Devaluing Miles… and Honesty

Like many a regular United Airlines customer – I have put in ~400k miles over the past 2.5 years – I am upset about the massive devaluation of United MileagePlus miles announced this past Friday.

For those unaware, United made it somewhat more expensive to fly premium classes (Business and First) on United, and significantly more expensive – in some cases twice as much – if a single leg of an award itinerary is on a non-United plane, i.e. one of its partners.

In some ways, I understand why United did this. It has aggressively marketed credit cards that give award miles, sometimes 30-50,000 miles just for signing up and spending a few thousand dollars in the first few months. Because of its successful credit card campaigns, it now has a very large number of miles floating around that customers are actively using to book award seats.

At the same time, United only has itself to blame for bringing these customers on board. It wanted them as credit card customers, and was willing to pay (in miles) to market to them, together with Chase Bank, its card partner. It reminds me of the man accused of murdering his parents who begs the court for clemency because he is now an orphan!

However, the biggest issue isn’t the credit card users; it is the frequent travelers. Those who earned their miles “the good old way,” by spending tens of thousands of dollars and hundreds of thousands of miles per year on United planes, have paid real money earning those miles, and now feel rightly deprived.

In general, it is really bad business practice to screw over your best and highest-paying customers.

Even worse, however, is that United has devalued honesty.

If you were to write on United’s Facebook page, or email their CEO jeff.smisek@united.com, you would get a response that includes the following standard.

“We are increasing the number of miles required to redeem some Saver and Standard awards – the first time we’ve made such changes in several years – to offset the increased cost of providing award travel, particularly premium-cabin award travel and award travel on MileagePlus partner carriers.”

At first blush, this response makes sense. Isn’t it more expensive to book tickets now on United and Lufthansa and Turkish? When you look deeper, however, you realize how deceptive this truly is. Of course, it is more expensive… and thus United fares have increased. Every seat-mile that was earned by frequent travelers cost more to earn!

The real question, then, isn’t, “how much does it cost United to give out an award seat?” Since each mile spent was actually earned by paying for a seat, the real question is, “what is the ratio between United revenue for each award mile earned and United cost for each award mile paid?” Let’s call it the “award ratio.” This is what really matters. If the cost to pay out goes up by 10%, but United earns 10% more for each mile earned, then United is in exactly the same place as before.

Indeed, this is the case. The “award ratio” is unchanged. By increasing the award cost, United is changing the award ratio in its favour… and against its travelers.

What should United do?

  1. It should keep the award charts the same for an extended period, say, 6 months.
  2. It should give its real frequent-travelers, its Platinum and 1K members, a discount on premium award travel. Those who earned their miles the good old way – by paying United to fly with them – should get the benefit of those miles over the credit card earners. United makes money from the credit card partnerships, but it makes its real money from those frequent travelers, and must keep them happy.

Someone at United, probably focused on cost at finance, took a look at how much potential revenue United is “losing” on award seats (~7% in 2012 according to its 10K) and said, “hey! We need to improve that!” It was the job of sales and marketing to step up and say, “Hold on! We are spending that to acquire our best customers! Can we reduce those costs from others without upsetting our 1K and Global Services travelers?”

Jim Compton (CRO), Jeff Foland (EVP Marketing) and Jeff Smisek (CEO) need to step up to the plate.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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