What will Dynamic Award Pricing mean to United Airlines??

Just one line in an internal company note, a view to what the next year will include for the airline. And it is arguably enough to send many loyalty program members into a panic. Dynamic Award Pricing is on the product road map for the United Airlines MileagePlus and it is coming soon.

Deliver first phase of united.com 2.0 by 2q 2015, including bundled ancillary offerings; begin introducing dynamic award pricing.

A United Airlines spokesman confirmed that the news is true, adding:

[W]e’re interested generally in giving customers a broad set of redemption options, as evidenced by our extensive non-air redemption offers and our focus on ensuring saver-award availability in general.

So, no specifics yet on what it means and the timeline is similarly vague, though the document suggests within a year so short-term, not long-term. And so perhaps it is time for some speculation on how this will play out.

More Tiers?

Arguably the pricing today – at least for United-operated flights – is already dynamic. There are two rates (three if you count “sold out”) and multiple inventory buckets included in the calculations depending on elite status or credit cards held. That alone is a “dynamic” way of pricing awards. Delta has five tiers for its most recent SkyMiles incarnation which makes it even more dynamic by that measure. Does adding tiers to the United award pricing scheme make this happen? And, if that’s the play, how do partner awards work in to the situation?

Dollar-Based?

If more tiers is more dynamic then an infinite number of tiers is infinitely dynamic. A “pay-with-points” sort of option where a dollar value is assigned to points and awards are priced based on some conversion from the fare price is also a viable option, though there are many challenges with such an approach. Most of them are tied to partner awards and calculating fares. That is not to say they cannot be overcome, but today a multi-partner award prices essentially as a collection of end-on-end full fare tickets. That sort of math is untenable for a dollar-based points program.

Read more: The power of low-value redemption options

There are many other airlines and programs running dollar-based valuations today. Southwest‘s Rapid Rewards is arguably the largest but it is definitely not the only one. And Southwest doesn’t have partners involved. Both Virgin America‘s Elevate and JetBlue‘s TrueBlue are also dollar-based and do have some partner redemption options but in neither case is the system particularly transparent or easily translated from desired flights to booking costs. And that is to say nothing of the technical challenges associated with the transition, should United choose to still only make partner award inventory available rather than going to a true revenue-based system where it buys seats in exchange for points rather than cash.

It is also worth mentioning that a strict pay-with-points model could conceivable remove one of the barriers which makes selling some partner awards online untenable to the company. If the segment costs are now tied to the dollar amount of the fare rather than a bilaterally negotiated deal there is no reason not to list the inventory online. Anyone willing to buy at the published price would more than cover the company’s costs. But those costs might not be so reasonable.

Hybrid Models?

Perhaps we’ll see a mix of models, where dedicated award inventory prices at one level (hopefully cheaper) and above that the “pay-with-points” option kicks in for people who are more demanding on specific flights. At least in theory the points valuations today are keeping in line with the old award prices from partners, at least for most partners, so the only real reason to make an increase there is higher profits. Then again, I’ve rarely met a business not seeking higher profits.

My Best Guess

There’s still far too little data available to know for sure what this means so my guess is mostly based on conjecture and looking at the rest of the industry rather than something specific to the MileagePlus program. And I’m betting – at least initially – that the dynamic pricing applies to United-operated flights. We’ll see a “pay-with-points” model come through which allows the company to sell the idea of every seat available as an award and mean it, even if the pricing is less than desirable. Given the increased earning rates on higher fares recently the shift arguably makes sense: Those typically spending the most on seats still have lots and lots of points to be able to redeem for more seats.

For partners things are far more complicated. The joint venture partners – ANA over the Pacific and Lufthansa, Swiss, Air Canada, et al. over the Atlantic – might be reasonably easy to include. If United simply takes a charge against the points value and transfers that over as a payment method this actually makes partner inventory significantly more available, though the prices are unlikely to be appetizing. Those partners also typically allow for seats and fares to be sold and combined more “normally” than just full-fare end-on-end every time so the award costs are not spectacularly unreasonable. The non-JV partners would be a very, very different situation and I do not expect them to come in to the pay-with-points side of things all that quickly, though I suppose it is possible for awards wholly on partner metal.

And, at the end of the day, customer satisfaction with the programs is more typically measured by “Could I get an award on the flights I wanted when I wanted?” rather than “Did I get the absolute best value for my points ever?” That distinction suggests that the company may be right in making such changes, even if the numbers get worse for some customers.

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