I decided to catch up with my friend Kyle Dover who writes the miles & points blog Dovertime. Kyle is a CPA and I thought it would be interesting to pick his brain about his view on credit card sign-up offers, loyalty programs, devaluations, and tax incentives.
Why do airlines and hotel chains provide loyalty programs?
Airlines and hotels don’t have to provide loyalty programs. But the formula for generating a loyal customer obviously benefits airliners and hotel chains. Creating loyalty through upgrades, elite status, free nights, free breakfast and club access gives travelers a reason to keep coming back to the same airline or hotel chain. Creating that loyalty does nothing more than provide added revenue for the airlines and hotel chains.
Why do banks offer credit card sign up bonuses?
By offering a Southwest co-branded credit card, Chase can directly tap into a market (Southwest Airlines travelers) of consumers. The credit card itself attracts the Southwest traveler market, but offering credit card sign up bonuses only strengthens their position in this market. Using the example above, Southwest more than likely sells their air miles to Chase at a favorable rate. So Chase buys the air miles at a good rate and entices customers to apply for Southwest Airlines credit cards with bonus miles. Chase then makes their money from annual fees on the credit cards and of course interest charges, late payment fees and other various fees. (Remember, not everyone is diligent about paying their credit card bill in full every month).
Who benefits the most from credit card sign up bonuses?
Airlines, hotel chains and the banks definitely benefit the most from this! Airlines are able to produce cash easily and NOT record revenue until consumers burn their miles. After a thorough read of American Airlines Form 10-K, they have caveats everywhere that says American Airlines can adjust the value of the miles at any point. They also can release as much or as little space as they wish. Banks benefit by establishing a long-term client base, tapping into additional consumer markets, and collecting interest and fees along the way.
So are you telling me that consumers are getting hosed?
Absolutely not! Consumers are earning non-taxable air miles and points that they can redeem for free travel! It has become a bit tricky to redeem your air miles or hotel points as the airlines and hotel chains have the ultimate control over award space. But the savvy frequent traveler can always find a way to capitalize on the air miles and points that they accrue.
Why do frequent traveler programs devalue their points?
In the past year, we have seen many devaluations of points, but none more significant than Hilton HHonors points and United MileagePlus air miles. The devaluation has caused a gigantic stir among savvy frequent fliers. Both of these devaluations largely affected consumers that burned points on extravagant travel such as free nights at the lavish resorts and First Class airfare! Hilton and United more than likely spent months determining the extent of their devaluations and how their actions would affect consumers. They did this to cut costs and to remain consistent with other industry loyalty programs. Devaluations are the most important reason to earn your miles and burn your miles! Loyalty points are nothing more than a currency and like any currency, there is inflation and devaluations.
Any closing statements to help frequent travelers?
Pay attention to the details! Read the fine print in whatever activities you engage in. If you don’t want to read the fine print, visit blogs like Well Traveled Mile and Dovertime daily to stay up-to-date. But most of all, HAVE FUN! Collecting and spending frequent flier miles and hotel points is meant to be fun. Traveling is meant to be fun!
Thanks Kyle for a great interview and insight into the world of airline miles and credit card points, I always love hearing new perspectives on the miles & points world.