Author Topic: Airline's Entire Profit Margin From Mileage Sales?  (Read 5212 times)

Offline churnbabychurn

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #60 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...

Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #61 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.
I've been waiting over 5 years with bated breath for someone to say that!
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Offline EJB

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #62 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.

Offline EJB

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #63 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 :)

Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #64 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.
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Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #65 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?
I've been waiting over 5 years with bated breath for someone to say that!
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Offline EJB

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #66 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.

Offline churnbabychurn

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #67 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.. :) )

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #68 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. (are we full circle with the PSA offshoots?)
« Last Edit: March 18, 2019, 08:08:15 PM by ExGingi »
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Offline churnbabychurn

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #69 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. (are we full circle with the PSA offshoots?)
I had a lot to say on that thread but didn't get round to it...

Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #70 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:

I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

Offline Dan

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #71 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.
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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #72 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.
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Offline cmey

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #73 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.

Offline churnbabychurn

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #74 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?



Offline cmey

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #75 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?

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #76 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?

Offline Dan

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #77 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.
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Offline Dan

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #78 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.
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Offline Dan

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #79 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
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