Airlines should think twice before devaluing their frequent-flyer points

By A.W. | WASHINGTON, DC

THE DEVALUATION of a currency is often regarded as a bad thing by economists, in part because it discourages saving and investment. In the words of John Maynard Keynes, a British economist:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency… [he] was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

If the devaluation of a currency is bad for those who hold it, it must follow that slashing the value of loyalty-scheme points is bad for frequent flyers. Many airlines are resorting to this trick to boost margins as oil prices rise and competition in the skies increases. Recently, the number of miles required to buy many flights has increased by 45% on Qatar Airways and 30% on Japan Airlines. Six of the 10 American airlines surveyed by WalletHub, a consumer website, devalued their miles last year. Samuel Engel of ICF, a consultancy, told the Los Angeles Times earlier this year that the devaluation of miles is starting to look “like the hyperinflation of Zimbabwe or Venezuela.” Now many are warning that the move could blow up in the industry’s face.

Frequent-flyer programmes are massively profitable for airlines. A carrier can charge credit-card companies far more for the miles or points they offer customers than it costs the airlines to redeem them. (It basically becomes free money when customers do not redeem all their points.) Airlines are becoming increasingly reliant on these schemes as a source of income. A public filing last month from American Airlines revealed that the world’s biggest airline—with the world’s biggest frequent-flyer programme—was earning all its profits from this scheme instead of actually flying passengers.

But last month Mark Ross-Smith, the former head of Malaysia Airlines’ loyalty programme, published a piece warning full-service carriers of the existential risk they faced if they continued to devalue miles. His argument is simple. As airlines slash the benefit passengers get from such schemes, fewer flyers will make their flight decisions on the basis of loyalty programmes, and more will do so on the basis of price. That deprives legacy airlines of one of their biggest advantages over low-cost carriers, which tend to win customers on the base of price rather than loyalty scheme. “In this sense,” Mr Ross-Smith writes, “the loyalty programs that partake in these devaluations are losing their foothold into the massive cash-generation machines they’ve enjoyed for over 20 years—by pushing cashed up loyal members into the open arms of low and ultra-low-cost carriers.” In short, just like with real money, devaluing frequent-flyer points not only discourages flyers from spending them—but also bothering to save them at all.