Ask Randy

Randy Petersen answers reader questions about how to maximize travel-related loyalty programs.

Dear Randy,
I transfer miles from my American Express reward program to the frequent flyer plan of a Star Alliance carrier. I then use those miles to book award travel on
a different Star Alliance carrier. How do each of the parties benefit from this arrangement?

American Express uses miles as an incentive for two purposes—to entice you to choose that particular card, and its partnership benefits, against a background of competition in the credit card arena. They also hope that your incentive to “earn” miles will drive a higher-than-normal credit card spend. Given that American Express extracts a fee from merchants who accept the American Express card, the more you spend, the better the margins are for American Express. At the end of the day, you are happy to have the additional miles, and American Express is happy to take micro amounts of the pennies it earns from these transactions of yours (minus the cost of the miles).
Since American Express is not the award supplier in this case—the airlines are—they have to purchase your choice of award from established contracts for the purchase of miles. Let’s say you have decided to redeem 100,000 points from Membership Rewards into Airline A in a deal in which Membership Rewards buys miles at a rate of 1.5 cents per mile. This means that Airline A will have received $1,500 from Membership Rewards.

Now, as we noted, Airline A has a partnership with Airline B based on a common earn/burn ratio. As part of the partnership, Airline B agrees to allot a certain number of seats to Airline A for award use at a rate of one cent per mile. As part of that reciprocal arrangement, Airline A agrees to allot a certain number of award seats from Airline B’s frequent flyer program redemption at a mutual rate of one cent per mile.

Airline A now pays Airline B $1,000 (100,000 miles at one cent per mile) for your award redemption from “controlled” inventory that would likely not have been sold to you anyway. Airline A is $500 richer, and, Airline B is happy to have monetized a seat that had not been sold.

Ask Randy.

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RANDY PETERSEN is publisher of Inside Flyer magazine and is president of Frequent Flyer Services. Email Randy at editor@executivetravelmag.com.