Will Club World fares go up?

British Airways has a new deal for their co-branded credit card holders – but as a result cash fares may rise for some

People who spend £10,000 a year on a co-branded BA Amex are rewarded with a 241 voucher. It is a great deal – for only half the usual Avios I took my family to Hong Kong in 2018 and Singapore in 2019. First class of course. But now the deal has got even better – people using the voucher to redeem in Club World can access extra seats that would usually only go to cash buyers.

Headforpoints reckons that availability improves if at least ten seats are available in I class, the lowest cash revenue booking designator (RBD) for Club World (there are four others – J, C, D and R).

So now that Avios redeemers can buy seats out of revenue inventory, will BA run out of cheaper cash seats? Let’s do a back-of-the-envelope calculation – read on to find out.

I class seat supply

How many I class seats does BA make available for sale each year? I counted about 75 destinations on Wikipedia’s list of BA destinations where Club World is offered (yes it’s Wikipedia and not an official source, but it’s good enough).

Some of these will be less than daily, others daily and others multiple daily. Let’s assume that on average there are about 1.3 flights per day, each way, to each destination.

75 destinations x 1.3 flights per day

= 100 Club World flights per day each way

= 200 Club World flights return

= 73,000 Club World flights per year.

A standard BA 777 has 48 Club World seats – let’s leave the 787, A380 and A350 aside to keep things simple.

73,000 flights x 48 seats

= 3.5 million Club World seats each year.

The typical net revenue each way that BA receive from selling tickets in the UK (the Amex is a UK product) probably looks something like this:

J = £2,000

C = £1,750

D = £1,500

R = £1,250

I = £1,000.

Yes, J tickets across the Atlantic can say £8,000 on the sticker. But most of these go to corporates who get significant rebates at year-end.

So how can we estimate how many seats BA offer in each fare class. One principle I have seen airlines use is that each RBD contributes roughly equally to revenue. At these fare points, for each RBD to contribute say a million Dollars we would have:

J = 14.1%

C = 16.2%

D = 18.8%

R = 22.6%

I = 28.3%.

We saw BA have about 3.5 million Club World seats available each year. That means:

I class = 28.3% x 3.5 million

= 990,000 I class seats per year, just under a million.

Demand for seats with the 241 voucher

But how many people have the card? Rob Burgess at Headforpoints reckons that BA have achieved great success in making their co-brand a mass-market product, with about 500k in circulation. But he also reckons that 90% of these are the free card, which is not relevant for this analysis because their 241 voucher can only be used to book seats in economy.

That gives about 50k 241 vouchers competing for Club World seats (Rob points out that nobody would pay for the card if they did not get the voucher). Take away:

10% = 5k booking First or premium economy

20% = 10k booking shorthaul

10% = 5k booking Club World from regular redemption inventory, not I class

That leaves 30k vouchers redeemed for I class seats. Remember that each of them is a return booking for two people, so that means:

30k vouchers x 2x flights x 2x people

= 120k I class seats

Intuitively 50k vouchers seems right to me. There are about 50 million adults in the UK and 50k would represent a 10% market share of the highest-income 1%.

So will prices rise?

120k out of a million I class seats per year is 12% - small but significant. Not every I class seat is sold – some go empty or the relevant advance purchase window closes out, pushing a passenger up to R or higher. Across the network I would be surprised if it became much harder to find an I class fare in Club World.

But some people will lose out. I think that those most affected will be:

1. People who would otherwise pay cash for Club World flights at Christmas and the school holidays, especially to premium leisure-heavy destinations like Florida, California, the Caribbean and Cape Town.

2. People who travel out of Europe, where I class fares are lower than from the UK – extra competition for seats from the UK will push up the bid-price of lower inventory seats, resulting in the revenue management system closing out I class ex-EU

3. People booking Club Europe out of non-London UK, who have a cheaper add-on for their domestic sector if I class is open but who have to use a more expensive add-on for R, D or higher if I class is closed

A further note on the economics of these cards

120k seats at £1,000 revenue dilution a pop is £120 million – that’s a lot of money. From the cards BA are earning at least:

50k cards x £10k spend x 1% Avios wholesale price

= £5 million

Say 10k cards spend significantly more:

10k x £100k spend x 1% Avios wholesale price

= £10 million

That’s only £15 million out of £120 million. The difference is the value of loyalty for people who hold cards like this. BA would not do it if it was not profitable.

My next vouchers

I am hoping to take my family to Japan with the vouchers sitting in my account right now. If you have any suggestions about what I should see and do when we are there, please let me know.

oliver AT ransonpricing DOT com