Why United Airlines Decided to Eliminate Mile Expirations: A Strategic Move for Sustainable Growth

Recently, United Airlines made a significant decision to remove expiration dates on their frequent flyer miles. This change reflects a broader strategy aimed at optimizing customer engagement and ensuring profitability in an increasingly competitive loyalty program landscape. Let’s delve into why this move was necessary and how it aligns with United’s business objectives.

Understanding the New Model: Variable Price Redemptions

United’s decision to move towards a dynamic pricing model for award redemptions signifies a shift in their approach to reward management. Traditionally, the number of miles required for redemptions has been relatively fixed, but under the new system, the number of miles needed for various rewards is likely to be significantly higher. This change stems from a desire to reduce the frequency of redemptions and thereby enhance the sustainability of the program.

The Impact on Chase United Credit Cards

For United’s credit card partners, such as Chase, this transition poses significant challenges. The Chase United credit cards offer premium rewards and benefits to cardholders, making them a highly attractive option for frequent flyers. However, under the new model, where redemptions are less frequent and often involve high mileage requirements, these cards may not be as appealing. The primary revenue stream for both United and Chase comes from the miles issued to cardholders in exchange for spending. By eliminating expiration dates, United effectively turns these miles into a more reliable source of revenue.

Creating Incentives with Mile Expirations Removed

One of the key motivations behind this change is to stimulate ongoing cardholder engagement. If customers are assured that their miles will never expire, they are more likely to maintain their active use of the credit card. This continuous engagement is crucial for both Chase and United, as it ensures a steady flow of spending and corresponding revenue.

Financial Implications and Revenue Management

From a financial perspective, the removal of expiration dates on miles has far-reaching implications. Traditionally, unredeemed miles represent a liability for airlines, as they are guaranteed obligations that could deplete the company’s assets. However, with the new model, unredeemed miles effectively represent a zero-liability obligation. This means that even if all the miles were to be claimed at once, the airline could simply upprice the awards to prevent this from happening.

A poignant example of this can be seen in the calculation of potential liability. Assuming United has 25 trillion unredeemed miles, under the old model, these miles would represent around one billion potential domestic round-trip saver awards or one billion potential domestic one-way any-time awards, valued at $500 each. This would amount to a potential liability of $500 billion. However, with the new model, the airline can simply adjust the redemption prices to prevent such a scenario from occurring.

This approach allows United to give away seats on flights that are otherwise empty, treating such awards as a cost of doing business with elite customers. In essence, it’s a win-win, as the airline gains a valuable resource (customer loyalty) while reducing immediate financial exposure.

Strategic Insights from Competitors’ Moves

Delta Airlines, a key competitor in the US aviation market, has been at the forefront of such strategic initiatives. Delta’s ability to predict consumer behavior and adjust its pricing models accordingly has given it a significant edge in the market. Similar to United’s move, Delta has implemented dynamic pricing for award redemptions, making them less predictable and more flexible. This strategy not only enhances customer engagement but also allows for better revenue management.

Lessons from Government Debt Management

The concept of eliminating liability through dynamic pricing is not new and can be seen in the operations of the United States federal government. By issuing debt that can never be called, governments ensure a steady flow of capital. United’s move is akin to this, as unredeemed miles do not represent a tangible financial burden but rather a flexible revenue stream that can be adjusted dynamically.

While this strategy may seem unconventional, it reflects a sophisticated understanding of the dynamics between customers, partners, and financial stakeholders. By ensuring the sustainability of their loyalty programs, United and its partners aim to build a more resilient and profitable future in an increasingly competitive market.