Tuesday, 3 May 2011

Always redeem your reward points for flights

by Rob d'Apice
If you've been following Prosple Blog, you'll remember we recently blogged about the key reasons to get a credit card: namely, to make you money, rather than take it away. That was only one half of the story (actually, only one third, but we'll get to that in a bit). Once you get a card, you need to know how to use it right, and a bank isn't going to tell you this (it's not in their interest to do so, unfortunately).

So, we present to you a new Prosple series: the 10 top tips for getting the most out of credit cards. We'll be publishing these tips over the next few weeks, so keep your eyes on the prize.

Tip 1: Always redeem thy reward points for flights

This does depend somewhat on what card you're using, but it is almost always true that redeeming reward points for vouchers, cashback or products will return less money to you than spending them on flights.

The actual business strategy that leads to this outcome is a pretty fascinating aside. Putting someone in a seat that would otherwise be empty comes at almost no additional cost to an airline (perhaps the cost of the meal, as you can imagine that's not very pricey...). Airlines therefore had a very interesting problem: a product that is effectively zero cost, but isn't selling.

So airlines developed a variety of strategies for getting extra $ from these seats. One obvious idea is selling seats very cheap at the last minute. Another is packaging up discount 'mystery flights' where people buy a cheap ticket to an unknown destination (and the airline just chucks them on any empty flight when they rock up to the airport). Perhaps the most lucrative and successful, though, is the proliferation of frequent flyer reward points. The premise was simple: people who flew frequently accrued reward points and could use their points at getting some of these empty seats for free. The points were almost zero cost to give away, and yet have such a strong perceived value with consumers and incite such strong brand loyalty.

Nowadays, Frequent Flyer points are big, big business. Qantas (for example) sells Frequent Flyer points to other companies (like Visa, Amex, Woolworths, various restaurants, etc.) to give to their customers as deal-sweeteners. To prove the point, Qantas now makes more money from Frequent Flyer points than actually flying people:

BTW, EBIT = Earnings Before Interest & Tax, for you non-Finance nerds. Source
That's worth stopping and thinking about, really. If someone asks you "what does Qantas do?", what would you answer?

There's another interesting tidbit in the table above, too: Jetstar made double the profit of Qantas in the last financial year ($131m vs $61m). No wonder Qantas' current CEO is Alan Joyce, the man responsible for building Jetstar.

In any case, the key point for us humble consumers is that points generally go further with flights than products or cash. To put a nail in this tangent-ridden coffin, here is a comparison of how I can spend my Qantas Frequent Flyer points:

Cents of value per Qantas Frequent Flyer point
through different redemption methods

In other words, if I'm spending 1000 points toward redeeming an iPod (through the Qantas Frequent Flyer Store), I'll get roughly $5.90 of value.  Alternatively, if I spend the same 1000 points toward a return flight to LA, I'll get $12.50 worth of flights - that's nearly double how much I was getting when I was redeeming for an iPod. Simple, no?

Again, your 'common sense' instinct fires: "Why would return flights to LA be such better value?? Am I being duped somehow?"  Well, now you know: the cost for Qantas of providing seats on underbooked flights is MUCH cheaper than buying you an iPod.

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