Author Topic: Airline's Entire Profit Margin From Mileage Sales?  (Read 1717 times)

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Airline's Entire Profit Margin From Mileage Sales?
« 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...
« Last Edit: March 18, 2019, 04:24:18 PM by Dan »

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #1 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

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Re: PSA: Don't swipe recklessly for others
« Reply #2 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.
I've been waiting over 5 years with bated breath for someone to say that!
-- Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #3 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.
« Last Edit: March 17, 2019, 03:17:15 PM by churnbabychurn »

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #4 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..

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #5 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)

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #6 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?

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #7 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..

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #8 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

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #9 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.

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #10 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.
Save your time, I don't answer PM. Post it in the forum and a dedicated DDF'er will get back to you as soon as possible.

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #11 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.
« Last Edit: March 18, 2019, 10:32:19 AM by cmey »

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #12 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.
Save your time, I don't answer PM. Post it in the forum and a dedicated DDF'er will get back to you as soon as possible.

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #13 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.


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Re: Re: PSA: Don't swipe recklessly for others
« Reply #14 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.
Save your time, I don't answer PM. Post it in the forum and a dedicated DDF'er will get back to you as soon as possible.