Author note: This is a long post, but it’s designed to generate discussion on how transferable points (Ultimate Rewards, Starpoints, Amex Membership Rewards and now Citi ThankYou points) are going to change how airlines set mileage redemption prices and compete with each other on price, quality and value. The views here are my own, but having spent some years doing M&A valuations, airlines have a long way to go to be considered a competitive market. Comment below on what changes you think are coming down the road and how these currencies may been good or bad for customers and airlines.

Expect to see more banks offer transfer options. Currently, SPG, AMEX, Citi and Chase all do.

A New Player to the Game

With the addition of Citi ThankYou Rewards’ transfer partners and Chase Ultimate Rewards steadily adding more transfer partners, for the first time, we might start seeing carriers begin to compete on the merits of their programs.

In the world before alliances, airlines used loyalty programs as a way to keep your revenue business. It was a straight up reward for loyalty. If you had a choice of carriers flying JFK-LAX or JFK-LHR, an airline wanted you to redeem more on them so that they’d be top of mind when you called to purchase your next revenue flight. They’d sometimes even top up your account to get you to that next award!

As the alliances formed and nearly every major airline buddied up - much like picking sides on a dodgeball team, the addition of global partners was seen as a competitive advantage, being able to project passengers to more aspirational destinations. “Fly with us (or our partners with our codeshare) to Tahiti or Machu Picchu.” American made a bet on strong partners in South America and Australia, while United and Delta divvied up Europe and Asia.

As credit cards entered the game, the balance started to shift. Miles became less of a reward for loyalty and more of a marketing tool, as well as a clearinghouse for distressed inventory. “We can’t offer $72 (at cost) fares from SFO-LAX, but we can sell miles to many partners for more than that and YOU get a FREE flight!”

But even then, it was still a pretty closed system. You could only get those miles in meaningful quantities by actually flying or maybe having the one cobranded credit card. 25,000 American miles = free trip to Disney World. As the hub and spoke model matured, many markets simply had dwindling options. People became United, Delta, or American customers because they HAD to. Or they flew Southwest.

Carriers recognized this. If you live in San Francisco, you’re probably “locked” into United. If you live in Atlanta, Delta is your “go-to” airline, whether you like it or not.

As a result, there was less incentive to compete on quality of product or mileage programs, because they became the dominant game in town. Price still mattered, and people would take that awful overnight connection or 5:30am flight if it meant saving a few bucks. But the airlines had a pretty sweet deal. With few options, your miles could gradually accumulate, but if the airline hit a rough patch ::poof:: suddenly those miles are worth less. The books balance, handshakes all around in accounting.

Airline Voice: “What are you going to do, it’s not like you can switch to another carrier from your hometown? Or if you do, it’s going to be a straight up fixed value scheme like Southwest, Virgin or Jet Blue. In the latter two cases, good luck on relying on them to take you ANYWHERE in the US, much less the world like we and our alliances can.”

It rarely made sense to credit miles to alliance partners because then you’d get a watered down version of status. No free upgrades, no waived fees. Maybe a few drink chits and lounge access. But many foreign carriers had even steeper qualifying tiers. (not all! BMI/Aegean/Turkish were/are oft-discussed exceptions)

But with the erosion of elite benefits, adding revenue requirements and devaluations of award charts year after year, many people switched to a “free agent” model, especially given the number of miles being issued through non-flying (66% according to American’s 10-K’s). Have a lot of miles in many accounts to protect against devaluations or regions where a particular alliance is weak. Take the strategy from the book of financial planners and “diversify your portfolio”.

But with meta-programs, we’re starting to see a change on the horizon and I put together some of those implications below. I think the people running these programs know this and in many ways these changes are good for us, the customers.

Carriers can profit from each others’ distressed inventory

Minting a bunch of miles to be used on your partners inventory can net you a lot of money. You sell the miles for $500 and pay the partner $300 for a flight. The partner might be paying you less than you are them, but they are in dire financial straights and need the money (American, United). Or they’ve bought a ton of aircraft, can’t fill them and would love to offset some of the costs (Turkish), particularly since their own members can’t redeem easily/cheaply (Thai).

People have more options to shop award charts and cherry pick redemptions

This means that devaluations will more likely move customers away than they did in the past. Now, you can effectively say one chart “dominates” another in certain regards, and this certainly matters for airlines that cooperate with the same bank (SQ/UA/Chase, ANA/Air Canada/AMEX, DL/AF/AMEX). This will add pressure to keep certain region pairs, like US-Europe, US-North Asia/South East Asia/India in check, much like domestic economy awards have always been far more in lockstep than international awards. There is inherent pain in devaluing if your partner/competitor does not or if people have a “backdoor” option that people do favoring SQ over UA in many cases with the same points balance.

For example - Joe from Saverocity not too long ago discussed that transferring to Flying Blue would have cost his client 75,000 AMEX MR points for an open jaw , but transferring to Delta only requires 50,000 for the same award. Another flyer talker debates how to redeem MR points with ANA one way (since they charge the same as roundtrip) and the community points out 45,000 each way on Aeroplan is a better deal. Jason Steele at TPG points out you can redeem on Malaysian for flights under 500 miles in length for a cool 18,000 Thank you points. But why would you do this when Avios are SO easy to earn and have access to nearly the same inventory?

Carriers now have to keep tabs on foreign award charts

When customers have options with miles, they start to look more like dollars, euros or yen. And when that happens carriers have more pressure to compete on “price” and “quality”. Truly innovative programs like BA, TA and SQ “get it” and are ahead of the curve on offering unique redemption options and working to become consolidators across many transferable programs. Look at how much positive press has been written about them. How many times have you recommended the British Airways card or an Ultimate Rewards card to a friend as their first “starter” card to get to Europe? Is it any surprise that Korean, Asiana, TACA, LAN, BA all offer credit cards as well as redemption options with meta-points? They know there are big bucks in luring redemptions from partners and competitors.

This downward pressure is good for the carriers too, because it starts to influence customer monetary decisions, which is a better use of marketing/mileage program budgets, generating a better return for the airlines. I will gladly use my Chase Points, MR or even starpoints with BA and SQ (or VS!) because they are inherently easier programs to use than the US (or many other devalued) programs. This means they get my booking fees, fuel surcharges, upgrade fees and change fees, while paying only a fraction to partner programs that can’t sell those seats.

Alliance relationships will be strained and make non-alliance partnerships stronger

Non-alliance carriers have the freedom to cherry pick partners that alliances do not. It’s not surprising that Singapore partners with Emirates and the Virgin group airlines because they offer a more premium experience - consistent across multi-carrier itineraries. It’s a let down to redeem hard-earned miles for an ancient 747 with screens at the front of the cabin on a 12 hour flight when you could be flying with state of the art lie-flat seats and GOOD food. Passengers, especially frequent ones, are taking notice that ANA, Asiana, Cathay, Qantas, Lufthansa, Swiss are better value for redemptions than US carriers, particularly on city pairs they both serve. The argument “I just want to fly one airline (or a US-based) airline” that kept the UA and DL/NW hubs in Tokyo alive is dying quickly.

Carriers will be more watchful of inventory and redemption imbalances

This imbalance of quality also puts pressure on charts to bifurcate and differentiate between awards on the carrier vs. its partners. United has done just that. Delta is introducing 5 tiers. Some carriers are even moving to dynamic pricing. As miles begin to act more like pure cash, carriers will need to seek additional price points to keep a good handle on the rate of redemption. They can’t risk a good quarter going belly up due to the mileage program.

The threat of murky fuel surcharges will increase

On the downside, this increases the pressure on US programs to match international peers on charging fuel surcharges (YQ). Delta is starting to charge on EU-originating itineraries. When the mileage charts will have increased pressure to stay in step, particularly on key region pairs, one way to make the redemption LOOK the same is through increasing YQ. It looks like a government mandated fee and airlines have never been transparent about how those surcharges are being calculated. Enough shenanigans with this though may cause more countries to ban them as Brazil has.

Tiered charts are a win for flexible travelers

But this tiering is also, in some ways, good for flexible/savvy travelers, because the people who HAVE to fly to Paris for New Years will subsidize your mileage spending. If you’re more patient or can wait to book travel close in by maintaining some status, you may come out ahead with these changes since the lowest costs on the award charts are the ones that offer the most attractive marketing to the masses.

Charts will better reflect geography

In the mid term, we’ll likely see more tweaks to redemptions that are grossly disproportionate to their geography or operating costs. UA is (supposedly) tightening up in Oceania. South America and Africa were broken into multiple regions. Hawaii is now a separate region for most of the US carriers, but not for foreign partners. Typically the further the region from the airline, the less attention they pay to it and they better the redemption value. US Airways still has a fundamental lack of understanding of where anything in Southeast Asia is.

Carriers will start to pay more attention to the reimbursement rates they send each other

I would love to be in the room when United tries/tried to argue it should be reimbursed the same rate for travel from SFO-HKG as Singapore or American on routes to Asia with Cathay. Similarly for Aerolineas Argentinas and Delta (so I’m not hating on the US carriers). When Singapore demands more for segments shared with partners, UA starts to block space. But that doesn’t work because I’ll just transfer my points to SQ instead of UA and book the same itinerary. These backdoors mean that carriers will have additional pressure to keep up quality with their partners and general competition or risk being shut out of the redemption market. Metal neutral joint ventures have been formed, particularly among UA/LH/NH, AA/BA and DL/AF/KL on routes they dually serve, so each carrier splits the kitty evenly regardless of who you fly, but if service and award charts get too out of whack, there will be increasing pressure to part ways and compete on the merits of their product, frequency and network.

There may be initial infighting, but eventually carriers will have to compete on quality on an unequal playing field, merge/acquire, or die

The alliance fracturing may be driven by structural costs. It’s no real secret that government owned alliance partners and those with access to cheap jet fuel and cheaper labor markets have an absolute advantage over carriers hamstrung by unions and fuel prices. But that’s how trade (particularly free trade) works. Boeing/US, Airbus/EU, Embraer/Brazil may be better at building aircraft and the UAE, Singapore and Hong Kong might be better at flying them. Maybe every country doesn’t need its own airline.

There may be a few bankruptcies and restructurings along the way, and carriers putting pressure on regulators to decry that these advantages are somehow “unfair”. But I’m (cautiously, wishing, praying) optimistic that regulators will eventually, years down the road, end up on the side of free trade over protectionism, particularly given the considerably reduced security concern of letting a foreign carrier operate point-to-point within your airspace (or y’know build vehicles for your roads and trains for your tracks…). If it opens up the possibility for transoceanic acquisitions and mergers like we have in NEARLY EVERY OTHER INDUSTRY, that may not be a bad thing in the medium term.

Consolidation at home = Bad. Consolidation abroad = Less confusing and wasteful

Having flown itineraries with 8 carriers, it’s an absolute bear to manage all the systems and there would be huge synergies/savings that could be passed on by taking the best out there and cutting out partner communication snafus and millions of dollars wasted in rebookings/aircraft deployments/excess inventory on routes. Similarly having a LX or SQ standard of service introduced to the Americas would be a boon for most air passengers, even if they slipped a little bit. I imagine Germans would love to get seat assignments when they fork over thousands of euro for a LH business class ticket. While LAN is eating up South America, we’re at least seeing better schedule alignment, smoother ticketing, online check-in and fewer lines and stranded passengers. Newer carriers like Azul and BQB can still enter and often leapfrog legacy costs. Openskies within the EU has seen a plethora of discount carriers fly point to point routes never before possible.

While we decry consolidation in the US, particularly because most of us have seen prices rise (partly due to fuller planes and the economic recovery since 2008) even alliance partners are still pretty inefficient at talking with each other. To be fair, they operate in a pretty unique co-opetive and complicated, highly regulated environment, so the incentives are only partially there. Not quite utilities or governments, but certainly not ruthlessly competitive consumer product companies.

Banks have the upper hand now because airlines were poorly run in the past.

They have an interest in pitting transfer partners against each other to keep the cost of miles low.

Let’s not forget that banks acquired these points on the cheap because airlines have been mismanaged and defaulted in the past. In some ways, this shift in the power balance was decades in the making. But the gravy train may run out if the cost to acquire points goes up for the banks. This is still several years out, and banks will be incentivized to increase the number of eager international transfer partners to lower overall costs (diversify THEIR portfolio because surprise, they already DO this!), ironically because the market for miles is probably already more efficient than airline reimbursement rates. They’ll start to better match each other, but that’s on the other side of a lot of negotiation. I can’t imagine Chase cares a great deal if United whines that yet another transfer partner from Star Alliance gets added. United needs to sell miles to someone and Chase is the biggest buyer/creditor.

The banks are creating a competitive environment for “most valuable” points. It’s not just AMEX’s game anymore. Expect more to enter.

Ten years ago, AMEX was undoubtably the power player in the meta-points game. But it got complacent and lost a few partners due to mergers. Continental went over to Chase and Chase went for the jugular. Citi and Barclays now want in on the game and even US Bank is starting to offer more on the credit card front. Just wait for Barclays Arrivals points to become transferable. While this market is still pretty nascent, the banks are clearly seeing the marketing potential of flexible points and see a very healthy market segment of mobile young professionals and families to shower these points on. Chase has made incredible gains against AMEX on offering very competitive cards and (along with Citi) has essentially forced AMEX to start operating its own lounge network. As these meta-programs develop, expect to see more partners across hotels, car rentals and even things like Uber or AirBnb. Frequent flyer miles are still in the aspirational category for most consumers and aren’t seen as real money, so banks will focus on offering redemptions for things that people WANT, not NEED. Air travel isn’t even mentioned on Membership Rewards main site. So more concert and golf experiences are in everyone’s future, as well as those ubiquitous shopping portals. Treat yourself (or let others while you sip Krug from your suite)

Conclusion: Meta points offer many choices to consumers that put competitive pressures on carriers.

The banks wrestling power from carriers will be good for consumers and will remain for a while.

As banks offer more options with meta-points (which has been absolutely fantastic for customers, dramatically raising the value of opportunity costs across the board) the airlines with have to adjust to less power in those relationships. The savvy ones will (and are) profiting from the new regime, while the ones struggling will keep trying to get you redeem miles for a toaster. But the best thing is that for the short and medium term, you get more options of where you want to go, and you get cozier to the banks and guarantors of free/cheap travel than the airlines themselves.

Wallet share and brand advocacy have tangible value, and if you go to Chase, Citi, Barclays, Singapore or British Airways first when you want to fly somewhere, it means they have a better chance at earning your dollars and loyalty than your hub’s dominant airline. Smart airlines will see this and change their behavior.