Airline's Entire Profit Margin From Mileage Sales?

[EJB]

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.

[Dan]

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.

[babypurin]

Obviously a not-so-insignificant number. We can thank the CC companies for purchasing an endless stream of miles.

[chaimdasap]

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"

[Denverite]

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, I’m 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 don’t 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.

[churnbabychurn]

The loss would seem to be in potential revenue that they would have otherwise made.
I’m 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 let’s 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. "

[cmey]

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 it’s cathay. Next time it’s 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 it’s 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 I’ve heard of (and likely a whole lot more that I haven’t), and many were doing extremely heavy volume. Is that not a significant dollar amount?

[ExGingi]

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.

[cmey]

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.

[Dan]

WOW

If only they had mileage revenue

[cmey]

😀