Author Topic: Airline's Entire Profit Margin From Mileage Sales?  (Read 11017 times)

Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #20 on: March 18, 2019, 01:58:31 PM »
Price rises won’t 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.
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Offline whYME

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #21 on: March 18, 2019, 02:09:07 PM »
Price rises won’t 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?

Offline cmey

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #22 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 airlines’ 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 “x” , “x” 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 I’m 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 don’t figure in the international scene. I get that it’s 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.

Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #23 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.
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Offline cmey

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #24 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.

Isn’t 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?

Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #25 on: March 18, 2019, 03:34:07 PM »
Isn’t 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.
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Offline mmgfarb

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #26 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.
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Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #27 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?
« Last Edit: March 18, 2019, 06:04:25 PM by ExGingi »
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Offline cmey

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #28 on: March 18, 2019, 03:55:23 PM »
+1000 that's the main point here.

I guess we don’t see eye to eye on that one. Can we agree that the statement “their entire profit margin comes from miles” could just as easily be said about numerous other revenue or expense items on the airlines books as well?

Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #29 on: March 18, 2019, 03:58:05 PM »
I guess we don’t see eye to eye on that one. Can we agree that the statement “their entire profit margin comes from miles” 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.
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Offline churnbabychurn

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #30 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

Offline churnbabychurn

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #31 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...

Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #32 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.
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Offline ExGingi

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #33 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.
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Offline Joe4007

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #34 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.

Offline ExGingi

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #35 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).
« Last Edit: March 18, 2019, 06:04:13 PM by ExGingi »
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Offline Dan

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #36 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
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Offline EJB

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #37 on: March 18, 2019, 05:51:58 PM »
@EJB

I have no idea what you’re talking about  ;D

Offline Dan

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Re: Airline's Entire Profit Margin From Mileage Sales?
« Reply #38 on: March 18, 2019, 05:56:39 PM »
I have no idea what you’re talking about  ;D
Booo milts
How long is that NDA for anyway?
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Offline EJB

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Re: Re: PSA: Don't swipe recklessly for others
« Reply #39 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.