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I've been wondering about this for a while: how do credit card issuers manage to produce those offers with gigantic bonuses in airlines miles? Could it be because the miles are worth less than pennies to them? So 50,000 miles may actually cost them a lot less than $500? Any idea how much credit card issuers pay for airlines miles?

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Now that you mention it, I wonder how the transferable point system works. I guess AMEX must purchase all these points i... (more)

HiLine (Feb. 06, 2013 @ 10:25a) |

Something to take into account is that point issuers can, for the most part, create and destroy points at will. In this... (more)

beatme (Feb. 06, 2013 @ 10:54a) |

Not a public disclosure but was a part of liability provision discussions at a major US airline.

bozo007 (Feb. 06, 2013 @ 7:20p) |

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I know when I was getting a refund of points from Marriott due to a horrible hotel experience, the guy I was dealing with said that 70,000 Marriott Rewards points would cost him about $460-$480. This translates to a cost of about $0.0066/point on the low side and $0.0069/point on the high side.

Marriott sells these points $12.50 per 1000 MRP or $625 per 50,000 MRP or $0.0125/point.

So it seems like Marriott locations and customer service get them for about half of what they sell them for "retail."

Joint marketing. When say Citi issues AA card, both Citi and AA benefit and hence should split the associated cost.

Airlines sell points to cards/programs in bulk. The airlines love it since they get the money upfront, and they can count on a good number of the points never being redeemed. I would be assured that they pay much less than 1 cent each for the points.

http://www.insideflyer.com/articles/printable/article.php?key=59...

They buy them in bulk, hundreds of millions (if not billions) of dollars worth, years in advance. Of course, they don't disclose how many miles they're actually getting for those prices, but it's likely far, far south of a penny per mile....

It's almost a certainty less than 1 cent per mile,

But you have to understand there is most likely an agreement between CC issuers and flight programs.

Specifically frequent flyer programs understands how a person would earn these points. People who do not earn enough for an awards flight, subsidize those who do. The percentage of customers who are able to redeem for a flight in 1 year/2 years/.../never , are all recorded. Other factors like the value of a flight, miles expiration, and annual fees are factored in as well. An actuary probably crunches the numbers and comes up with a final figure of what a mile is worth to the CC issuer.

That said they probably have restrictions on how they can give out miles. Meaning the CC issuer can not buy the miles with the purpose of reselling them. They can only award them for spending / as part of a promotion / as a bonus.

It's hard to assign exact cost to the miles issued by the credit card customers. The contracts are different between each airline/hotel and credit card issuer and likely have different forms of compensation for miles that are earned/redeemed so its really hard to quantify the cost. With that being said, it is most assuredly less than $0.01.

daw4888 said:   Airlines sell points to cards/programs in bulk. The airlines love it since they get the money upfront, and they can count on a good number of the points never being redeemed. I would be assured that they pay much less than 1 cent each for the points.
Exactly - a lot will be not be redeemed at all, because the person forgets. You also get many people who may have their miles expire. And it's a cheaper way to fund your business than issuing debt/equity, which will most certainly have a higher cost. The reasons just go on and on.

uutxs said:   Joint marketing. When say Citi issues AA card, both Citi and AA benefit and hence should split the associated cost.
I see where you're coming from... I think in reality, airlines are not in the business of financing credit cards and so they are more likely to just sell the points at a specified cost to the credit card issuer. If the CC issuer happens to make a ton more, that's to their benefit then. Because there are enough CC issuers, they aren't too worried about getting a horrible rate.

Someone who got a 1099 from
Citi for opening a bank account. (Not cc ) and got charged 2.5 cents per mile should sue citi and in discovery demand to find out the actual cost of the miles that citi paid

Based on actual redemption and use rates, airlines normally value miles at about one quarter of a penny (or even less) on their balance sheet.

bozo007 said:   Based on actual redemption and use rates, airlines normally value miles at about one quarter of a penny (or even less) on their balance sheet. OK i'll bite...can you back that up with proof?

crazypalooza said:   bozo007 said:   Based on actual redemption and use rates, airlines normally value miles at about one quarter of a penny (or even less) on their balance sheet. OK i'll bite...can you back that up with proof?
Agreed. Which source did this info come from? It would be very interesting to learn more, if there was indeed any kind of public disclosure of such information.

crazypalooza said:   bozo007 said:   Based on actual redemption and use rates, airlines normally value miles at about one quarter of a penny (or even less) on their balance sheet. OK i'll bite...can you back that up with proof?

Delta Airlines regularly lists the value in their annual statement : A few years back it was a liability at the rate of $22.xx per 25,000 miles, based on the expected fuel cost from an extra passenger's weight ($7.xx) plus the plus cost of occasionally giving away an award seat that could have been sold for cash ($15.xx).

Flyertalk years ago had an Citibank insider claiming they paid 0.8 cents/mile.

SUCKISSTAPLES said:   Someone who got a 1099 from
Citi for opening a bank account. (Not cc ) and got charged 2.5 cents per mile should sue citi and in discovery demand to find out the actual cost of the miles that citi paid


And what happened?

7890 said:   SUCKISSTAPLES said:   Someone who got a 1099 from
Citi for opening a bank account. (Not cc ) and got charged 2.5 cents per mile should sue citi and in discovery demand to find out the actual cost of the miles that citi paid


And what happened?


Operative word - should.

AMEX membership rewards points are .0074 per point

who cares, as long as we get free $hit out of it

It costs them NOTHING. They make up for it with outrageous interest rates and fees! They use the miles to bait people in.

jimmywalt said:   It costs them NOTHING. They make up for it with outrageous interest rates and fees! They use the miles to bait people in.
Oh please. They still have to pay for it even if they do make a profit at the end of the day.

And they never forced anyone into it either - it was an entirely mutual & consensual decision at the end of the day.

ankitgu said:   jimmywalt said:   It costs them NOTHING. They make up for it with outrageous interest rates and fees! They use the miles to bait people in.
Oh please. They still have to pay for it even if they do make a profit at the end of the day.

And they never forced anyone into it either - it was an entirely mutual & consensual decision at the end of the day.


When did the conversation shift to h & b?

Fishdude said:   AMEX membership rewards points are .0074 per point

Now that you mention it, I wonder how the transferable point system works. I guess AMEX must purchase all these points in advance and use the transfer bonus offers to discharge the points that they overstock. But how about loyalty programs that allow point transfers? For example I know that Hilton points can be transferred to frequent flier programs. In this case what do transfer partners do with each other's points? Clearly Delta has no use of Hilton points.

HiLine said:   Fishdude said:   AMEX membership rewards points are .0074 per point

Now that you mention it, I wonder how the transferable point system works. I guess AMEX must purchase all these points in advance and use the transfer bonus offers to discharge the points that they overstock. But how about loyalty programs that allow point transfers? For example I know that Hilton points can be transferred to frequent flier programs. In this case what do transfer partners do with each other's points? Clearly Delta has no use of Hilton points.


Something to take into account is that point issuers can, for the most part, create and destroy points at will. In this case, Hilton purchases points from Delta (presumably at a nice discount), and Hilton gets the points off its balance sheet.


ETA: Just noticed this is my 1K post, woot.

MidnightLight said:   crazypalooza said:   bozo007 said:   Based on actual redemption and use rates, airlines normally value miles at about one quarter of a penny (or even less) on their balance sheet. OK i'll bite...can you back that up with proof?
Agreed. Which source did this info come from? It would be very interesting to learn more, if there was indeed any kind of public disclosure of such information.

Not a public disclosure but was a part of liability provision discussions at a major US airline.



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