United Continental (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 moves by Delta (NYSE:DAL), Southwest(NYSE:LUV) and JetBlue (NASDAQ:JBLU) 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.
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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 (NASDAQ:AAL). 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 Travelers
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.Notes:
- United Airlines Unveils Changes to 2015 MileagePlus Program, June 10 2014, www.unitedcontinentalholdings.com [↩]