Some credit cards in Singapore reward you with air miles when you spend. Here's what it actually costs credit card companies to give you these rewards.
Airmiles are part of loyalty and reward programs offered by both airlines and other companies such as banks through their credit cards. You can accumulate frequent flyer miles based on either how far or how frequently you fly. Another way to earn miles is through spending on your credit card. These miles earned can then be used to buy or redeem flight tickets.
For those of you who do not know, miles do not directly correlate to the number of miles you can fly. Rather, miles are more like a points system in a reward program. The use of your miles depends on the availability of flights as well as the destinations offered by the airline for you to claim your miles.
However, these miles are not free. Here’s what it costs banks to pay for the miles that they give you for you to accumulate and eventually claim.
The Price Of Miles
Airlines sell miles to companies such as banks at about $0.01 to $0.05 for each mile (exact figures depends on the contract between banks and airlines). Banks buy billions of miles from the airlines to distribute them to their customers based on the type of card they hold and the spending done.
It is a win-win situation for both banks and airlines. Credit card users are encouraged to use their credit cards to earn more miles with their spending. Accumulation of miles also encourages customers to continue using the same card long term, especially for big ticket items that can help them earn more miles.
Besides earning from each mile sold to banks, selling miles also provides airlines with a stable income revenue especially during economic downturns. Airlines also naturally profit when these miles are cancelled, expired or not redeemed at all.
Redemption Cost For Airlines
It’s not entirely an easy way for airlines to earn from selling miles to their partners. Airlines incur a redemption cost when customers claim their miles earned.
Under accounting rules, mileage balances count as a liability, giving airlines an incentive to prompt you, to use the miles. To reduce this liability, companies sometimes set an expiry date for the miles earned. For example, your UOB UNI$ expire will expire 2 years from the quarterly period in which they were earned.
Any customer would hate to have their miles earned expire before they are used and negatively impacts their loyalty to the program. However, adding an expiration date allows the company to remove a large portion of their liability each period. Another way companies reduce their liability is to devalue the miles over time. They do so by simply increasing the amount of miles you need to redeem a flight.
Airmiles provide airlines with a high margin of profit, so much so that Bloomberg has suggested that airlines make more money selling miles than seats. The difference between the price airlines sell their miles and the redemption cost allows airlines to have margins as high as 50 to 60%.
With such high profitability, it is of no surprise that airlines continue to partner with banks to provide customers with cards that can earn miles towards their next trip.
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By Dollars and Sense
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.
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