Who are an airline's best customers?

Now that the three biggest US carriers (Delta, already followed by United, and soon to be followed by American) have moved to revenue-based mileage earning, at least on flights marketed or operated by them, we've heard a lot of rhetoric about how these programs will reward the airlines' "most valuable customers."

I think this is nonsense.

Delta markets hotel rooms and rental cars

You might think that Delta is a major US airline that operates with unmatched on-time consistency.

I think Delta's a corporate holding company with a subsidiary that happens to have a particular speciality in operating passenger aircraft. But in addition to operating passenger aircraft, which is a preposterously complex operation involving local, state and national contracts, a commodity trading desk, and is constantly prone to interference from the weather and other hazards, Delta also operates a hotel and car rental booking engine:

Delta doesn't have any specialization in operating hotels or car rental agencies. Indeed, Delta doesn't own any hotels or car rental agencies. Delta just collects a commission on hotels and rental cars booked through their website, then credits SkyMiles members with a seemingly random number of miles:

  • One mile per every $2 spent at delta.com for a completed hotel stay.

  • 1,250 miles per car rental for Diamond and Platinum Medallion members.

  • 1,000 miles per car rental for Gold and Silver Medallion members.

  • 500 miles per car rental for general members.

American licenses a shopping portal

You may be familiar with the AAdvantage eShopping Mall. It's one of those Rube Goldberg contraptions whereby Cartera Commerce, the portal's operator, receives a commission from merchants, then splits that commission with American Airlines, which then awards an arbitrary number of AAdvantage miles depending on their share of the commission.

The key point here is that American does not have any stake in Groupon, Bloomingdale's, Tumi or Dell.

American could not care less which online merchants participate in its Cartera-licensed portal, because the portal spins off cash regardless of the participating merchants.

An airline's best customers never set foot on a plane

Owning, operating, and maintaining passenger aircraft is expensive and extremely risky. If you're a corporate holding company, you'd naturally like to do as little of it as possible. Of course, somebody's got to operate passenger aircraft, and airlines are, as a matter of corporate organization, ideally suited to doing so.

But it's crazy to say that any airline passenger is among an airline's best customers. An airline's best customers are the ones who book hotels, rent cars, and do their online shopping through the airline's licensed shopping portal! Those customers generate what is indistinguishable from free cash, while even the customer booking a paid business class seat actually has to be conveyed, safely, from origin to destination!

Ok, large corporate travel coordinators are also great customers

If there's one exception to this rule, it's the travel coordinator for a medium or large corporation who gets to decide which airline should serve the company's business travel needs. If you can fill up two or three wide-body jets per year with your company's employees, you might be almost as profitable as the customer who buys a new laptop through the same airline's shopping portal.

But to be clear, that travel coordinator need never set foot on a plane to be the airline's best customer.

Airline tickets are a cost for you, not for the airlines

By focusing on the revenue the airlines get from their portal operations, you may think I'm missing the point: that the miles earned will eventually be redeemed for flights — and potentially expensive ones! That not right.

The airlines, against their better judgment, continue to operate high-fixed-cost, low-marginal-cost flights throughout the year. Giving away empty seats to their best customers — their shopping portal customers — is a no-brainer if it keeps that free cash coming in.

Shopping portals are profit engines

I always find extreme examples to be most illustrative. So let's say you decide to buy a 20,000-AAdvantage-mile one-way off-peak award (October 15 to May 15) to Europe exclusively by buying Proactiv+ through the AAdvantage eShopping Mall. You'll need to spend $1,000 on Proactiv+ to earn those 20,000 AAdvantge miles, for which we can assume American receives something like $200-$300.

You then get to redeem those 20,000 miles for:

  1. empty seats;
  2. during low season;
  3. on dates of American's choice.

And all American has to do is provide you with a couple cocktails and some flavorless fish.

Airlines shouldn't award miles for revenue flights at all

Since airline miles don't cost the airline companies anything, you might wonder why they're being so stingy in handing them out.

I have the opposite question: since operating passenger aircraft is by far the most expensive source of revenue for the airline holding companies, why do they reward people for buying passenger airline tickets at all?

After all, however small the cost of airline mile redemptions is (and it is very small), it's not zero, which means that rebate value could be used to reduce airfares and move your airlines' flights higher in the now-ubiquitous price-sorted booking engines.

Airline miles would make much more sense as a reward for directing your online purchases towards one airline's booking engine rather than another's, or for putting spend on one airline's co-branded credit cards rather than another's.

Rewarding people for booking flights on your full, gas-guzzling passenger aircraft seems like a serious strategic miscalculation.

Should all manufactured spend go through American Express gift cards?

Earlier this week the BeFrugal shopping portal temporarily raised their payout on American Express gift cards to 2.2% from 1.5%. Several shopping portals (including my favorite, TopCashBack) periodically raise their earning rates on these cards, so many folks wait to buy their American Express gift cards until payouts are increased.

I don't write very much about American Express gift cards because I don't use them very much, but they're extremely popular, and for good reason.

Why buy American Express gift cards?

The argument for buying American Express gift cards is simple: they turn every credit card into a cashback-earning American Express card. Instead of just earning United miles with a Chase United MileagePlus Explorer card, you can earn United miles and 1.5% cash back.

If that sounds to you like it's too good to be true, then you're in good company! Lots of travel hackers find it worthwhile to direct much or most of their manufactured spend through American Express gift cards.

Why not buy American Express gift cards?

There are a number of potential issues to be aware of if you're considering using American Express gift cards:

  • The gift cards are (obviously) American Express cards. Some techniques for liquidation either don't allow American Express cards to be used, or specifically refuse gift cards for purchases (some Simon Mall locations are notorious for this). Plan in advance which merchants you'll spend the gift cards at;
  • The cards are shipped out activated and ready to use, and in my experience usually don't require a signature for delivery. If you have a day job, you may not feel great about having thousands of dollars left out on your doorstep all day.
  • If you order personalized cards, they can take anywhere from a few days to a week to ship and be delivered. You'll need to build that dead time into your strategy, and be willing to tie up the available credit on your cards for days with nothing to show for it;
  • Finally and most importantly, orders are often denied for little or, most frequently, no reason at all. After moving in May, I couldn't get a single order approved for months, although my approval rate has noticeably increased lately.

There is so much more to say about American Express gift cards, and fortunately most of it has already been said by Frequent Miler! Check out that page for a tremendously helpful resource.

Should all manufactured spend go through American Express gift cards?

In recent months I've done as much as possible to tighten up my own manufactured spending strategy.

First I should say that unlike many of my readers, I don't place a high value on my time, or rather, I don't treat manufactured spend as a time "suck:" I do much of my manufactured spend on foot, which makes it feel vaguely healthy; I listen to funny and educational podcasts while I work; and I'm always gathering more news and updates for this blog, increasing the value I provide my readers. So I don't feel the need to put a dollar cost on my time spent, since I love my job!

At the same time, I do put a dollar cost on my dollars, and aim to maximize the value I get from each dollar spent manufacturing spend. For me, that means using cards exclusively at merchants where my spend is bonused, while using my cash back cards at cheap, unbonused merchants and for American Express gift cards.

The interesting thing about American Express gift cards, however, is that just as you can impute redemption values by comparing a 2.22% cashback-earning credit card to a hotel's co-branded credit card, you can also impute redemption values by comparing your bonused earning rates to American Express portal payouts.

For example, when you use an American Express Hilton HHonors Surpass at a grocery store, you earn 6 HHonors points per dollar spent. When purchasing American Express gift cards through a 1.5% cash back portal, you earn just 3 HHonors points per dollar spent — and 1.5 cents in cash back.

In other words, your "bonused" earning rate allows you to buy HHonors points at 0.5 cents each, which is at the high end of the range of real-world Hilton redemptions.

When portal payouts on American Express gift cards are raised to 2.2% cash back, spending with your card becomes an even worse deal, allowing you buy HHonors points for 0.73 cents each. Realistically, you're not going to consistently redeem your HHonors points for that much value.

Within reason, more points are more valuable than fewer points

Everything I've said so far is true, and you can take a look for yourself at the numbers — and the potential problems I outlined — to see whether American Express gift cards make sense in your own miles and points strategy.

However, there's one final issue that's worth mentioning. As regular readers know, I'm the biggest advocate of earning only as many miles and points as you can reasonably expect to redeem, since an unredeemed mile is worse than worthless: it actually cost you the cash back you could have earned instead.

At the same time, within reason, at the margin points become more valuable the more you have of them: 12,499 Delta SkyMiles can't be redeemed for travel, but 12,500 can. In that situation, the last SkyMile you earn is in a concrete way the most valuable SkyMile, since it unlocks the value of all the other ones!

How about a concrete example? I have an upcoming Hilton stay I'm currently saving up HHonors points for:

  • I'll redeem 200,000 HHonors points for a 5-night stay in New Orleans that would cost $820, or roughly 0.41 cents per HHonors point;
  • At 6 HHonors points per dollar spent, that's more valuable than a 2.22% cash back card;
  • But if I instead earned 3 HHonors points per dollar spent on American Express gift cards, I'd fall short of the 200,000 HHonors points I need to receive the 5th night of my stay free, and have to pay 50,000 HHonors points per night instead;
  • 3 nights would cost 150,000 HHonors points and I'd be saving $492 for those three nights, a redemption rate of just 0.32 cents each.

I'd be better off using a 1% cash back card!

Note that these numbers are specific to my own situation. That's exactly why I preach that miles and points shouldn't be earned speculatively, but rather with specific redemptions in mind.

Of course, the other possible conclusion you could reach is that Hilton HHonors points just aren't very valuable!

Cash back at Amazon.com

First of all, check out my spiffy new disclosure policy which should now be found at the top of each blog post when you visit my website. It reads:

"Disclosure: to the best of my knowledge, I receive no third-party affiliate revenue for any of the content on this site. I do occasionally include my own personal referral links for products and services, many of which you can find on my Support the Site! page. I am also theoretically paid for clicks through the Google Adsense ad found in the righthand sidebar (theoretically since I haven't actually hit a payment threshold yet) and for purchases made through my Amazon Associates referral link."

I don't know if there's anything else anyone has any questions about, but obviously it's a work in progress so do let me know if there's any ambiguity or anything like that.

HawaiianMiles for shopping at Amazon.com

All the way back in the day, Hawaiian Airlines was the only shopping portal that awarded miles for shopping at Amazon.com through their HawaiianMiles shopping portal (the "online eMarket"). I earned a whole 982 HawaiianMiles which, I noticed while researching this post, expired back in July:

This is obviously fairly embarrassing, since I could have redeemed them for something exciting like a subscription to All You magazine.

After HawaiianMiles cut Amazon.com from their shopping portal, I pretty much gave up on cash back while shopping there, and focused other ways to maximize my purchases, like rotating credit card categories with Chase Freedom or Discover it, or the "bookstore" 5% bonus category with the US Bank Cash+ card.

It's worth using cashback portals to shop at Amazon.com

For some reason I was recently clicking around TopCashBack and discovered that the "limited" departments TopCashBack pays out on are actually the very categories I do most of my Amazon.com shopping in!

TopCashBack pays 8% cash back for purchases in the following departments:

  • Home & Kitchen;
  • Women's Fashion;
  • Men's Fashion;
  • Kid's & Baby Fashion.

That's an incredibly generous range, and includes virtually everything I buy from Amazon.com. If you're combining it with a card that pays 5% cash back (or gift cards purchases at a bonused merchant), you'll increase your savings even more.


My Amazon Associates referral link pays me much less than 8% for purchases made by my readers, so if you're shopping in one of the 8% cash back categories you have my blessing to collect portal cash back instead!

Reminder: double dip with portals & cardholder promotions

Today I was reminded of an old marketing aphorism: "I know half my advertising budget is a complete waste. I just don't know which half."

I was reminded of this because I'm in the market for a pair of running shoes.

Whenever I log into my Bank of America online account, I'm reminded that one of their current BankAmeriDeals® (I kid you not) is for 10% cash back on one purchase of up to $175 at the Sports Authority.

If you're not familiar with BankAmeriDeals, they work exactly like (most of) American Express's "Offers For You:" you "add" them to your card, and then if you make an eligible purchase you automatically receive the offer amount as a statement credit.

The cool thing about these offers is that since they're triggered solely by the amount of your purchase, you can combine them with online shopping portals. That enables at least double dips, and sometimes triple or quadruple dips if a merchant also participates in a marketing program like Plink.

Anyway, back to my running shoes. Bank of America is offering 10% cash back, which is nice, but American Express is also offering an "Offer For You" (Offer For Me?) at the Sports Authority (in-store only): $10 back on a purchase of $50 or more – a 20% discount on a purchase of exactly $50!

Let me guess: you already see where this is going.

That's right, by buying a $50 gift card in store, then using it on an online purchase (paying the balance with a BankAmericard), you can earn between 10% and 20% cash back on your entire purchase (up to $175, at least).

But wait: there's more. As I mentioned, since these deals are triggered by your credit card activity, you can combine them with shopping portal bonuses, like the one currently offered by ShopDiscover:

I know what you're thinking: who cares, right? I'm the one buying the running shoes, after all, not you.

But I'm also the one who had some free time this afternoon to put together this table:

This isn't totally exhaustive since I may not have been selected for every linked offer. But it's probably pretty close! I didn't verify most of the evreward portal payouts, although I did check the ones that seemed way out of line (15 Ultimate Rewards points per dollar spent on berries!).

Are you starting to pity the company whose marketing department got the brilliant idea of running simultaneous, stackable promotions? Don't bother. After all, to get a full 25% off at Crate & Barrel, for instance, you'd need to buy something that cost exactly $50. And the markup on Crate & Barrel objects that cost exactly $50 is probably close to 100%.

Biggest Discounts

Here are a few of the biggest discounts. Enjoy your shoes, jeans, flowers and...pet food?

  • iTunes: 100% off $5
  • Reebok.com: 39% off $60
  • Diesel.com: 39% off $150
  • Personal Creations: 38.6% off $49
  • Shari's Berries: 35% off $50
  • FTD: 35% up to $175
  • Henri Bendel: 30% off $200
  • Sports Authority: 30% off $50
  • Petco: 30% off $25