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Please, Please Stop Whining about the US Airways/American Devaluation

The travelblogeteria(tm) is chock full o’ complainin’ today about the admittedly annoying changes US Airways and American made to their programs yesterday, with much of the complaining focused on how it isn’t “fair” for the airlines to do this, and that airlines need to be more “respectful” of their program members.

That is absolutely hilarious.

A few thoughts here:

– These are public companies, and their first responsibility is to their shareholders. Sure, some companies will tell you that without happy customers they can’t run a profitable business. That has not been the case for airlines. Southwest Airlines has very happy customers and from May 2011 to this month, their stock when from roughly $12 to roughly $24. Spirit’s stock went from $11 to $60 during that period (they IPO’d in May 2011). Delta, who has had the industry-worst frequent flyer program, saw its stock triple during that period. You can love (or LUV) your customers, or you can get great stock returns. You pick.

– I know everyone in frequent flyer programs are referred to as “members” but we are not “members” – we are people who are hoarding a highly speculative currency. As I wrote last year:

First, they are not loyalty programs. A loyalty program would reward loyalty. Airline and hotel points programs do not reward loyalty; they issue a currency…and, like all currencies, they can be devalued (or overvalued) over time. We are always surprised, shocked, and offended when airlines and hotels change the value of the currency, and on some level I blame them for it — if these are loyalty programs, is our loyalty now less valuable? Well, no – because they’re just issuing currency, not rewarding loyalty. Starwood is basically the Central Bank of the Republic of Starwood.

Airlines have printed points like, as I’ve said before, they’re Zimbabwe’s finance minister…we cannot possibly expect their value to hold when points are so readily available. And there’s literally nothing keeping airlines from devaluing the points, changing the rules for the points, or adding fees to using the points. It’s in the fine print, but it’s in there. I’m not sure why this is surprising – we have been kidding ourselves if we think that we have all been good soldiers and we can’t believe that we are being betrayed. Please. You think there’s no cost to Vanilla Reloads and credit card churns? THIS is the cost.

– How many people complaining about this have earned these miles through credit card churn, and not through airline loyalty, by the way?

– Fly coach…there are no changes there.

– I was actually serious yesterday when I wrote that you should buy shares in the airlines you fly as a hedge against these moves. Sure it’s annoying when airlines change their rules, but if they’re doing it to boost their bottom line, why wouldn’t you take advantage of the upside there? Airline stocks have been gangbusters over the past couple of years now that they’re actually running good businesses and charging fees where they can. I know that’s annoying as a traveler; but I’ve hedged that by buying shares in US Airways & Spirit Airlines. Suddenly that $3 water on Spirit isn’t so annoying. Plus, if hoarding points IS currency speculation (which I argue it is) then I SHOULD have a hedge against it. Which I’ve done.

– And perhaps, then, shame on all of us who write about miles for not stressing more clearly that miles have no value until used. I’ve danced around that idea (as I appear to be the only person telling people not to take advantage of the US Airways mileage sale the other day), but speculatively buying points always seemed crazy to me. Yesterday I was reminded why that is.

– And finally…for all of the virtual ink that was shed on this and how unfair it is and how badly we’re treated, I just wanted to remind everyone that the CEO of General Motors has been in front of Congress trying to explain why they didn’t bother recalling cars that they knew had caused the deaths of 12 of their customers. Eliminating a free stopover and charging for upgrades seems like a petty complaint in comparison.

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  1. For the record, “Fly coach…there are no changes there” is absolutely not true. *Each* devaluation on the AA side affected coach travel. Last Thanksgiving I willingly played the AAnytime award for 25K to fly the day after Thanksgiving. That same flight will likely now cost 50K. For a one-way ticket.

    (I otherwise whole-heatedly endorse this post)

  2. Jared, overall I love your contrarian bent in all posts, and I find myself agreeing with most of this post. That said, your “shareholder value” diatribe is at least partly a non-sequitur to me, because while programs have the RIGHT to devalue their currencies whenever they want, and NEED to maximize shareholder value, there is essentially no cost to giving the customer at least a little warning when doing so. Most of the bloggers are not even necessarily arguing against whether Explorer awards or stopovers should be eliminated, but rather are saying that it would have been nice to have just a little notice. It’s not the airline’s obligation, but giving even a week increases goodwill without doing any harm whatsoever to the delivery of value to shareholders.

    • I agree with what you say, EggSS4. But, to be honest, why provide advance notice of said changes to your competitors? Or provide advance notice to your customers about how you’re going to devalue their chosen currency? I actually think that this is the least painful way to do this for the company – no months of complaints, no months of being beaten up in the media. And as I said in another post on this yesterday, what is good for the company is unlikely to be good for the consumer…

      • I hear you, and I don’t think there’s any cost to telling customers in advance. However, I’m not sure I can name a single industry where companies DO signal price changes in advance? (And I actually thought that in certain industries this wasn’t legal…)

      • I agree 100%, EggSS4, and I, too, usually find Jared’s posts refreshing. But I think he overlooks perhaps the main gripe with AA’s deval: absolutely no prior notice whatsoever.

        It is my sincere belief that AA could have largely avoided the overwhelming amount of negativity had they given 4-8 weeks of lead time.

        As to Joe, why provide notice? Sure, the T&Cs don’t require it, but as a business, engendering loyalty–as opposed to butchering it–is the smart play. Giving lead time here wouldn’t have caused AMR to tank due to a slight uptick in redemptions. And, yes, in the grand scheme of things, the redemptions would have been slight.

        Could have been handled oh so much better, IMHO.

        Even UA, who was raked through the coals for their unprecedented 87% increases, deserves kudos for giving months of lead time. AA surprised me with this one.

        • thexfactor, I am not sure I agree that providing notice would have avoided most of the negativity. It would have just engendered more harping about the devaluation and rule changes, for longer.

          By providing NO notice, the company has cleverly pushed the focus of complaints to be on that issue, not the substance of the changes (which, had they provided notice, would have been louder and, in most cases, criticism of the program and the changes themselves).

          I have no doubt that AA looked long and hard at UA’s experience, and decided to go the other way.

          • That’s a good point.

            But if you’re going to endure negativity in any event, why not give your “loyal” members an opportunity to redeem prior to implementation of the rules?

            Everyone knows devals happen. Every knows it was going to happen to UA/AA (in fact, the devals are probably far from done).

            But the one thing that pissed people off more than the deval itself, is the lack of notice.

            Many people save up hundreds of thousands of miles for the perfect Explorer award. Some people may have even had that award on HOLD! And then BAM, gone.

            Giving some time, even if it was 4 weeks (or heck, even two weeks) wouldn’t have killed them. It’s sneaky and disingenuous, even if it was “clever.”

          • I think there’s a fundamental difference in how I’m looking at it, and how others are:

            If it’s a “loyalty program” then, yes, not telling your loyal customers about changes is pretty crappy.

            If they’re running a currency operation, then why would they announce a devaluation? They don’t announce changes in fares in advance (I’m pretty sure they’re not allowed to, actually).

            There is nothing about frequent flyer programs that are about loyalty. Nothing. My wife and I are sitting on 800,000 Delta miles and I believe I’ve flown them twice in 5 years. Some poor schmuck who flies them for every business trip 50k miles a year would take 16 years to earn what I’ve earned by doing nothing.

            They are a currency (well, they’re basically a rebate program), and fluctuations in their value happen, and they happen without notice.

          • Another Richard

            Fare changes and other pricing moves aren’t really a comparable analogy — those all operate in a universe where goods are paid with cash, and any advance notice allows competitors to directly respond, either through collusion (which is, I believe, why they are prohibited from signaling moves in advance) or competition (which could undermine the original airline’s intents). Doesn’t apply with frequent flyer miles. My billion AA miles can only be used with AA, and there’s nothing UA could really do to take advantage if AA had signaled in advance (in the short term).

            The currency analogy seems closer, but still off to me. When a currency devalues in a significant way, it’s a big deal that can have long-term consequences for the currency. People are justified in being upset and whining.

          • Jared, your point about miles being a currency or a rebate program makes a lot of sense. This said, rather than asking “why would a currency program do this if they’re just a currency program”, I think it makes more sense to view it as a cost/benefit analysis: there might not be a major upside for a currency program (one that is allowed to) to announce a change in prices, but if it IS allowed — and it is in this case, despite not being allowed for airfare and in other settings — then what is the downside in giving even a week’s notice?

            The REALITY may be that they are operating a currency program, and you and your readers may know that, but the airlines still at least in public CLAIM to run loyalty programs. If you are going to make that claim, and have the ability to live up to it without virtually any cost, then even if that’s not your end driver, why wouldn’t you take a cost-free chance to continue to perpetuate the loyalty program charade? By failing to pre-announce a devaluation, you just feed into more people realizing that the emperor wears no clothes — that it’s not actually a loyalty program at all, and I doubt it’s good for business to have more people realize that.

  3. This is refreshing and spot on! Finally some clear thinking on what “loyalty rewards” are and arent. I would argue against buying airline equities (theindustry is one the greatest destroyers of capital over time with limited barriers to entry and no pricing power) but that is debatable in the short run…

  4. Excellent post, Jared. I hope that some of the other bloggers who are resentful these changes think about the advice that they give out; and re-evaluate some of their statements when they refer to an AAdvantage mile being worth 1.1 cents each, or whatever. These valuations are a particularly heinous way of evaluating these “currencies” – both incorrect and misguided, and very dangerous for those who don’t know better, as they buy or hoard miles.

    In any case, we need more analysis from bloggers like yourself, who have analyzed this industry for a living, rather than hobbyists whose sole goal is to accumulate miles as quickly and cheaply as possible. No one in their right mind would accept advice from an amateur stock picker, or currency trader when trying to purchase a retirement plan. Why do people think that these point currencies are any different?

    As a former airline industry employee (planning analyst and, later, strategist), I am consistently saddened by the quality of analysis provided to an uneducated public.

  5. Back in 2011, I bought 3 shares of AMR stock as to get the Sharebuilder hit for US Airways grand slam. I feel like there’s a slight tinge of irony in how I acquired my hedge ;)

    • @Chris – that’s how you do it…buy shares to earn miles as a hedge to earning the miles. Brilliant. Or insane. Or both. I’m not sure :)

  6. Another Richard

    One additional point —

    The Explorer ticket was the ultimate aspirational award on AA — the round-the-world trip — and accordingly pretty much the most expensive award you could get. I know people who were saving the 200,000+ miles to redeem one of these awards, once-in-a-lifetime trips. And overnight AA just took the option away.

    A lot of your thoughts about earning and not burning, speculatively buying miles, the risk of award chart increases etc. hold for most devaluations. But if you wanted the Explorer award, the top award, you had no choice but to save up the miles. AA didn’t increase the cost, it just took it away, and I think that’s particularly offensive.

  7. Well, as both a “significant” US Airways shareholder AND a frequent flyer, these are my quick thoughts:

    1) It was poor business practice for AA to change award levels with zero customer notice. It alienates customers for no good reason. What, they woke up one day and realized the Asia biz class award was too generous? Puh-leez. Give 60 days and move on.

    2) If you are not a sophisticated inventor, you should probably not buy airline stocks, or any other individual stock. The game is essentially rigged against individual investors. Success involves both luck and skill.

    3) 1.1 cents per mile is a good price to buy US Airways miles at. But you should not buy them unless you are a sophisticated user of these miles. Do you comb the online award inventory and plan around-the-world trips stopping in multiple cities? Do you know who every member of the oneworld alliance is? If so, buy the miles. If you redeem miles for a trip every couple of years, do NOT buy these miles. They are going to be freakin’ hard to use and you will later regret your purchase.

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