If you book an award ticket on an airline, is it really free?
That question is more complicated than it may seem. If you earn miles and points the old-fashioned way, by flying, the answer is probably yes. You'll fly free sometimes as an airline thanks you for your loyalty.
But if you generate miles via credit cards, as many travel-savvy spenders do, your flights aren't exactly free. Your credit card company is buying miles from the airline, and using them to reward you. How much the card companies pay is a trade secret, but analysts say it's probably around 1.25 cents per mile
Let's do some back-of-the-napkin math. You can buy a one-way ticket next month on Southwest from Chicago to Orlando for about 4,100 points. At 1.25 cents per mile, J.P. Morgan Chase would pay Southwest about $52 for a segment that costs $77 in cash. Since cards have other benefits for airlines as well
, Southwest is "really ambivalent whether it's a cash paying customer or a reward customer," Andrew Watterson, Southwest's chief revenue officer, told me recently.
Watterson and I had an interesting conversation about the economics of loyalty programs, and why Southwest expects its new Hawaii routes to "ignite" credit card applications
. Let me know what you think by emailing at email@example.com or tweeting me at @briansumers