One way normal credit card companies makes money is this way: They charge the merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the customer. They make profit on the difference.
With a deal with an airline, the company doesn't have to do the 1-2% cashback, instead they give 0 to the customer. The airline company will give them miles though. Now the airline company can say to the credit card company: "look these thousands of customers you have them only thanks to me, so let's split your profits from the merchant 50/50 (or at least give me that 1% cashback you don't have to pay the customer), plus at some point I'll have to actually offer a plane ticket to those customers who earn enough miles"
What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. (Plus the money the credit card company give them is today, whereas the plane ticket might be in one year or more, so the present discounted value of that ticket is even less)
> What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there.
Your math is way off. If it's 7 miles per dollar spent on the card, that is 7% back by your math, compared to 1-2% cashback, this conflicts with "they're also saving money there."
With that math, you're saying that it's a great deal for the consumer. Perhaps the other things you mentioned still add up to being in the airlines favor, but whats really going on?
The marginal cost of a single passenger is fairly low to an airline. That's why they have blackout days, and restriction on where you can actually fly with earned credit-card miles... in order to make sure the cost of your flight is always to their benefit or at worst break even.
Most cards give you two miles per dollar spent, not seven. If you did get seven, then that carrier would value those miles even less than they currently do
This is a great explanation -- so clear. Now the article makes sense. Business magazines never seem to give straightforward explanations like the above, especially with topics like currency exchange, trade balances, or inflation. I suspect that business authors make processes sound mysterious and complicated to cover up the fact that they don't understand it themselves.
And tech magazines rarely give a straightforward explanation of why memory speed is important when talking about DDR5.
This is likely because they presume most of the readers reading a Bloomberg article about whether or not airlines are undervalued due to the revenue stream of their loyalty programs are passingly familiar with many of the core concepts.
> Consumer website estimate that in the best of case, a mile is equal to $0.01,
Can you give a source for this? I've definitely gotten much better value out of my miles than this (though not always). And I'm talking about normal coach fare, not wasting miles on first class tickets that only seems like a good deal because the list price is so exorbitant.
It's an average bloggers come up with based on potential and actual redemptions. They even do really dumb stuff like counting the face value of a seat nobody would pay cash for. Like "I got this $6,000 seat for 100,000 miles, so they were worth 6 cents per point."
What value you personally actually get out of miles is individualized and taking a valuation from a rando blogger at face value is incredibly stupid. Especially from bloggers like The Points Guy (which was linked), because they get kickback when you use their referral links to sign up for credit cards.
If you offered me the choice between 10 AA miles and 1,000 Delta miles, I'd choose 10 AA miles, no matter what bloggers say. I'll always use AA miles and I would have trouble doing anything with Delta miles.
For instance, I fly over 100,000 miles per year with one airline alliance which puts me in the highest earning category for earning award points. Essentially they give you a an 11x multiplayer of award miles for every actual mile (domestic, overseas is more complicated). At lower levels it may be be 9x or 7x, etc. That means the difficulty of earning miles scales significantly with frequency, which if course changes the value.
Now, rather then trying to figure out the price of a ticket and comparing it to #of miles spent, which is difficult because of black out dates, variable pricing, destination/date premiums, and a ton of other factors, I found out you can just buy gift cards.
Specifically, you can buy Amazon gift cards at about 15,000 points per $100 gift card. While not as fungible as USD, given my spending habits and Amazon's large selection, it becomes a pretty good stand in. That means for me, a mile is always worth around 0.006 cents at a minimum. At around 250,000 award miles a year that's around 1,600 dollars per year which isn't that bad. At the very least it's better then some random blogger picking a number based on ticket prices.
I don't think "~1%" is a fair summary of that link, especially not "in the best case". You're trying to breakdown what happens to a 4% fee, and many of the airlines have miles valued at >2% at that link.
I also don't know where you're getting that 7 miles/dollar number from.
The 7 miles per dollar comes from the delta Amex marketing flyer sitting on my pile of mail, but I didn't look at the fine print, I got curious and looked into details : actually it's only 1 mile per dollar for usual purchases, you get one additional mile on "delta purchases", then you can get 5 extra more on money spent on flights itself. So yeah on average it's close to 1 mile per dollar, I can't edit the original post. So the math makes more sense with those numbers :)
- buying more useless stuff (to collect miles) that they would otherwise won't buy.
- making outrageous travel plans (using those miles) that they otherwise won't make (e.g., fly to europe over the weekend if you're feeling bored; or world tour for honeymoon).
And of course a bunch of those miles will expire, or some customers will never reach enough miles to make a flight. And at least in the past some airlines have had pretty high fees for redemption flights ("fuel surcharge") that might even cover most of the cost
With a deal with an airline, the company doesn't have to do the 1-2% cashback, instead they give 0 to the customer. The airline company will give them miles though. Now the airline company can say to the credit card company: "look these thousands of customers you have them only thanks to me, so let's split your profits from the merchant 50/50 (or at least give me that 1% cashback you don't have to pay the customer), plus at some point I'll have to actually offer a plane ticket to those customers who earn enough miles"
What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. (Plus the money the credit card company give them is today, whereas the plane ticket might be in one year or more, so the present discounted value of that ticket is even less)
[1] https://thepointsguy.com/2017/04/april-2017-monthly-valuatio...