Devaluation of airline miles likely with air travel resumption, but impact unlikely to be severe
Watchers say it's up to airlines to manage trade-off between "earn and burn"
Singapore
RELAXED restrictions mean that air travellers are scrambling to get their hands on flight tickets after the Covid-19 pandemic halted leisure trips overseas for almost 2 years. As such, there is likely to be a surge in the redemption of airline miles, and it is up to airlines to manage the trade-off between "earn and burn".
Under the loyalty programmes offered by airlines, consumers can redeem airline tickets using miles. In addition, banks also allow customers to convert credit card points into miles or redeem points for hotel stays.
Over the past 2 years, passengers have chalked up points on their credit cards through on-the-ground activities such as dining and shopping.
A Singapore Airlines (SIA) spokesperson told The Business Times that the carrier has seen an increase in KrisFlyer miles balances over the last 2 years. KrisFlyer is SIA's frequent flyer programme.
Points can be earned through flights with SIA and its partner airlines. The programme has evolved to offer more on-ground, lifestyle-centric accrual and redemption opportunities over the last few years - including more than 3,300 non-airline partners and merchants worldwide such as banks, hotels and restaurants.
"This (increase in KrisFlyer miles balances) is largely due to the pandemic, when members accumulated miles through a variety of accrual options including credit-card spend," said the spokesperson, adding that SIA has been extending the validity period of miles since April 2020.
"KrisFlyer regularly reviews its programme to ensure that it remains competitive. We will make adjustments to our programme where necessary," they added.
With more people now using miles points, a "soft devaluation" is already taking place, warned Aaron Wong, who runs travel site TheMileLion.
He has observed that flights under KrisFlyer Saver awards - the cheaper of two options - have become hard to find for flights to popular destinations such as Australia. First Class Saver Awards tickets have "disappeared" on a lot of routes.
Meanwhile, Advantage awards - which require more miles to redeem tickets - are still available for now, he said. "If you're looking at a June holiday trip to Europe, it's generally quite difficult to find Saver Awards in premium cabins."
This, said Wong, is an example of "soft devaluation" - because the number of miles required to redeem Advantage and Saver award tickets is still the same, but availability has suffered.
Redeeming tickets on other airlines is also costlier now. Wong notes that a Qatar Airways round-trip business-class ticket redemption will cost up to US$300 more now, thanks to the reintroduction of "award segment fees", while Hong Kong's flag carrier Cathay Pacific reinstated fuel surcharges on award tickets in February last year.
Last May, Bloomberg reported that liabilities linked to the 5 most valuable airline loyalty programmes in the US rose by nearly 12 per cent to US$27.5 billion in 2020. Analysts said airlines looking to strengthen their balance sheets could reduce the value of their reward offerings.
However, Wong said that things are unlikely to get worse in the near term, as airlines such as SIA have to bear in mind several "commercial considerations" that prevent them from "jacking up prices as and when they feel like".
This also means that a "hard devaluation" - for instance, raising the number of miles needed to redeem a ticket from 10,000 miles to 20,000 - might not happen anytime soon.
Devaluation pressures for SIA are also low, he said. An airline typically faces such pressures when customers redeeming miles start competing with cash-paying customers, which has not yet come to pass for SIA on an overall basis.
In its February operating results, SIA said it expects passenger capacity to reach only around 57 per cent of pre-Covid levels by April.
Although devaluations have a certain "inevitability", the way for airlines to deal with this surge in redemption of miles points is to manage the trade-off between "earn and burn", said Wong. Raising the range and number of on-the-ground ways for customers to spend their miles points could help "casual users . . . to burn their balance" at a low cost.
SIA's spokesperson said that more KrisFlyer members are also using their miles on other non-air redemption options, including KrisShop, Kris+, KrisFlyer Experiences, and Pelago. Wong cited the example of customers using miles at Harvey Norman via Kris+. "It doesn't cost SIA much when people redeem their miles that way," he said.
Samuel Yin, associate director at Maybank Investment Bank, said the real concern for airlines would be the utilisation of credits given to those whose flights were cancelled because of the pandemic.
"If that is the case . . . it will impact airlines' cash flows. That said, airlines need to fly to convert the credits into revenues and profits according to revenue recognition accounting standards. I would say this is just the cash cost of resuming business," he said.
"In the case of low-cost carriers, it is also better to have people flying even if the fare itself is non-cash-generating due to credits redemption, as they can always cross-sell other things such as luggage limit, inflight meals and seat selection."
US-based aviation analyst Robert Mann of R W Mann & Company said that the situation in the airline industry is now dynamic, and redemptions are no longer based on "fixed chart values", which could protect airlines from significant revenue dilution.
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