Revenue-based redemptions

As hotels abandon their charts in favour of dynamic award pricing, airlines should NOT do the same

It’s all-change over at Marriott Bonvoy, a large hotel chain’s rewards programme. Until now free nights have required a fixed number of points, with a little variation depending on the season. But from April 2022 dynamic pricing will be introduced with certain constrains and in 2023 will be completely unleashed. Rewards will then cost more or less, but sometimes much more than current rates, depending on underlying room prices.

Marriott is not the first hotel chain to move in this direction. IHG and Hilton recently made similar changes and Accor has been running a fixed value of points scheme for as long as I can remember. Economy class hotels have started selling for what would previously have been first class rates.

But should airlines do the same? I say no. Read on to find out why.

Most airline loyalty programmes charge a fixed price for their rewards, with some variation depending on whether flights are peak or off-peak. If reward seats are available the price in miles stays the same even if the cash fare dramatically increases, for example because an advance purchase horizon is passed.

Revenue-based rewards on the other hand would assign a fixed value to mileage, with redemption prices tracking cash fares. Airlines introducing such a scheme would be likely to claim that any such move would lead to better availability.

There are three big advantages to the fixed-point system with a standard rewards chart:

1. Simple – it is easy for consumers to understand the price they need to pay

2. Achievable – consumers can plan their mileage accrual and redemption patterns in advance

3. Realistic – first and business class redemptions are a mass affluent product

These together are likely to make people more loyal to an airline, buying cash tickets and clicking through the loyalty portal as they make other online purchases. Both these channels contribute to incremental revenue, in the second case directly but even in the first case too through buying seats that would otherwise go unsold or a general increase in demand.

Additional availability is a big advantage of revenue-based redemptions – first and business class redemption seats in school holidays are notoriously hard to come by. But I am not convinced that any such commitment is credible because it will be hard for loyalty to take away revenue management’s power to demand cash only. I have personal experience of this in hotel programmes.

Accor tell me that my points can be used to book anything at €40 per 2,000 points, the pure revenue-based model. But in practice I find that about 20% of the time the rate I actually want to pay is not possible with points and only a higher rate can be booked. This devalues the points so that I might only unlock €30 per 2,000 points.

As a regular Accor guest (I like their style) this does not really matter to me – I just wait until next time, when the regular valuation is achievable. But if I were splitting my business between Accor and other chains, or only making one or two ‘big’ stays a year this would really put me off Accor and I might take my business to another equally stylish hotel with a lower price.

If others do the same that would lead to more rooms/seats going unsold and lower revenue overall through the revenue optimiser perceiving less demand.

But additional availability, even if it really appears, is not helpful if the price demanded for a reward is so high that few people can achieve it in practice. People who collect and redeem miles are mainly affluent but they are generally mass affluent. When a seat reward requires a million Dollars of credit card spend or a hundred thousand Dollars of airline spend to earn the required points it starts to look a bit silly.

Some people might pay those prices, but the vast majority of customers will laugh and go elsewhere, either to another airline or (if all airlines adopt the model) to new hobbies. Those who had planned their redemptions based on price certainty (as in the current model) would be upset and not only go elsewhere but tell their friends to avoid the airline and it’s loyalty programme too, cutting revenue further.

Another great disadvantage of revenue-based redemptions is that at the higher end of the business and first class fare ranges the published price or the sticker price printed on the ticket is hardly ever the price actually paid in the end. A seat may be quoted for sale online at $10,000, $15,000 or $20,000 but the reality is that most people buying such tickets at that time have access to some form of corporate discount or rebate, or even if not they will be invoicing it to an employer or customer so somebody else is paying the bill.

Indeed as the years have gone by high-end premium cabin fares have gone up by more than inflation because every year the corporate discount offered to key customers goes up a bit and every year the fares on which these discounts are expected increases a bit as well to compensate.

So it is in many cases inappropriate to price a redemption seat based on a $10,000 fare when the seat is only expected to achieve $5,000 in the end.

All in all I am not in favour of revenue-based redemptions. The current structure of rewards is a good fit for the mass affluent market and highly profitable for airlines who do it well. They should stick with it. Some of the benefits, like better availability, can also be accommodated within the current system – BA for example allow their Gold members to book any seat for double the usual mileage, which is still a bargain compared to some of their cash fares.

I would not recommend that airlines move to revenue-based rewards. The discussion around status is a little different – I will leave that to another time.

oliver AT ransonpricing DOT com