Credit Cards and Oil Prices
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Credit Cards and Oil Prices


Updated: December 26, 2012

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Credit Cards and Oil Prices
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You are much more likely to be using a frequent flyer credit card and reaping its benefits, if any, than to realize what role such cards play in the business of airlines and credit companies. Meantime, frequent flier programs that initially were started as a tool of attracting loyal customers, have undergone a fundamental change in the last 30 years and turned into a big and really profitable business for the airlines.

The business is becoming ever more valuable in the light of the ever rising oil prices, and in their pursuit of revenues, airlines often move their customers to the background. Hence, there are all those customers' recent bitter complaints about flaws in the frequent flyer programs they participate in.

So, how do carriers like Delta, Continental Airlines, Qantas, Northwest and American do their business? They make billions of dollars on selling miles to their partners like hotel chains and credit card companies. The latter allow customers to take advantage of the miles through FF credit cards offering miles as sign up bonuses or redeemable rewards.

The revenues coming from the selling of the miles not only cover the growing fuel prices but also bring millions of dollars of pure profit. The figures of 2007 are really amazing. United revealed the revenue of $ 800 million after it sold its miles and Quantas made $218 million from selling miles to third parties.

Banks and companies earn no less by offering the so-called unrestricted credit rewards involving miles, for which customers are supposed to pay escalating fees, higher interest rates and other charges.

Evidently, airlines and card companies get their share, considering that the average price ranges from one to three cents a mile.

What about customers, those frequent flyers who value the miles so much that bend over backwards to earn another one in every possible way? They have been complaining and not for nothing. On the one hand, it is the lack of a seat desired, the rising fees required to be able to redeem miles for a 'free ticket" and the shortening expiration dates.

On the other hand, there is a bitter contradiction - more opportunities of collecting frequent flyer miles run counter to smaller redemption activity. It does not mean that travelers just store the miles for an uncertain future, it just means that they don't know all the redemption opportunities and lack credit card smarts on miles utilization.

Realizing that the imbalance between the miles earned and miles redeemed can violate the stable revenuer inflow, the airlines are now offering new ways to customers to use their miles.

The new opportunities include redeeming miles for Broadway tickets at online auctions, exchanging miles for merchandise and adding miles with cash for air travel.

The previous redemption options remain but became more flexible in offering free tickets, seat upgrades and magazine subscriptions.

Facing the escalating oil prices, carriers have been forced to apply stricter redemption requirements. The expiration dates have reduced to only two years or 18 months instead of the typical three years, so customers have to think more actively how to redeem the accumulated miles.

So, it is the highly profitable business mostly that drives the airlines' policy today, not the sincere wish to win a customer's loyalty. A traveler needs to play the rules of the airlines and credit companies to really benefit from their frequent flyer credit card program.

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