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Why – financially – hotel loyalty programmes are different to airline schemes

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I am in Washington at the moment meeting with the Hilton Honors team – I even got to meet Hilton’s CEO, Chris Nassetta, yesterday.  A few articles from this trip will follow over the next week.

One of the interesting points that came up during a discussion on Monday was about the funding of hotel loyalty schemes vs airline ones.

Frequent flyer schemes are generally seen as the greatest marketing invention of the last 30 years.  As well as being hugely successful, they are also hugely profitable.  Avios Group is approaching an operating profit of £200m per year which would value it at around £3bn as a stand-alone business – although in the post-Aeroplan world it would be close to impossible to float a frequent flyer scheme.

(Aer Canada sold off its frequent flyer scheme, Aeroplan, and pocketed a substantial amount of money.  A few years down the line, it announced that it was dumping Aeroplan and starting a new loyalty scheme, leaving Aeroplan – now Aimia – a financial wreck.)

Back to the point ….

Graphic illustration ©2012 by Brian Cohen of The Gate

You might think that hotel loyalty schemes are also a licence to print money.  You might be surprised to find that they are not.  You may be even more surprised to find that they are not allowed to make money.

This is how it works.  Virtually all branded hotels these days operate as franchises or management contracts.  The operator of the hotel pays various fees to the brand owner – in this case Hilton Worldwide – for the use of the brand, the use of the reservation system and for marketing.

The money paid for marketing is ring-fenced.  It can only be used for promotional activity, including running the loyalty scheme, and cannot be pocketed by Hilton.  Obviously there will be management charges etc etc but fundamentally what comes in must go out.

In theory, whilst there will always be changes to the way hotel loyalty schemes operate, they should be cost neutral at the end of the day.  The last round of Hilton Honors changes, for example, shifted the balance towards greater rewards for heavy stayers with Blue members receiving fewer points.

Devaluations are often driven by the need to pay more to hotel owners for redemption rooms.  Most hotel loyalty schemes have to pay something close to the standard daily rate for reward nights when a hotel is over 95% full.  As global hotel occupancy improves – as it has done annually for some time – there will be more nights when the scheme has to effectively pay the standard rate to the hotel, and this money may need to be clawed back by raising the points cost of some hotels.  Hotels also have to be compensated for funding elite benefits.

At the end of the day, Avios and the other major global frequent flyer schemes are there to make a profit – something they do very well.  The hotel loyalty schemes are not.

(Want to earn more hotel points?  Click here to see our complete list of promotions from the major hotel chains or use the ‘Hotel Promos’ link in the menu bar at the top of the page.)

Comments (64)

  • ADS says:

    doesn’t the Aeroplan example demonstrate that the declared profits of Avios (and others) are an accounting fiction ?!

    • Mark2 says:

      would you care to elaborate?

      • Rob says:

        There are plenty of companies with one customer (pretty much) but which are profitable. The profit is not a fiction but the company has a higher systematic risk. Look at the businesses which Apple effectively bankrupts each time it announces it will start making a key component in-house.

        • ADS says:

          but the price that Avios Ltd pays to BA/IB/EI for a seat is the main factor behind whether Avios is a profitable business. and it’s hardly as if the purchase of seats is a open market transaction. if IAG decides to set a high price, then profit is reported in Avios Ltd, if IAG decides on a low price, then profit is reported in BA Ltd / IB Ltd etc.

          and if you pay your accountants enough, they will come up with a justification for whatever price you want to set !

          • Rob says:

            Aeroplan was virtually identical though – a set number of guaranteed seats plus others on quiet days. The frequent flyer scheme is a way of quietly dumping seats at a low price without starting a price war – same as with BA Holidays where BA also dumps inventory.

        • ADS says:

          and if Avios lost their contract with the rest of the IAG companies (like Aeroplan did), then they too would cease to exist as a viable business. so the idea that Avios is a profitable company if false. it’s just a choice that IAG makes as to where to report their profit.

          • Rob says:

            Yes and no. You are talking to a guy who was a partner at a major buy-out house for many years 🙂

        • ADS says:

          even former major buy-out house partners can fall for a shibboleth !

  • TripRep says:

    Slightly O/T Hilton Honors got a pop bar in Boxpark, Shoreditch, London tomorrow at 4pm..

    See their FB feed..
    https://m.facebook.com/events/266657697214127

    • Rob says:

      Weird. No-one told us! Given that only 7 people say they are coming it looks like it could have done with some HFP promotion 🙂

  • Sarah says:

    True! Anybody knows if there are loyalty programs for certain travel agencies? That would be good to know! We booked a a china rundreise with YOLO (https://www.yolo-reisen.de/) but would be good to get some discount on it or payback for our nextrip. Cheers!

  • Alex says:

    O/T Rob – Just got an email from TravellingConnect that Hilton will not longer be a partner from 1st July 2018.

  • Andy F says:

    I think both the hotel and airlines rewards programs need to actually look at what their customers really want, no matter how it’s paid for by them, and what they can afford to offer and offer flexible rewards to folks at all levels of membership.
    When I’m flying business I want two things [A] more legroom / lie flat seat and [B] a business class lounge to do some work / maybe have a drink – I want to use my points flexibly to get those. When I’m staying at a hotel on business I want an upgraded room and free breakfast.

    That’s about it, it’s not rocket science or particularly expensive, and most of the business travellers I know want the same thing…. My choice of airline, credit card or hotel group reflect those simple requirements but every single bleemin company seems to waste money on nonsense that no one really wants in the name of rewards.

    @BA I don’t want that damn magazine you keep emailing me, I don’t want a better meal in premium econ, I don’t care about more luggage, I don’t care about ‘priority boarding’, I don’t care about being able to spend my points on wine or an ‘experience day’, I don’t care about seat selection, I don’t care about dedicate phone lines, … just offer me more legroom and lounge access or let me buy those individually with avios.

    Same with @IHG, I do not want three ebooks (I mean WTF) every quarter, nor your letter I get each time I stay, nor my amenity gift, you can stick your Hertz membership and you physical card option. I don’t want accelerate programs or whatever gimmick it is every month to encourage me to stay more – I want a room upgrade and I want free breakfast / parking….. Can’t offer me free breakfast, fine let me pay in points, can’t upgrade my room – fine let me pay in points, can’t offer free parking – fine let me pay in points – but oh no, that’s impossible :/

    Rant over! lol