Wednesday, April 26, 2006

The Cost of Airline Miles sold in customer loyalty programs

Traditionally airline miles have been valued at $0.12 per mile to the consumer. It's a number I've traditionally used in to calculate the cost of purchasing things with miles - flights or otherwise.

Recent changes in MBNA's programs seem to push that value per mile down closer to $.01 per mile (at least for receiving cash in exchange for miles), which incidentally is right where most of the rebate credit cards are at; i.e. 1% back cards.

I recently read an article in the Tuesday April 25, 2006 edition of the Wall St. Journal. It discussed Air Canada's strategy of creating a holding company for its diversified operations (maintenance, air flights, short haul flights, mileage program etc...) and taking the profitable ones public. Their mileage program is qutie profitable.

The program leader explained some details regarding the industry, one of which is that the calculated cost of producing an airline mile is $0.05 per mile. Airlines seek to sell them to banks (credit card companies) at about $0.08 per mile. These numbers can give us an idea on the spread between the credit card company's redemption value to consumers (us) and their costs.

One thought I've always wondered about:

How hard is it to transfer miles from one program to another; for example, if MBNA rules become unattractive (they are now less attractive due to their increasing the cost of european tickets to 60,000 miles), could I switch my miles to a different program?

Have a wonderful day,

1 comment:

Anonymous said...

I don't know of any credit cards that let you roll your rewards to other credit cards. Interesting post about the value of the miles themselves, though. I actually didn't know how the airlines worked their deals with the credit card companies, and I spend a lot of time thinking about this stuff.