  receivable,  net  on  the  accompanying  consolidated  balance  sheet,  these  primarily include  receivables  for  tickets  sold  to  individual  passengers  through  the  use  of  major  credit  cards.  These  receivables  are  short-term,  mostly settled  within  seven  days  after  sale.  Bad  debt  losses,  which  have  been  minimal  in  the  past,  have  been  considered  in  establishing  allowances  for doubtful  accounts.
Not that significant..
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Zalc on March 18, 2019, 12:13:30 AM
It's like meeting a comedian and saying, "tell me a joke."
I guess they think it's like meeting a Rabbi or Shliach and saying "tell me a vort", which is perfectly reasonable...

Like David said, it's "so far out of his payscale..."
(He's come very far from his starting days, maxing out his credit cards to open his business)
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Zalc on March 18, 2019, 12:18:07 AM
Not that significant..
Isn't this before expenses?

What's their total profit vs the income earned from loyalty programs?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: churnbabychurn on March 18, 2019, 06:34:56 AM
Yes, they report it as revenue before expenses.
They price the rewards for recording income as if these are regular revenue tickets using an internal model of historical redemptions,and adjust for unredeemed percentages..
It's also not "insignificant", but no way a primary profit driver..
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: a mirrer on March 18, 2019, 07:35:04 AM


The first Rov said he hasnít heard of a rov that says itís Mutar to sell. Does anyone know a rov thatís allows it ?
yes I spoke to a Dayan here in Israel who went through the T&C's of quite a few airlines and told me that it is muttar lchatchila to sell
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: EJB on March 18, 2019, 07:43:54 AM
Yes, they report it as revenue before expenses.
They price the rewards for recording income as if these are regular revenue tickets using an internal model of historical redemptions,and adjust for unredeemed percentages..
It's also not "insignificant", but no way a primary profit driver..

Youíd be surprised. It may not be #1, but for some airlines itís billions a year. Thatís not chump change.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 07:51:05 AM
Youíd be surprised. It may not be #1, but for some airlines itís billions a year. Thatís not chump change.
And without that, many wouldn't be profitable.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 10:25:51 AM
And without that, many wouldn't be profitable.

That may be technically true but it rubs me the wrong way when those kind of stats are used because you can pull out any line item and do that to almost any industry: If not for lower fuel prices x trucking company would have swung to a loss this year. The margins on x line of product, the savings from tax changes, the hotel chain switching to changing linen and towels every other day, etc. swung the company from a loss to a profit. There are complex pricing models that account for hundreds of factors to try to ensure profitability. If a variable changes, the pricing structure will usually change to account for it. There are also many costs that are shared across product lines so a loyalty program may generate a profit on paper but really many of the fixed costs like advertising, customer service, etc. are being absorbed by other segments of the company. If all of the fixed costs would be distributed evenly the loyalty program could easily be made to show a loss. To single out any one line item as the profit driver is not really accurate. I remember hearing that the entire profit margin of a certain chalav yisrael milk route was from the distribution of heimishe orange juice on the route. Without it the chalav yisrael route would lose money. The whole premise of the business is to lose money on the milk and make profit on the orange juice. Then I realized that itís hardly so simple.

You can say that the dollar amount of loyalty program revenue is significant since it equals the total profit for the year, but to say the Airline would swing to a loss is hardly accurate. I know business analysts pull that trick all the time but itís really inaccurate.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 10:29:31 AM
The difference is that the rest of the airline is operating either way. Except that the rest of the airline is a money loser and airlines lost billions for years until they figured out how to profit on the sales of miles.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 10:44:57 AM
The difference is that the rest of the airline is operating either way. Except that the rest of the airline is a money loser and airlines lost billions for years until they figured out how to profit on the sales of miles.

Technically yes. Yet if the miles business disappeared tomorrow the airlines would still need to survive. To do so they would all raise fares, nickel and dime travelers just a bit more, cut marketing budgets in unison, renegotiate unionized labor costs, etc.  Iíll bet that without the seat upgrade pricing many airlines would lose money. Years ago when airlines were losing billions exit seats were a free perk. Would it be fair to say that they are responsible for saving the airlines from financial ruin? I donít think so. The main factors are actually far higher occupancy of smaller planes. That, and optimized variable pricing algorithms and other such changes that have a far greater impact. Miles sales  income is hardly what makes or breaks them in the end of the day.

Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 10:47:23 AM
They can't raise fares any more, due to Frontier, Spirit, etc. And those airlines don't make much of mileage sales and would be happy if the programs died tomorrow.

Arguably El Al is in trouble specifically because they have not figured out how to make more money from mileage sales.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 11:31:26 AM
They can't raise fares any more, due to Frontier, Spirit, etc. And those airlines don't make much of mileage sales and would be happy if the programs died tomorrow.

Arguably El Al is in trouble specifically because they have not figured out how to make more money from mileage sales.

I definitely would not say that mileage sales are the factor that swung them from billions in losses to profitability. Take the load factor for example. Well above 80% now, as opposed to around 55% in the Ď70ís. That would account for a big chunk of the improved profitability.

https://www.wsj.com/articles/the-last-747-airlines-dump-the-jumbo-jet-transforming-international-travel-11546059601
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 11:33:31 AM
I definitely would not say that mileage sales are the factor that swung them from billions in losses to profitability. Take the load factor for example. Well above 80% now, as opposed to around 55% in the Ď70ís. That would account for a big chunk of the improved profitability.

https://www.wsj.com/articles/the-last-747-airlines-dump-the-jumbo-jet-transforming-international-travel-11546059601
You're comparing load factor from pre and post regulation?!?
A more meaningful comparison of load factor and mileage revenue would be '98-'08-'18.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 12:41:34 PM
You're comparing load factor from pre and post regulation?!?
A more meaningful comparison of load factor and mileage revenue would be '98-'08-'18.

Ok
https://fred.stlouisfed.org/series/LOADFACTOR

Load factor was averaging well below current levels back then.

Hereís Delta, for example
https://www.statista.com/statistics/221085/passenger-load-factor-of-delta-air-lines/


Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: aygart on March 18, 2019, 01:34:26 PM
Technically yes. Yet if the miles business disappeared tomorrow the airlines would still need to survive. To do so they would all raise fares, nickel and dime travelers just a bit more, cut marketing budgets in unison, renegotiate unionized labor costs, etc.  Iíll bet that without the seat upgrade pricing many airlines would lose money. Years ago when airlines were losing billions exit seats were a free perk. Would it be fair to say that they are responsible for saving the airlines from financial ruin? I donít think so. The main factors are actually far higher occupancy of smaller planes. That, and optimized variable pricing algorithms and other such changes that have a far greater impact. Miles sales  income is hardly what makes or breaks them in the end of the day.


Do you mean that there are ways they can make their revenue flights more profitable that they aren't doing? THey need new management!!
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 01:57:14 PM
Do you mean that there are ways they can make their revenue flights more profitable that they aren't doing? THey need new management!!

Price rises wonít stick due to competition. If everyone was forced to come up with additional revenue they would, much what happens when fuel prices rise...
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 01:58:31 PM
Price rises wonít stick due to competition. If everyone was forced to come up with additional revenue they would, much what happens when fuel prices rise...
You're ignoring that prices are low due to Frontier and Spirit, which don't make significant money on selling miles.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: whYME on March 18, 2019, 02:09:07 PM
Price rises wonít stick due to competition. If everyone was forced to come up with additional revenue they would, much what happens when fuel prices rise...
Do I understand your argument correctly?

"You can't say that the airlines make their profit primarily from selling miles because if they weren't making their profit from selling miles they would raise their prices to make a profit."

Is that the gist of it?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 03:26:30 PM
Do I understand your argument correctly?

"You can't say that the airlines make their profit primarily from selling miles because if they weren't making their profit from selling miles they would raise their prices to make a profit."

Is that the gist of it?

There are hundreds of components to the airlinesí bottom lines of which miles selling is only a tiny component so I guess I would tweak what I said a bit. You can say that airlines profit margins are entirely composed of ďxĒ , ďxĒ being any revenue item or cost savings out of the hundreds of contributory items. Potentially if under pressure from losing any one item, airlines could try anything from raising prices to renegotiating airport fees or dozens of other cost or revenue line items. I get what Dan is saying but Iím not sure how that would play out since in the end of the day spirit and frontier are a fraction of the total capacity and certainly donít figure in the international scene. I get that itís not a perfect analogy but I still think that if push can to shove it would work out largely the same as the milk distributors losing the orange juice route.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 03:28:46 PM
Your claims of being to raise revenue from other routes simply doesn't hold water.

On international routes there are other airlines, like WOW, Norwegian, and even El Al, that make small potatoes if anything off of mileage revenue. There wouldn't be some magical way to raise fares without the competition eating their lunch.

If there are other ways of maximizing profits today, they'd be doing it.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 03:31:27 PM
Your claims of being to raise revenue from other routes simply doesn't hold water.

On international routes there are other airlines, like WOW, Norwegian, and even El Al, that make small potatoes if anything off of mileage revenue. There wouldn't be some magical way to raise fares without the competition eating their lunch.

If there are other ways of maximizing profits today, they'd be doing it.

Isnít it a lot easier to get a collective fee increase to stick or to make  a convincing case to renegotiate a union contract or an airport fee if all the big airlines are losing money?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 03:34:07 PM
Isnít it a lot easier to get a collective fee increase to stick or to make  a convincing case to renegotiate a union contract or an airport fee if you are all collectively losing money?
You keep saying all collectively, but there are only a few airlines that are making a true killing off mileage sales.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: mmgfarb on March 18, 2019, 03:35:08 PM
If there are other ways of maximizing profits today, they'd be doing it.
+1000 that's the main point here.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 03:35:39 PM
Your claims of being to raise revenue from other routes simply doesn't hold water.

On international routes there are other airlines, like WOW, Norwegian, and even El Al, that make small potatoes if anything off of mileage revenue. There wouldn't be some magical way to raise fares without the competition eating their lunch.

If there are other ways of maximizing profits today, they'd be doing it.

Do they record the outstanding mileage at a lower price than they sold it, recognizing an immediate profit, or do they only recognize the profit once the miles are used/expired?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 18, 2019, 03:55:23 PM
+1000 that's the main point here.

I guess we donít see eye to eye on that one. Can we agree that the statement ďtheir entire profit margin comes from milesĒ could just as easily be said about numerous other revenue or expense items on the airlines books as well?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 03:58:05 PM
I guess we donít see eye to eye on that one. Can we agree that the statement ďtheir entire profit margin comes from milesĒ could just as easily be said about numerous other revenue or expense items on the airlines books as well?
Nope.
Everything else is a traditional cost or profit of doing business.
Miles are something that were not intended to be a profit center, but became one and could not be replaced. It also allows them to dump practically zero cost inventory that was spoiling before and recognize those revenues on the books.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: churnbabychurn on March 18, 2019, 04:12:10 PM
Do they record the outstanding mileage at a lower price than they sold it, recognizing an immediate profit, or do they only recognize the profit once the miles are used/expired?
Very important point. I don't really understand the whole discussion because of this.

They report revenue up front (with a liability offset), so all they are doing essentially is selling tickets to Citi instead of directly to pax. So all this is really is a agressivly sales technique.. Not sure how this is a material change in how they make money. It's not even a separate business model, and doesn't have different margins/prices/loads etc
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: churnbabychurn on March 18, 2019, 04:16:12 PM


Nope.
Everything else is a traditional cost or profit of doing business.
Miles are something that were not intended to be a profit center, but became one and could not be replaced. It also allows them to dump practically zero cost inventory that was spoiling before and recognize those revenues on the books.

If you are correct that they wouldn't be able to sell this inventory otherwise, then I can accept that this is a major profit driver.

In other words, though it appears to be only a top line item, it's really about selling spoiled inventory, which is an expense reduction as well...
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 04:20:31 PM

If you are correct that they wouldn't be able to sell this inventory otherwise, then I can accept that this is a major profit driver.

In other words, though it appears to be only a top line item, it's really about selling spoiled inventory, which is an expense reduction as well...
Just try to find a a business saver award on DL or UA to TLV. These go out full, so they don't open them up for saver awards except for the rare cases where inventory management decides that there would be spoilage.

Same reason why CX and LH open premium space close-in.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: ExGingi on March 18, 2019, 04:20:34 PM
Very important point. I don't really understand the whole discussion because of this.

They report revenue up front (with a liability offset), so all they are doing essentially is selling tickets to Citi instead of directly to pax. So all this is really is a agressivly sales technique.. Not sure how this is a material change in how they make money. It's not even a separate business model, and doesn't have different margins/prices/loads etc
They aren't selling tickets, they are selling an expiring currency of which they control the value. So they can use whatever creative formula they want for the liability. And upon redemption (other than partner redemption - which I would love to find out how those are accounted for) they erase the liability and recognize a small operating expense not directly related to the liability.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Joe4007 on March 18, 2019, 05:36:54 PM
Just try to find a a business saver award on DL or UA to TLV. These go out full, so they don't open them up for saver awards except for the rare cases where inventory management decides that there would be spoilage.

Same reason why CX and LH open premium space close-in.
I'm guessing this is only true to an extent (an acceptable one to the airlines I'm sure), as there are pax that would've paid cash if not for mileage availability.
They aren't selling tickets, they are selling an expiring currency of which they control the value. So they can use whatever creative formula they want for the liability. And upon redemption (other than partner redemption - which I would love to find out how those are accounted for) they erase the liability and recognize a small operating expense not directly related to the liability.
Not to mention expiring miles that's pure income.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 05:38:36 PM
According to my calculations
Can we have the formula please? (and while you're at it, tell us what the airlines pay each other for partner awards).
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Dan on March 18, 2019, 05:45:39 PM
and while you're at it, tell us what the airlines pay each other for partner awards.
@EJB
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: EJB on March 18, 2019, 05:51:58 PM
@EJB

I have no idea what youíre talking about  ;D
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 05:56:39 PM
I have no idea what youíre talking about  ;D
Booo milts
How long is that NDA for anyway?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: EJB on March 18, 2019, 05:57:31 PM
I'm guessing this is only true to an extent (an acceptable one to the airlines I'm sure), as there are pax that would've paid cash if not for mileage availability.Not to mention expiring miles that's pure income.

I haven't read the entire discussion, but read any of the numerous articles online about ASC 606 and how it impacts points accounting by airlines.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 05:57:48 PM
How long is that NDA for anyway?

Can't answer that either
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 06:02:33 PM
I haven't read the entire discussion, but read any of the numerous articles online about ASC 606 and how it impacts points accounting by airlines.
https://www.bna.com/airline-frequent-flyer-n73014463438/

Interesting, so it affects how to recognize actual revenue on revenue tickets. Seems crazy if they have to actually adjust the revenue on each ticket sold, rather than just recording the liability as the miles are earned. What happens with retro credit? What happens when credited to partners? How is all this accounted for (and what in the world do airlines pay each other for those miles and award seats?)
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 06:03:41 PM
https://www.bna.com/airline-frequent-flyer-n73014463438/

Interesting, so it affects how to recognize actual revenue on revenue tickets. Seems crazy if they have to actually adjust the revenue on each ticket sold, rather than just recording the liability as the miles are earned. What happens with retro credit? What happens when credited to partners? How is all this accounted for (and what in the world do airlines pay each other for those miles and award seats?)
They defer and ďbreakĒ the revenue.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 06:06:19 PM
They defer and ďbreakĒ the revenue.
Does that mean they separate the revenue into two parts, one that would wash with the miles liability, and then the rest. And if the miles liability is claimed, so that just washes out that part of the revenue until the liability is cleared by expiration or redemption?
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 06:08:08 PM
Does that mean they separate the revenue into two parts, one that would wash with the miles liability, and then the rest. And if the miles liability is claimed, so that just washes out that part of the revenue until the liability is cleared by expiration or redemption?
Yes, with the addition that they model how they expect the miles to be used and adjust if actuality differs from expectations , in many cases.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 06:10:34 PM


Not to mention expiring miles that's pure income.

They adjust that out
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 06:13:22 PM
Yes, with the addition that they model how they expect the miles to be used and adjust if actuality differs from expectations , in many cases.

Hence
They aren't selling tickets, they are selling an expiring currency of which they control the value. So they can use whatever creative formula they want for the liability. And upon redemption (other than partner redemption - which I would love to find out how those are accounted for) they erase the liability and recognize a small operating expense not directly related to the liability.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 06:13:44 PM
https://www.bna.com/airline-frequent-flyer-n73014463438/

Interesting, so it affects how to recognize actual revenue on revenue tickets. Seems crazy if they have to actually adjust the revenue on each ticket sold, rather than just recording the liability as the miles are earned. What happens with retro credit? What happens when credited to partners? How is all this accounted for (and what in the world do airlines pay each other for those miles and award seats?)
I posted up thread the actual disclosure where they explain how they account for these
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: EJB on March 18, 2019, 06:15:00 PM
Hence

Their models are audited by big 4 firms. But yes they have some flexibility in the timing that they recognize the revenue. They donít have the flexibility to not at all recognize the revenue.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 06:15:54 PM
I posted up thread the actual disclosure where they explain how they account for these

TLDR.

At least when I post something for you to read, it's in a language we use in day-to-day learning, and usually a clear image rather than a tiny font.  ;D
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: ExGingi on March 18, 2019, 06:16:27 PM
Their models are audited by big 4 firms. But yes they have some flexibility in the timing that they recognize the revenue. They donít have the flexibility to not at all recognize the revenue.

I wasn't implying flexibility on revenue, but rather flexibility on how to model the liability.

And don't get me started on big 4 auditing. They aren't rating agencies, but no-one served time for the pristine ratings the agencies gave to junk sliced and diced MBS. And Enron took down Arthur Andersen.

I am not comparing. Let them do whatever they want with the liability. איך פארגין זיי דאס. What I can't stand is the games they play with YQ/YR.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 06:20:40 PM
I wasn't implying flexibility on revenue, but rather flexibility on how to model the liability.

And don't get me started on big 4 auditing. They aren't rating agencies, but no-one served time for the pristine ratings the agencies gave to junk sliced and diced MBS. And Enron took down Arthur Andersen.

I am not comparing. Let them do whatever they want with the liability. איך פארגין זיי דאס. What I can't stand is the games they play with YQ/YR.
Loyalty treatment has substantial assumption material to the financials of airlines. The assumptions are scrutinized. And significant changes in assumptions are usually published in published financials.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 18, 2019, 07:10:09 PM
I have a hard time accepting that much of it is zero cost spoiling inventory. If they didnít have this means of disposing of it they would probably market it at low price points that would get some people to bite. Also whether you condone it or not, there is a whole industry geared toward brokering miles and they heavily market to paying travelers, often using points to buy premium tickets that would have sold for many multiples what the airline sold the miles for. I would be surprised if we arenít talking about a total value into the billions. Not all of it would have found its way into the airlines bank account as cash paying pax but a good chunk of it would likely have.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 07:12:48 PM
I have a hard time accepting that much of it is zero cost spoiling inventory. If they didnít have this means of disposing of it they would probably market it at low price points that would get some people to bite. Also whether you condone it or not, there is a whole industry geared toward brokering miles and they heavily market to paying travelers, often using points to buy premium tickets that would have sold for many multiples what the airline sold the miles for. I would be surprised if we arenít talking about a total value into the billions. Not all of it would have found its way into the airlines bank account as cash paying pax but a good chunk of it would likely have.
So many bad assumptions, I'm not even sure where to start.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:16:52 PM
So many bad assumptions, I'm not even sure where to start.

Write a new post. You've got the MBA to be able to make a coherent explanation so that everyone can understand the accounting and math, especially those who are well versed in סדר נזיקין.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 07:17:07 PM


I wasn't implying flexibility on revenue, but rather flexibility on how to model the liability.

And don't get me started on big 4 auditing. They aren't rating agencies, but no-one served time for the pristine ratings the agencies gave to junk sliced and diced MBS. And Enron took down Arthur Andersen.

I am not comparing. Let them do whatever they want with the liability. איך פארגין זיי דאס. What I can't stand is the games they play with YQ/YR.

Re big 4, people have a misconception of what audit really is. at most a reasonable assurance that it's more likely than not etc etc.. but not sure what the rating agencies failings have to do with B4 audits..
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 18, 2019, 07:17:57 PM
So many bad assumptions, I'm not even sure where to start.

Iím definitely not intricately familiar with the process. If Iím making mistaken assumptions please elaborate.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:18:06 PM

Re big 4, people have a misconception of what audit really is. at most a reasonable assurance that it's more likely than not etc etc.. but not sure what the rating agencies failings have to do with B4 audits..

I've worked for a company that passed audits and then saw the proprietors serve time when things unraveled. 'nuff said.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 07:18:35 PM
TLDR.

At least when I post something for you to read, it's in a language we use in day-to-day learning, and usually a clear image rather than a tiny font.  ;D
Re the font I dafka copied and pasted the text.. the image was just for the data table. But i hear you, it is definitely accounting speak..
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:20:37 PM
Re the font I dafka copied and pasted the text.. the image was just for the data table. But i hear you, it is definitely accounting speak..
Accounting speak doesn't scare me. But I have no patience to read lengthy small print. I need to be able to scan read it. I guess if I copied it to a word processor and reformatted with a more readable font, I'd have no problem. Just give us the executive summary.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 07:21:47 PM
I've worked for a company that passed audits and then saw the proprietors serve time when things unraveled. 'nuff said.
Oh of course. And often auditors get sued as well...
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:23:53 PM
Oh of course. And often auditors get sued as well...

But when the entire world suffered a financial crisis due to shenanigans that were AIDED AND ABETTED (at the very least) by rating agencies, no-one served jail time! And those rating agencies didn't suffer the consequences that Arthur Andersen suffered in the Enron aftermath, despite possibly doing much worse.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 07:26:48 PM
I've worked for a company that passed audits and then saw the proprietors serve time when things unraveled. 'nuff said.

There are exceptions to everything. But the purpose of audit and disclosure requirements is to minimize these kind of things.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 07:27:38 PM
But when the entire world suffered a financial crisis due to shenanigans that were AIDED AND ABETTED (at the very least) by rating agencies, no-one served jail time! And those rating agencies didn't suffer the consequences that Arthur Andersen suffered in the Enron aftermath, despite possibly doing much worse.
Bc they relied on the auditors :)
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:29:38 PM
There are exceptions to everything. But the purpose of audit and disclosure requirements is to minimize these kind of things.

In my above mentioned experience, the auditors weren't there to find problems. This wasn't forensic accounting that they did. They ask for a report, then ask for supporting documentation, and as long as you give them whatever they are looking for to the extent that they dig (not too deep) they sign of on it, and the math adds up (bottom line, or top level - not the hundreds of thousands of lines). I can't recall which one of the big 5 or 6 (at the time) it was.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 07:30:52 PM
Bc they relied on the auditors :)

Since when do auditors have any say about forward looking assumptions?
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 07:34:42 PM
Since when do auditors have any say about forward looking assumptions?

That doesn't mean a rating agency can't rely on statements that they audit to be accurate.

That being said, the problem with rating agencies wasn't that. It was that their models were full of crap.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 07:50:10 PM
I have a theory that it doesn't really matter if the financials are 100% accurate or not. It's all numbers on paper anyway. If auditors said the eps was x, then that is what the stock value actually is.. and it's as good as money in the bank.

(Disclosure, I am currently on VERY strong pain killers for some minor thing so maybe I'm not articulating clearly.. :) )
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 08:03:05 PM
That doesn't mean a rating agency can't rely on statements that they audit to be accurate.

That being said, the problem with rating agencies wasn't that. It was that their they were wined and dined to accept, or come up with models were full of that illustrated crap as pure gold, aka alchemy.
FTFY

And there you have it:

I have a theory that it doesn't really matter if the financials are 100% accurate or not. It's all numbers on paper anyway. If auditors said the eps was x, then that is what the stock value actually is.. and it's as good as money in the bank.

(Disclosure, I am currently on VERY strong pain killers for some minor thing so maybe I'm not articulating clearly.. :) )

Kind of like ties in to the discussion on whether the pilpul and reid in the sugya actually leads to practical application (https://forums.dansdeals.com/index.php?topic=102020.msg2067938#msg2067938). (are we full circle with the PSA offshoots?)
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 08:10:20 PM
FTFY

And there you have it:

Kind of like ties in to the discussion on whether the pilpul and reid in the sugya actually leads to practical application (https://forums.dansdeals.com/index.php?topic=102020.msg2067938#msg2067938). (are we full circle with the PSA offshoots?)
I had a lot to say on that thread but didn't get round to it...
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 08:12:27 PM
I had a lot to say on that thread but didn't get round to it...

Here you go:

(http://pamplinmedia.com/images/artimg/00003625639670-0205.jpg)
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 08:12:54 PM
I have a hard time accepting that much of it is zero cost spoiling inventory. If they didnít have this means of disposing of it they would probably market it at low price points that would get some people to bite. Also whether you condone it or not, there is a whole industry geared toward brokering miles and they heavily market to paying travelers, often using points to buy premium tickets that would have sold for many multiples what the airline sold the miles for. I would be surprised if we arenít talking about a total value into the billions. Not all of it would have found its way into the airlines bank account as cash paying pax but a good chunk of it would likely have.
1. Airlines charge much more money for tickets close-in because that's how they segment business passengers from leisure passengers.
2. Airlines don't typically drop the price of close-in flights even if they see that there will be a lot of spoilage as they make more selling just a few of those seats at full fare prices to businesses.
3. Airlines don't typically worry about releasing mileage space close-in, because businesses don't typically pay for tickets with miles.
4. Airlines have entire fraud departments to deter the selling of miles as someone who is buying miles is more likely to cause an actual loss of revenue to the airline versus someone who is occupying a seat that he would not have purchased and that would have been spoiled.
5. Obviously this has nothing to do with me condoning it. It is a huge concern to airlines like AA and they police it aggressively by banning people who sell their miles and blacklisting brokers IP addresses and phone numbers.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 08:17:30 PM
2. Airlines don't typically drop the price of close-in flights even if they see that there will be a lot of spoilage as they make more selling just a few of those seats at full fare prices to businesses.

And one seat for $1,000 has less potential liability attached to it than 5 seats at $200.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 18, 2019, 09:02:29 PM
1. Airlines charge much more money for tickets close-in because that's how they segment business passengers from leisure passengers.
2. Airlines don't typically drop the price of close-in flights even if they see that there will be a lot of spoilage as they make more selling just a few of those seats at full fare prices to businesses.
3. Airlines don't typically worry about releasing mileage space close-in, because businesses don't typically pay for tickets with miles.
4. Airlines have entire fraud departments to deter the selling of miles as someone who is buying miles is more likely to cause an actual loss of revenue to the airline versus someone who is occupying a seat that he would not have purchased and that would have been spoiled.
5. Obviously this has nothing to do with me condoning it. It is a huge concern to airlines like AA and they police it aggressively by banning people who sell their miles and blacklisting brokers IP addresses and phone numbers.
In regards to # 4 and 5
I knew someone involved in the business a couple years back and the numbers were staggering. As much as the airlines tried to police this, the amount of travelers who would have paid cash and instead used miles brokers to purchase a ticket at a fraction of the going rate (Asia routes seemed to be very popular) was enormous. Is it realistic to assume hundreds of thousands of such fares were being booked on a yearly basis? It sure sounded like it.  I donít know if things changed in the past couple of years but based on what I heard then the airlines had to be losing huge sums of potential revenue from cash paying customers due to their mileage programs. This is lost revenue, not leisure travelers booking spoiled inventory and it would never appear on their books. Thatís why I questioned if a big chunk of the money they are raking in by selling miles to the cc companies isnít coming back to bite them, offsetting their gains  by lost potential revenue that is difficult to quantify.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 09:08:45 PM
They record revenue from a milage redemption based on what they actually sell these tickets for.
So if I am understanding this correctly, say 10k miles redeems a $8k value revenue ticket, they would have earned $8k of revenue on their books.
So where is the loss on this aspect?


Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 18, 2019, 10:02:39 PM
They record revenue from a milage redemption based on what they actually sell these tickets for.
So if I am understanding this correctly, say 10k miles redeems a $8k value revenue ticket, they would have earned $8k of revenue on their books.
So where is the loss on this aspect?

The loss would seem to be in potential revenue that they would have otherwise made.
Iím pretty sure they sell the miles to the cc company at a preset rate, recognizing the revenue when the miles are used. So if  for example AA sells a block of 100 million miles to citi at .02 a mile ($2 million) when all the miles that will do not expire, go unused etc. are redeemed for letís say $1.2 million in airfare they will recognize revenue of $800,000 from the sale of the points, as well as 1.2 million in airfare revenue.. They will also recognize as revenue a portion of the miles which historically will mever be redeemed.

Sounds like an easy $800,000 revenue from the sale of the miles, in addition to $1.2 million in airfare that was used by the credit card holders for seats that might have been unsellable anyway. However, if out of the $1.2 million in airfare, $800.000 was redeemed by brokers for passengers who would have otherwise paid cash for their tickets, the true net gain of the mileage agreement with citi was $1.2 million, or $800,000 less than they appear to have benefited from the arrangement.

Am I getting the process right?
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: Definitions on March 18, 2019, 10:05:57 PM
With all these technical terms I barely understand the conversation in this whole thread.

Two newbie questions, on the beginning of the thread.

They can't raise fares any more, due to Frontier, Spirit, etc. And those airlines don't make much of mileage sales and would be happy if the programs died tomorrow.

Arguably El Al is in trouble specifically because they have not figured out how to make more money from mileage sales.

If miles are the thing that makes the airline industry profitable. How is frontier and spirit able to make a profit on their routes if they aren't focused on miles?

You're comparing load factor from pre and post regulation?!?
A more meaningful comparison of load factor and mileage revenue would be '98-'08-'18.
Which regulation?
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 10:09:06 PM
In regards to # 4 and 5
I knew someone involved in the business a couple years back and the numbers were staggering. As much as the airlines tried to police this, the amount of travelers who would have paid cash and instead used miles brokers to purchase a ticket at a fraction of the going rate (Asia routes seemed to be very popular) was enormous. Is it realistic to assume hundreds of thousands of such fares were being booked on a yearly basis? It sure sounded like it.  I donít know if things changed in the past couple of years but based on what I heard then the airlines had to be losing huge sums of potential revenue from cash paying customers due to their mileage programs. This is lost revenue, not leisure travelers booking spoiled inventory and it would never appear on their books. Thatís why I questioned if a big chunk of the money they are raking in by selling miles to the cc companies isnít coming back to bite them, offsetting their gains  by lost potential revenue that is difficult to quantify.
Asia routes? You're talking about partner airline bookings. Airlines pay a small fraction of a cent per mile for these.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 10:10:50 PM
The loss would seem to be in potential revenue that they would have otherwise made.
Iím pretty sure they sell the miles to the cc company at a preset rate, recognizing the revenue when the miles are used. So if  for example AA sells a block of 100 million miles to citi at .02 a mile ($2 million) when all the miles that will do not expire, go unused etc. are redeemed for letís say $1.2 million in airfare they will recognize revenue of $800,000 from the sale of the points, as well as 1.2 million in airfare revenue.. They will also recognize as revenue a portion of the miles which historically will mever be redeemed.

Sounds like an easy $800,000 revenue from the sale of the miles, in addition to $1.2 million in airfare that was used by the credit card holders for seats that might have been unsellable anyway. However, if out of the $1.2 million in airfare, $800.000 was redeemed by brokers for passengers who would have otherwise paid cash for their tickets, the true net gain of the mileage agreement with citi was $1.2 million, or $800,000 less than they appear to have benefited from the arrangement.

Am I getting the process right?
You are ludicrously exaggerating the impact from brokers on the overall mileage. Never mind that these aren't actual losses. Booking a $30,000 Cathay Pacific ticket with AA miles doesn't cause a loss to AA. And regardless, that person wasn't paying Cathay Pacific $30,000 anyway.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 10:11:54 PM
With all these technical terms I barely understand the conversation in this whole thread.

Two newbie questions, on the beginning of the thread.

If miles are the thing that makes the airline industry profitable. How is frontier and spirit able to make a profit on their routes if they aren't focused on miles?
Which regulation?
Frontier and Spirit have non-hub business models, which don't need mileage sales to support it. Airlines with hub and spoke systems don't make a profit if not for miles.

https://en.wikipedia.org/wiki/Airline_Deregulation_Act
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: EJB on March 18, 2019, 10:19:14 PM
Frontier and Spirit have non-hub business models, which don't need mileage sales to support it. Airlines with hub and spoke systems don't make a profit if not for miles.

https://en.wikipedia.org/wiki/Airline_Deregulation_Act

I agree with your statement. But disagree that they dont make a profit without "selling" miles. They'd make much less money, but they'd still make money.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 18, 2019, 10:22:12 PM
I agree with your statement. But disagree that they dont make a profit without "selling" miles. They'd make much less money, but they'd still make money.
Depends on the quarter.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: babypurin on March 18, 2019, 10:46:09 PM
Obviously a not-so-insignificant number. We can thank the CC companies for purchasing an endless stream of miles.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: chaimdasap on March 18, 2019, 10:53:17 PM
I have a theory that it doesn't really matter if the financials are 100% accurate or not. It's all numbers on paper anyway. If auditors said the eps was x, then that is what the stock value actually is.. and it's as good as money in the bank.

(Disclosure, I am currently on VERY strong pain killers for some minor thing so maybe I'm not articulating clearly.. :) )
Maybe we switch the thread to the "Trump Administration crackdown on Opioid Abuse"
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Denverite on March 18, 2019, 11:01:21 PM
Maybe we switch the thread to the "Trump Administration crackdown on Opioid Abuse"

First, ROTFL!

Frontier and Spirit have non-hub business models, which don't need mileage sales to support it. Airlines with hub and spoke systems don't make a profit if not for miles.

https://en.wikipedia.org/wiki/Airline_Deregulation_Act

Second, Iím kinda following all this but get lost in the accounting.  How does Southwest (and maybe JetBlue) fit into all this? Their points have a (relatively) fixed amount that seem like they can easily be accounted like an accounts payable or unredeemed gift card.  They donít have convulated partnership agreements or arbitrage opportunities for business class seats at relatively low points to price ratios, hence also no value to buy and sell their points on the black market or the airline opportunity cost of losing full business class fares that others have referenced.

Also they started as point to point (and still are with lots of direct flights to tons of different destinations) but also have now definitely turned some cities into hubs.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: churnbabychurn on March 18, 2019, 11:30:38 PM
The loss would seem to be in potential revenue that they would have otherwise made.
Iím pretty sure they sell the miles to the cc company at a preset rate, recognizing the revenue when the miles are used. So if  for example AA sells a block of 100 million miles to citi at .02 a mile ($2 million) when all the miles that will do not expire, go unused etc. are redeemed for letís say $1.2 million in airfare they will recognize revenue of $800,000 from the sale of the points, as well as 1.2 million in airfare revenue.. They will also recognize as revenue a portion of the miles which historically will mever be redeemed.

Sounds like an easy $800,000 revenue from the sale of the miles, in addition to $1.2 million in airfare that was used by the credit card holders for seats that might have been unsellable anyway. However, if out of the $1.2 million in airfare, $800.000 was redeemed by brokers for passengers who would have otherwise paid cash for their tickets, the true net gain of the mileage agreement with citi was $1.2 million, or $800,000 less than they appear to have benefited from the arrangement.

Am I getting the process right?
Here is how they describe it:


"American  applies  a  relative  selling  price  approach  whereby  the  total  amount  collected  from  each passenger  ticket  sale  is  allocated  between  the  air  transportation  and  the  mileage  credits  earned.  The  portion  of  each  passenger  ticket  sale attributable  to  mileage  credits  earned  is  initially  deferred  and  then  recognized  in  passenger  revenue  when  mileage  credits  are  redeemed  and transportation  is  provided.  The  estimated  selling  price  of  mileage  credits  is  determined  using  an  equivalent  ticket  value  approach,  which  uses historical  data,  including  award  redemption  patterns  by  geographic  region  and  class  of  service,  as  well  as  similar  fares  as  those  used  to  settle award  redemptions.  The  estimated  selling  price  of  miles  is  adjusted  for  an  estimate  of  miles  that  will  not  be  redeemed  based  on  historical redemption  patterns. "
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 18, 2019, 11:50:15 PM
You are ludicrously exaggerating the impact from brokers on the overall mileage. Never mind that these aren't actual losses. Booking a $30,000 Cathay Pacific ticket with AA miles doesn't cause a loss to AA. And regardless, that person wasn't paying Cathay Pacific $30,000 anyway.

True AA might not be taking the hit on that one, but some airline is getting cannibalized any time a broker sells a miles ticket to a customer that would have paid cash, which likely describes the vast majority of a brokers customer base. This time itís cathay. Next time itís another partner airline sticking it to AA etc. Maybe not 30k worth, since the customer may have gone with a cheaper option if paying cash, and itís not an actual loss, but in the aggregate it offsets the profits generated by selling miles and it follows that if the miles sales were removed from the equation the airlines would not see nearly as much of a slide in profitability as implied.

I got the distinct impression that brokers were selling a very sizable number of award bookings. There are scores of them that Iíve heard of (and likely a whole lot more that I havenít), and many were doing extremely heavy volume. Is that not a significant dollar amount?
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: ExGingi on March 18, 2019, 11:52:13 PM
Here is how they describe it:


"American  applies  a  relative  selling  price  approach  whereby  the  total  amount  collected  from  each passenger  ticket  sale  is  allocated  between  the  air  transportation  and  the  mileage  credits  earned.  The  portion  of  each  passenger  ticket  sale attributable  to  mileage  credits  earned  is  initially  deferred  and  then  recognized  in  passenger  revenue  when  mileage  credits  are  redeemed  and transportation  is  provided.  The  estimated  selling  price  of  mileage  credits  is  determined  using  an  equivalent  ticket  value  approach,  which  uses historical  data,  including  award  redemption  patterns  by  geographic  region  and  class  of  service,  as  well  as  similar  fares  as  those  used  to  settle award  redemptions.  The  estimated  selling  price  of  miles  is  adjusted  for  an  estimate  of  miles  that  will  not  be  redeemed  based  on  historical redemption  patterns. "

Great. So now, why don't you explain this with a practical example of a revenue ticket sold for $1,000 that earns 3,000 miles which are subsequently redeemed. But oddly enough, 2,000 of those 3,000 miles end up being redeemed as part of a 25,000 economy ticket redemption that would cost $300 as a revenue ticket. And 1,000 were redeemed as part of a 60,000 mile business class redemption that would cost $2,400 as a revenue ticket. Add to the mix 100,000 miles that were sold to a bank for $0.0125 per mile, and presuming that 50% of all miles issued will eventually expire. @Dan please correct my hypothetical assumptions to something closer to reality so CBC can put them into the explanation that might eventually get published.
Title: Re: Re: PSA: Don't swipe recklessly for others
Post by: cmey on March 28, 2019, 08:34:35 AM
Your claims of being to raise revenue from other routes simply doesn't hold water.

On international routes there are other airlines, like WOW, Norwegian, and even El Al, that make small potatoes if anything off of mileage revenue. There wouldn't be some magical way to raise fares without the competition eating their lunch.

If there are other ways of maximizing profits today, they'd be doing it.
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: Dan on March 28, 2019, 09:03:20 AM
WOW
If only they had mileage revenue ;)
Title: Re: Airline's Entire Profit Margin From Mileage Sales?
Post by: cmey on March 28, 2019, 10:09:51 AM
😀