With COVID-19 causing a huge decline in travel bookings, many airlines and hotels find themselves facing bankruptcy and in need of fast cash. One potential solution is preselling travel points.
Hilton Hotels recently sold $1 billion in Hilton Honors points to American Express; Delta Air Lines and United Airlines are also in talks with their credit card partners to presell miles. While this may seem like nothing but a simple (albeit expensive) transaction between two businesses, points presales are also important for consumers.
Here’s a closer look at how these presales work, and how they could offer an opportunity to maximize your travel rewards.
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How preselling travel points works
Quite a few travel providers partner with credit card companies. Through these partnerships, the credit card company offers co-branded cards tied to the travel provider’s loyalty program.
American Express and Hilton, for example, are partners — American Express offers credit cards that earn Hilton Honors points. When you use one of those cards to earn points, American Express buys the points from Hilton at a rate the two companies agreed to. Like any good partnership, there are benefits for both sides:
- The credit card company can acquire more cardholders and make money from transaction fees.
- The travel provider makes money by selling points to the credit card company. By offering credit cards in its loyalty program, the travel provider can also increase customer loyalty.
A presale means the credit card company is buying a bundle of points (or frequent flyer miles) to use later. In this situation, the credit card company gets the better end of the deal, because it can pay a discounted rate on the points. For the travel provider, this is usually a survival strategy. It gets the money it needs to stay afloat, but sacrifices future earnings and sells points at a lower rate.
Why points presales benefit consumers
When a credit card company buys points, it can use those points to convince consumers to open a credit card, and/or to keep current cardholders happy. The easiest way to do both is to beef up its bonus offers.
After a points presale, there’s a good chance the credit card company will improve one or more of the following on its co-branded credit cards:
- Sign-up bonuses
- Bonus categories (for example, a card may start earning 3 points per $1 at restaurants instead of 2 points per $1)
- Retention offers (incentives to offer when a cardholder wants to cancel the card)
There is a potential downside. It’s possible that a travel provider could later decide to devalue its points. A devaluation is when the travel provider increases what it costs to redeem points for travel bookings. An airline could raise flight prices from 15,000 to 20,000 miles, or a hotel could raise nightly rates from 25,000 to 30,000 points.
You’d expect that credit card companies would set up a contract to avoid this possibility, but there’s no way to be sure a devaluation will or won’t happen. Still, it’s unlikely after a points presale. If American Express spends $1 billion on Hilton Honors points, it doesn’t want Hilton dropping the value of those points six months later.
It’s also important to remember that the reason a travel provider presells points in the first place is to raise money during tough times. That’s currently because far fewer people are booking travel. The last thing an airline or hotel would want to do is devalue its program’s points when it’s already dealing with low demand.
Watch out for chances to earn more points
This obviously isn’t the best time to travel, but if you’re financially stable and you like using travel rewards credit cards, then you should keep your eyes open for new bonus offers in coming months. You could end up stockpiling points you can put to good use when it’s safe to travel again.
View more information: https://www.fool.com/the-ascent/credit-cards/articles/airlines-hotels-preselling-travel-points/