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How do British Airways profit from Avios?

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  • polly

    My lot were n economy btw, so l guess good value on the avios spent, even if max avios used…

    memesweeper

    My lot were n economy btw, so l guess good value on the avios spent, even if max avios used…

    Avios in Economy can make a lot of sense, especially last minute, long haul one-way, and if you need the flex (the value comparison then is with a full Y fare, not the discounted one).

    Londonsteve

    Re Rob’s comment I’m amazed that BA only get circa 0.55p for each Avios. If that’s the case, bearing in mind RFS restricts the cash component to a low fixed amount, ex London for zone 1 flights they must be perilously close to losing money on each passenger, bearing in mind the need to pay UK government dept. tax and Heathrow’s PSCs. It does now make sense why they would rather you pay more in cash and less in Avios when comparing payment options and why ‘Avios only’ £1 redemptions are so heavy on Avios.

    Froggee

    The company that handles Avios is separately incorporated (Avios Group Limited). Obviously you can only get so much from its accounts but I’m sure IAG are happy with the business. The most recent set of accounts are for 2020 which was obviously a funny year but even so it had revenues of £290m and a pre tax profit of £60m. By comparison, 2019 had £811m revenues and £180 pre-tax profit.

    In 2020, 51 billion Avios were issued and 27 billion were redeemed compared to 119 billion and 94 billion in 2019. Issuing an Avios does not equal revenue as it is,in effect, creating a liability for Avios Group Limited. In exchange it gets cash from the likes of Amex and by the look of things “flight prepayments” from BA, Iberia etc. Avios Group Limited only recognises revenue when Avios are redeemed at which point it recognises an expense equivalent to their internal management accounting cost of generating that revenue.

    These accounts will be IAG’s best approximation of the profitability of Avios. It will likely be close enough. The level of profitability ties in with them selling Avios at 0.8-1.0p and an average value being obtained for them of 0.55p-0.8p by a typical uninformed punter.

    There are, of course, occasions when IAG will lose on Avios flights etc but overall they win. They also have control of the currency and the rules so as loopholes etc pop up they can close them. I along with many was disappointed when they changed they pricing of gold priority rewards as that pretty much killed one lucrative redemption. But there are others. As long as few enough people make the effort to identify these redemptions and most people are happy to take 0.55p value for their “free” Avios then IAG will be delighted with their highly profitable loyalty scheme.

    And who said accounting isn’t fun?

    Londonsteve

    Wow, that’s quite the analysis! So we cannot be sure that BA are receiving a mere 0.55p per Avios redeemed with them? Or perhaps that’s not the basis on which IAG Loyalty compensates BA for issuing a reward ticket based on your description. I’m a lawyer by learning, not an accountant so forgive me if your explanation already has the answer.

    If a status holder buys a zone 1 reward seat and BA receives a mere £24.75 (4500 Avios at 0.55p) + £17.50 = £42.25 for the seat, minus £13 UK departure tax and circa £30 Heathrow PSCs, that’s precisely the same as the cost they sold the seat for and doesn’t account for fuel cost, any baggage handling fees and any glasses of champers drunk in the lounge beforehand. Would they rather chalk up some revenue and improve their load factor stats than allow the seat to fly empty, even if it generates a year-end loss for them?

    Peter K

    Wow, that’s quite the analysis! So we cannot be sure that BA are receiving a mere 0.55p per Avios redeemed with them? Or perhaps that’s not the basis on which IAG Loyalty compensates BA for issuing a reward ticket based on your description. I’m a lawyer by learning, not an accountant so forgive me if your explanation already has the answer.

    If a status holder buys a zone 1 reward seat and BA receives a mere £24.75 (4500 Avios at 0.55p) + £17.50 = £42.25 for the seat, minus £13 UK departure tax and circa £30 Heathrow PSCs, that’s precisely the same as the cost they sold the seat for and doesn’t account for fuel cost, any baggage handling fees and any glasses of champers drunk in the lounge beforehand. Would they rather chalk up some revenue and improve their load factor stats than allow the seat to fly empty, even if it generates a year-end loss for them?

    What you are forgetting is goodwill. If someone is earning avios and redeeming on BA, even if BA make some loss, they are generating goodwill for the company. Especially business people will likely buy more BA cash tickets which makes them more money long run.

    You need to give people something worthwhile to aim for!

    Alec23

    I’m looking at redeeming Avios against an european flight. The £1 plus 23,000 avios is more than the same ticket in cash. Pity you don’t get TP and Avios when you use them

    I’m not excessively avios rich, but I do get about 5-6000 per month on a credit card, so the £1 deals do work for me and BA…

    NorthernLass

    @Alec23 – indeed, it’s easy to get bogged down in how much statistical value you’re getting and not the value to you personally. I do normally redeem for very expensive cash flights, but also occasionally for quirky routes where it just feels like fun, e.g. DCA to Key West on AA in December. Avios value was pretty average (though you get free seat selection which is a bonus), but it just seemed like more fun to book the seats as a redemption, don’t ask me why! Possibly to do with the insanely low taxes on US domestic redemptions so they feel like genuinely free flights.

    Alec23

    I’m looking at redeeming Avios against an european flight. The £1 plus 23,000 avios is more than the same ticket in cash. Pity you don’t get TP and Avios when you use them

    I’m not excessively avios rich, but I do get about 5-6000 per month on a credit card, so the £1 deals do work for me and BA…

    I have to admit avios has made me loyal to BA, but I’m a fan of Spanish companies..and it’s actually quite nice to support a british brand…one of the last really…

    SteveJ

    Avios has made me loyal to BA in a way I wouldn’t be otherwise. Given the choice I’d prefer to fly anyone but BA as their standards are, IMHO, pretty atrocious. All things being equal, if I were paying cash and a direct route was served by another nonhbudget airline I’d almost never pick BA.

    But their direct route network out of London and the ability to earn Avios relatively easily keeps me paying their surcharges.

    ChrisBCN

    I have to admit avios has made me loyal to BA, but I’m a fan of Spanish companies..and it’s actually quite nice to support a british brand…one of the last really…

    What do you mean, a British brand? They might have the word British in the name, but they are owned by IAG, and you should look to see just how British they are….

    Londonsteve

    @Alec23 your collection rate of circa 6000 a month would imply that you’re not one of the big collectors while you have a few bob and are putting solid spend through the credit cards. On the basis that you’re not sitting on a mountain of Avios you’ve accumulated from jetting around the world for work, but could afford to pay a few pounds more when booking a reward flight, why not look to pay £17.50 or £25 in cash each way rather than £1 plus Avios? You’ll get a far better return on your miles and preserve a chunk for the next jolly. Personally for zone 1-3 flights I always pay the minimum Avios and maximum cash as this values my Avios the highest while allowing me to rinse and repeat and it’s still way cheaper than paying cash at the times I use it, often cheaper than flying with a low cost airline especially if I’ve got checked luggage.

    Lady London

    Think carefully about how many “expenses” were taken off the revenue earned for Avios the company before leaving the profit they declared. I’ll bet they had to work really hatd, to get profit down to that.

    Taking a close look at some of their expenses at line item level and who’s incurring them, would be fun. Pkus I am sure they exhaust all opporunities for product development expenses, provisions/ contingency etc. And who/which other entity Avios the company pays all sorts offees to, will doubtless reveal something interesting.

    BuildBackBetter

    Pity you don’t get TP and Avios when you use them

    Why would an airline ‘give’ you miles while redeeming miles? That’s like a discount for redemptions. Some airlines do sell last min availability at discounted rates, like Krisflyer spontaneous rewards, but that’s rare.

    TP on the other hand is a different matter. It might act as an incentive to miles collectors to keep collecting that airline’s miles. I believe VS does.

    BuildBackBetter

    Think carefully about how many “expenses” were taken off the revenue earned for Avios the company before leaving the profit they declared. I’ll bet they had to work really hatd, to get profit down to that.

    Taking a close look at some of their expenses at line item level and who’s incurring them, wouls be fun. Pkus I am sure they exhaust all opporunities for product development expenses, provisions/ contingency etc. And who Avios the company pays fees to, will doubtless reveal something interesting.

    True, overheads can add up a bit, but in return, airlines or airline groups get a predictable steady revenue and lock in the customers to their ecosystem.

    Look at American big 3. There are many reports that show the airlines’ profits in recent years (pre-covid) have been pretty much from selling miles. They are basically a miles business that also operate flights.

    Lady London

    The most important way BA profits from avios is that corporate travellers do anything to fly BA so they can collect avios.

    One corporate traveller quoted, against company policy, why he needed to take a BA flight home on a Friday afternoon when LH was better timed and considerably cheaper the exact wording that he had to have a “fully flexible” flight. When there was no ambiguity about the time he’d need to take the flight and if he’d missed it (unlikely to the point of impossible) the bank would have paid another ticket once he was in that situation anyway. The fully flex was something like 6x the cost.

    This is the main way BA makes money on avios I suspect.

    PS Corporate credit cards earning avios, and of course personal credit cards earning avios (especially if the company reimburses expenses incurred on personal rather than corporate cards – some employers try not to in their policies for employees ) work the same way.

    Londonsteve

    Wow, that’s quite the analysis! So we cannot be sure that BA are receiving a mere 0.55p per Avios redeemed with them? Or perhaps that’s not the basis on which IAG Loyalty compensates BA for issuing a reward ticket based on your description. I’m a lawyer by learning, not an accountant so forgive me if your explanation already has the answer.

    If a status holder buys a zone 1 reward seat and BA receives a mere £24.75 (4500 Avios at 0.55p) + £17.50 = £42.25 for the seat, minus £13 UK departure tax and circa £30 Heathrow PSCs, that’s precisely the same as the cost they sold the seat for and doesn’t account for fuel cost, any baggage handling fees and any glasses of champers drunk in the lounge beforehand. Would they rather chalk up some revenue and improve their load factor stats than allow the seat to fly empty, even if it generates a year-end loss for them?

    What you are forgetting is goodwill. If someone is earning avios and redeeming on BA, even if BA make some loss, they are generating goodwill for the company. Especially business people will likely buy more BA cash tickets which makes them more money long run.

    You need to give people something worthwhile to aim for!

    This would be true if the majority of redemptions are from high spending business travellers like back in the day when the EC currency was BA Miles. These days the majority of Avios come from credit card bonuses, Nectar collectors and so on. Most people redeeming for a reward flight are not regular BA flyers, they might even never fly BA for cash but for booking reward flights. I could understand BA giving away seats at cost as it gets their load factors up and increases the year-end revenue figure, but not if it’s actually loss making. Perhaps as you suggest goodwill is still the important aspect in the zones 1-3 RFS since it creates an attractive product for IAG loyalty to market which in turn ensures that more Avios are sold to partners.

    Do all profits from IAG Loyalty flow back to IAG so any loss at airline level can be offset by running a profitable subsidiary? In that case the profit on the reward seats are accounted for in advance when the Avios are sold and paid for by the likes of Amex and co.

    Whatsthepoint

    Loyalty schemes can be hugely profitable. Large numbers of partners from amex to Sainsburys pay for them to reward customers. Many customers who end up with them then use them unwisely or not at all to the benefit of airlines selling them. Despite the vast number of page views HfP gets, it remains only a fraction of the numbers holding and using loyalty points so most are not as clued in as HfP readers.

    I know others have already confirmed this, but in my experience it is so entirely true that I want to repeat on it. This site can be a bit of an echo chamber for avios earning; it is easy to think that everyone, everywhere, are doing the same and really optimising their usage.

    The truth is though that despite my best efforts, none of the people I have ever tried to help have come anywhere close to making good use of their opportunities. An Amex Plat here (never using any of the Amex offers), a Capital on Tap card there (using it for no more than the odd purchase), these businesses are benefitting from the enticements they are “giving” away. The card firms win and BA wins as ultimately, the Avios they sold don’t get taken advantage of. I even know someone who has almost 160k Avios and it is almost certain they will never, ever use them.

    Beyond signup bonuses, it seems very few people can be bothered to max out their earning opportunities or simply make good use of them.

    Of course that all said, maybe I am just a very poor teacher!

    I’ve tried with my friends too. The reality is that most people just can’t be bothered to spend a bit of effort to maximise the return on every pound they spend. I find that attitude weird because it’s both enormously financially beneficial and can also be a lot of fun. What better hobby can you have that results in free/very discounted travel? Still, I am happy for loads of people to squander the opportunities as it means I probably have more opportunities, as a result of their apathy and disorganisation.

    Lady London

    The most important way BA profits from avios is that corporate travellers do anything to fly BA so they can collect avios.

    One analyst-level corporate traveller quoted, against company policy, why he needed to take a BA flight home on a Friday afternoon when LH was better timed and considerably cheaper the exact wording that he had to have a “fully flexible” flight. (A senior employee would have worded it more subtly). When there was no ambiguity about the time he’d need to take the flight and if he’d missed it (unlikely to the point of impossible) the bank would have paid another ticket once he was in that situation anyway. The fully flex was something like 6x the cost.

    This is the main way BA makes money on avios I suspect.

    PS Corporate credit cards earning avios, and of course personal credit cards earning avios (especially if the company reimburses expenses incurred on personal rather than corporate cards – some employers try not to in their policies for employees ) work the same way.

    FatherOfFour

    An interesting article popped up on my news feed this morning linked to the above discussion. Google “Skift IAG Loyalty”

    memesweeper

    I’ve tried with my friends too. The reality is that most people just can’t be bothered to spend a bit of effort to maximise the return on every pound they spend.

    Absolutely this. No-one I know (except those I’ve met through HfP), not even the otherwise financially savvy ones, pays any attention to the sort of deal they get from Avios (or any other kind of points-based pseudo currency). Changing the default valuation on Avios on booking RFS to the £1 option will have all but wiped out any losses made by BA on very short haul flights. There will be some other corner cases where a loss might occur, like the loss of cash revenue that the guaranteed seats on very popular flights likely to sell out completely. Other forms of redemption on BA (almost all award flight seats, seat selection, food, cash + Avios etc) will be making a clear and tidy profit for BA and IAG loyalty.

    MNDltd

    Ive booked lots of Avios plus £1 flights, I never even looked at the value of paying more cash….I get about 25k a month and always seem to have more than enough for what we need but I shall be more careful in future.

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