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The business of your miles – a revenue management perspective

by on Mon February 24, 2014 • 3 Comments


An early system for revenue management and reservations

An early system for revenue management and reservations

Are you frustrated with your miles?

According to our 2014 Mile Satisfaction Survey, there’s a good chance you are.

And the biggest reason most of us are frustrated with our miles is rewards costing more than we expected. So if you’re saving for a trip to Hawaii, you’re going to be upset if the flights you want cost 90,000 miles instead of the 45,000 miles that are advertised at the lowest Saver levels.

Why does this happen?

It’s because of a discipline called revenue management. Airlines use its principles to predict how many people will want to book a flight and when, letting them optimize availability of seats, using rules and prices to adjust to demand over periods of time, all to make sure they make the most money possible on the flights they are operating every day.

To put it in simple terms for you the consumer, it’s how airlines decide what you should pay for a seat, and when you can pay that price.

If you can’t get upgraded ahead of time, thank revenue management. If you can’t get an award seat when you want it, thank revenue management.

An airline’s fear is letting you snag a seat with an award on a flight that becomes full, leaving someone else who is willing to pay a lot of cash for the seat looking for another airline. That makes for a complex game of cat and mouse between the airline and the miles you have waiting to use for an award ticket.

But it’s not all a dismal science – the fact that you can fly one-way for a reasonable price compared to inflated prices years ago is also made possible by the constant evolution of revenue management practices. And airlines make billions of dollars selling miles to banks and other partners, so they don’t think of your award seat as entirely free and need to keep you happy so they can keep selling them.

With the biggest changes in years hitting airline mile programs in 2014 we spoke with one of the leading experts in revenue management, Dr. Larry Weatherford, Dick and Maggie Scarlett Endowed Professor of Decision Science at the University of Wyoming, about how airlines think about making seats available for awards.

Award availability can vary widely by airline even though fares are often very close.

He says “some airlines still offer a minimum number of award seats on some flights” even as revenue management software continues to become more sophisticated. In many cases he says the airlines will manually override what their revenue management software dictates in order to fulfill on loyalty program obligations.

That is why you’ll sometimes see award seats “pop up in sets of 2 or 4 on certain flights,” especially to high award demand places like Hawaii where the software may be more likely to dictate making few or no seats available at the minimum mileage levels.

It’s impossible to tell which flights will be treated this way, but at minimum if you have the ability to plan far ahead, he advises trying to search as close to the day the schedule will open up (often 331 days out), as the few seats that are made available via manual override are taken quickly. As flights get closer to departure, award seats become subject again to traditional supply and demand dynamics and he thinks the very last minute can also be an opportunity. He also recommends taking what you can get, and being willing to split a family up or buy cash tickets alongside award tickets when enough seats aren’t available.

Efforts to improve transparency about mile program pricing like the satisfaction study can have a double effect according to Dr. Weatherford. An airline that scores poorly is likely to reassess its award availability practices and may “loosen up” in response, while one that scores very well may see it has an opportunity to tighten while still maintaining good outcomes versus its competitors.

Airlines also have “looked at lifetime value per customer,” he says. How they act on that information varies. But airlines at least intuitively know that a customer trying to redeem an award to Hawaii who has a history of profitable travel should have a better shot in theory than one who doesn’t have the same history. And he says they know that they need to deliver on some of the more high value awards: “they know you are getting 3, 4, 5 cents a mile in value on some redemptions” and work to maintain some level of availability for higher value awards.

Dr. Weatherford thinks current IT systems, while always improving, are still holding back airlines from making more refined changes to loyalty programs, like targeting redemption to the highest value fliers and tying mile earning and redemption closer to the cost of a ticket. Those changes could take years to implement.

And the airlines are on to those who exploit the programs. While systems and other issues can create lags in response times, he says airlines are well aware when redemption rates get out of line, or a group of unintended customers starts to extract disproportionate value from a program. For example United recently increased the cost of redemption of some of its first class awards on partner airlines, tickets that cost $10,000 or more if purchased with cash. These awards were favorites of people who used non-traditional methods to spend more on credit cards than is natural, earning hundreds of thousands of miles a year without flying. As that became too popular the award prices were increased, discouraging that kind of behavior.

“Mile redemption gets C-level attention” at airlines, he says.


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3 thoughts on The business of your miles – a revenue management perspective

  1. Paul R

    I wish United looked at lifetime value per customer. Doesn’t feel that way after their recent changes. All nickel and diming.

  2. David C

    This has always been a cat and mouse game with game being the key word. Plenty of opportunity if you’re willing to play along.

  3. Jeff

    In my experience American and United are more consistent about making seats open right when the window for booking a flight opens up. Delta seems less reliable this way.

    My view is as the airlines’ profits increase the industry will start to increase capacity again and some may over extend, which will create more opportunities for using miles.


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