(NYSE"UAL) announced Tuesday, June 10, that from March next year it
will award miles to fliers based on the amount they spend on
tickets. Currently, the carrier awards miles to fliers based on the
distance they fly with it. This move by United follows similar
) and JetBlue (
) in the recent past. These carriers also shifted the award of free
miles to fliers from a model based on distance flown to a model
based on revenue contributed.
In our view, airlines are altering their mileage programs in
this way so as to better reward business class fliers who
contribute more revenue per seat than economy class fliers.
Currently, with the award of free miles based on distance flown,
business and economy class fliers are rewarded with equal miles.
But, with the change of mileage award to a model based on amount
spent on ticket purchases, business class fliers will see more free
miles coming their way than economy class fliers. For United, this
change will likely help it retain its business class fliers, as
they will now have a very similar reward plan in place as Delta's
business class fliers. Delta announced its shift to revenue-based
award of miles earlier in the year. Business class fliers are very
important to United as it is seeking to catch up with Delta and
American's higher passenger yields in the domestic U.S. market.
Passenger yield represents the amount collected from each passenger
for a seat per mile of flight and is driven by passenger fares. It
is an important parameter as it helps drive profitability. With the
new mileage plan in place, United will likely be able to retain its
business class fliers who in turn will help push up the carrier's
passenger yields and profitability.
We currently have a stock price estimate of $46.86 for
United, marginally below its current market price.
See our complete analysis of United here
This Change In Mileage Award Plan Will Help Reinforce
Loyalty From United's Premium Class Fliers
Under the new mileage program, United's fliers depending on
their elite status will earn between 5 and 11 miles for each dollar
spent on ticket purchases. This move by United will help it compete
more aggressively for business class fliers with Delta and a
resurgent American (
). Although American hasn't announced this change in its
mileage award program and still awards miles to fliers based on
distance flown, we figure that once the carrier is through with
integrating US Airways, which it acquired last December, it will
likely make such an announcement. Currently, the integration of
American and US Airways is expected to take over an year, so the
shift in American's mileage program to a revenue based model will
likely take some time.
Additionally, airlines' focus on increasing rewards for business
class fliers is driven by the fact that these fliers provide higher
margins. Higher margins are very important to network carriers such
as United as they face intense competition for budget fliers from
low-cost carriers such as Southwest and JetBlue. Thus, in order to
maintain their results, it is absolutely essential for network
carriers to retain their business class fliers.
This Change In Mileage Award Structure Will Hit Budget
This shift in mileage award program to a revenue based model
will however adversely impact budget fliers who scout for low
fares. These fliers will see fewer award miles coming their way
compared with the past. But, conceptually, we figure this change is
valid as airlines are right in awarding greater benefits to
customers who contribute more revenues.
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