I swear it happens all the time. I write about the new benefits of a new program only to have it devalued shortly thereafter. On Monday I wrote an article about how to use Alaska Miles to book partner awards on Singapore Airlines. One of the areas of focus was around the sweet spot of SE Asia to SE Asia in Business Class (25K) and First Class (35K). Because China was considered SE Asia in the original award chart, you could do things like this:
Had you jumped onto this award prior to Alaska’s devaluation on Thursday, you could have flown about 10 hours in the air in Singapore First Class for 35K Alaska Miles, which was an extraordinary value. You could have also stopped in Singapore for up to 364 days, which opened up some significant loopholes, especially for those that were based out of SE Asia.
Imagine being based out of somewhere in SE Asia like Hong Kong. It meant that you could book Hong Kong (HKG) to Singapore (SIN), stop for up to 364 days, then go back to Guangzhou (CAN) in Singapore’s First Class cabin for 35K Alaska Miles.
Due to Hong Kong and Guangzhou geographical proximity and the fact that they are connected by high-speed rail, you could realistically get two First Class one-way tickets for the very low price of 35K Alaska Miles. Oh … and that train ticket between HKG and CAN? About $40-45 CAD.
But overnight, Alaska put an end to these types of routings by making two changes that ended this loophole:
- No more intra-Asia stopovers – you can no longer stop in the hub city of Singapore. This is important because it has also affected the intra-Asia stopover for Japan Airlines (JL) on an Alaska Award.
- Alaska has moved China out of SE Asia and into North Asia, meaning that the pricing is now as follows:
It’s definitely a devaluation because it’s a 140% increase in the cost of Business Class redemptions between China and SE Asia and a 115% increase for First Class. If you take into consideration the fact that you can no longer stop in Singapore, it’s quite the devaluation.
Here’s Why It Happened
During my time at WestJet, I was privy to contracts with our Frequent Flyer Partners (FFPs). I dealt with the Air France (AF), KLM (KL), Delta (DL) and Qantas (QF) contracts and relationships so I have had the unique experience of looking behind the proverbial kimono. I obviously cannot disclose the detailed internal workings of the contract but I can provide some insight into how these FFP partnerships work.
How Does it All Work?
Relationships between airlines are different depending on whether they are part of an Alliance, if they are in a Partnership, or if they are in a Joint Venture. WestJet was not part of an Alliance so I cannot claim to have a deep understanding of those types of relationships, but they were in partnership with four airlines (AF, KL, DL, QF). The relationship with Delta started out as a partnership but will eventually turn into a Joint Venture as soon as Antitrust Immunity (ATI) is received from the US Government.
Based on my dealings with these contracts, I can provide you with a high-level understanding of these relationships and agreements.
Distressed Inventory and Airline Economics
Those that have been in the Travel Hacking game for a while know that the award space that is opened up for redemption is distressed inventory. For those that haven’t heard of the concept, distressed inventory refers to a good or service that has a limited shelf life or expiry.
If you’ve been in a supermarket and have seen a sticker for 20% off a 4L of milk or a pound of ground beef, you have experienced distressed inventory. If compared the milk or beef that had the coupon attached versus those that didn’t, you would see that the items on discount expire within a day or two. This is because if they don’t sell the inventory, they will take a 100% loss on the item, so it would make sense to discount it to move it.
This is basic supply and demand economics and every industry faces it, including airlines.
Let’s think about airlines and the economic model they operate in. Let’s imagine an aircraft that has a hundred seats in it. As soon as an airline sells a seat, they have made a contract of carriage with the purchaser of the ticket. In most situations, this means that they are obligated to fly the plane to get the passenger to their destination. There are nuances to the rules but in general, this is what it means. When you provide an airline with money, they provide you with the promise of future travel.
Imagine for simplicity that the cost for the fuel, labour, landing fees, peanuts, etc. for that flight requires at least 60 seats to be sold to break even. What happens if they are a week out before the flight is scheduled and they have only sold 40 seats. Can they just not fly the plane and just refund everyone? No. They can’t. Imagine the news headlines if that happened.
So they just throw a seat sale together for that plane right?
In almost all cases, airlines will not do this. Why do you ask? Because it ruins their economics. It’s also logistically challenging to try to set up a sale that may only affect one particular flight. Imagine what it would be like to try to run sales on specific routes on specific days where sales are weak … it would be a nightmare.
If you have looked at airline seat prices, you will notice that prices generally do not decline at the last minute. This is because during the last 7 days or so prior to departure, business travellers take up the demand for the remaining seats. Often times, business travel is very last minute because of impromptu meetings, potential closing of business sales that require in-person meetings, last-minute changes to the schedule of business travellers, etc.
If airlines discounted tickets to move distressed inventory, business travellers, and eventually the general public, would begin to take notice and not book until the last minute. There are so many “when’s the best time to buy an airline ticket” articles out there. Almost all point to a time period of about 50-55 days from the date of travel. You won’t find an article touting the benefits of waiting until the last minute to book.
Essentially, it’s a cat and mouse game that airlines are playing in an attempt to maximize profits.
One way to “sell” the remaining distressed inventory seats is to open up award availability to members of your own Frequent Flyer Program (FFP) and to the programs of your partner airlines. This is a nice solution because it doesn’t devalue the remaining seats so business travellers aren’t getting an undue “discount” close in and you get to sell seats, albeit at a steep discount, to your partner airlines.
This is exactly what Singapore and Alaska’s other partners do.
How to FFP Agreements Work?
There are some unique aspects to every partnership but for the most part, FFP partnerships work the same. The airline that is offering the distressed inventory/award seat, determines how many seats to make available. They do this dynamically and are able to control their inventory through their Global Distribution Systems (GDS) like Sabre or Amadeus. Some airlines are most sophisticated than others when it comes to making award inventory available. Generally, you will notice the very sophisticated airlines updating inventory on a daily or even hourly basis, while other less sophisticated airlines use very simplistic rules to control inventory. Airlines often use complex software that uses judges multiple factors to determine expected demand. This software is overseen by analysts in Pricing and Revenue Management (PRM).
So now that we understand how inventory works, how does pricing work?
Well, that’s pretty simple on its face as well. Let’s use Alaska Airlines and their partnership with Singapore as an example. Let’s call Alaska – Airline A, and make Singapore – Airline B just to keep it simple.
I want to also establish that while the relationship could work differently than what I have seen first hand with other FFPs, I believe that what I am about to explain is very likely how the relationship works between Alaska and Singapore.
Once Airline A and Airline B agree to become FFP partners, they negotiate a rate at which they will reimburse each other for award flights. While not a rule, the common understanding is that if you want access to your partner’s fancy class inventory (Business and First Class), you should be willing to give access to yours.
Each class of service will typically have a different settlement rate. For example, an Economy Class redemption might cost the airline 10¢ per mile, whereas Business Class might be 20¢ per mile, and First Class being 30¢ per mile. It’s pretty standard to see Business Class settlement costs at 2x of Economy and First at 3x, which is why you often see award charts laid out in a similar fashion.
Let’s take for example award space on Airline A’s route of LAX-JFK, which is 2,475 miles.
Typically, there are a few ways to “settle” the revenue that each airline owes the other for award flights. In my experience, all settlement happens in USD so the calculations below are in USD.
Distance Flown x Settlement Rate – If Airline A provides access for Airline B’s customers to fly on their award inventory, the total distance flown is calculated, and the appropriate settlement is provided based on the Class of Service (COS) flown.
In the example above, Airline B would owe Airline A the following (depending on COS):
Economy = 2,475 miles x 10¢ per mile = $247.50
Business = 2,475 miles x 20¢ per mile = $495.00
First = 2,475 miles x 30¢ per mile = $742.50
Tiered Distance Flown x Settlement Rate – Airlines may provide different rates based on distance flown in a tiered table. It is very similar to the above but provides different pricing based on where the total number of miles flown falls into a table.
Based on the table above and the same award flight of LAX-JFK (2,475 miles), the settlement would be as follows:
Economy = 2,475 miles x 8¢ per mile = $198.00
Business = 2,475 miles x 16¢ per mile = $396.00
First = 2,475 miles x 24¢ per mile = $594.00
Tiered Table Fixed Price – same as the example above but instead of doing a calculation, the price is settled based on the amount corresponding to the range in which the correct distance is flown.
Based on the table above and the same award flight of LAX-JFK (2,475 miles), the settlement would be as follows:
Economy @ 2,475 miles = $250.00
Business @ 2,475 miles = $500.00
First @ 2,475 miles = $750.00
The most common redemption settlement scheme that I have seen is the Tiered Distance Flown x Settlement Rate.
Now, every airline has an internal calculation for what their miles are worth. This isn’t just a gut feel, it’s something that is very important because it is the basis of their outstanding liabilities as an airline. Airlines shape their redemptions based on what they value their own miles at.
So What Happened with Alaska and Singapore?
Now that we have established the basic economics of airline award redemptions, let’s explore what likely happened between Alaska and Singapore.
When Alaska launched the SQ redemption chart, they were very likely watching blogs, FlyerTalk and other forums that discuss these matters. They also very likely watched their redemptions on SQ quite closely to see what people were doing and if there were any loopholes they hadn’t thought of.
They likely saw a whole lot of chatter around the SE Asia to SE Asia with a stopover redemption and then crunched the numbers.
Let’s say they looked at my earlier example of HKG-SIN-CAN in Business Class for 25,000 Alaska Miles. and presume we are using the Tiered Distance Flown x Settlement Rate method. Because this is over 2,000 miles flown and in Business Class, the settlement rate is 16 cents per mile flown.
Revenue Generated (based on 2 cents per mile)
25,000 x $0.02 = $500
Settlement Cost (based on cost of 10 cents per mile back to SQ)
3,226 miles x $0.16 = $516.16
Total Revenue Lost or Earned
Revenue – Cost
$500.00 – $516.16 = ($16.16)
It may not seem like a loss of $16.16 is very much but take into consideration the number of people that could potentially take advantage of this opportunity that are based in China or SE Asia. The potential loss becomes significant enough that senior management would start to ask questions as to how the frequent flyer program started making losses instead of gains.
The other important aspect of this is that Singapore Airlines likely intervened as well, asking Alaska to fix this issue. While Singapore would be made whole no matter what because of the way the settlement works (pay per use), reputationally, they would want to stop anything that would make their own KrisFlyer program look to be less valuable than another partner’s program.
This was always something that we had to consider when partnering with an FFP. Would frequent flyers see more value in joining and earning within our partner’s program than they would with our own? It was always a fine line we had to try and walk.
In essence, you wanted to be generous with your partners but not more generous than you were with your own members.
The issue of Singapore Airlines’ awards using Alaska Miles is an interesting one with many factors that come into play. I am 99% sure that the reason the awards were changed (ie. devalued) was because of the potential losses that Alaska Airlines might realize if too many people took advantage of the loophole, so rather than have a potential area of revenue loss, they unilaterally changed the program rules without notice, as is their right.
While Singapore Airlines likely did not have a leg to stand on if Alaska wanted to keep the chart as it was, Alaska likely wanted to work in partnership with Singapore so they changed the award chart and the ability to have a stopover on an intra-Asia award.