The airlines have successfully squeezed banks a good deal more than that! At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point.
Source: Have negotiated these deals with airlines
Source: Have negotiated these deals with airlines
I had the impression that the value of an airline mile to the consumer was 1 cent. That would make paying more than a cent nonsensical.
Did airline miles suddenly become a lot more valuable?
That said there are offers to get cash for signing up. Some time ago First Republic Bank was giving $300 for cc sign up for Google employees (aka rich people).
(1) They work because the bank and airline partners are able to offer you something of high perceived value (a vacation, even in business or first class) for very low marginal cost.
(2) This means that (in my most recent redemption) the bank pays the airline $462 in rewards, that cost the airline $400 to deliver, and provides to you with $2500 in value.
(3) Points are great because people don't consider them "cash" but instead something they don't mind parting with. More of a rebate.
So the economics of it are that the bank collects $0.018 in interchange for every dollar spent on a card, converts that to a point that costs them $0.007 to deliver, which the airline services for $0.006 by disposing of inventory that would otherwise go unsold.
The airline wins again because they've created a secondary market for unsold inventory that they can sell to leisure travelers without undercutting the amount they can sell the same inventory for to business travelers.
It's a very nuanced and successful way of motivating people who have a choice to make the choice you want them to make.
On the other hand, $0.01 in cash back costs the bank $0.01, and then if you redeem for travel the airline gets paid $0.01, and you get $0.01 in value.
When the credit card says $200 in cash-back rewards, there's a lot less room to play games. 20,000 miles might buy a ticket today, but only an upgrade tomorrow. And that even assumes the ticket you wanted was available through the program you decided to back.
In general rule of thumb is Alaska miles are worth $0.02, American are worth $0.013, United are worth around $0.013, Delta are worth $0.01 (since you can redeem them for $0.01 as cash towards paid tickets if you have one of their credit cards).
Hotel points are different, Hilton, IHG and Club Carlson are around $0.005, Marriott are worth around $0.009, and Hyatt are worth $0.016.
But I digress, that's value to the end user. We're debating what the credit card company pays the airline for it.
If a flight is $500, the miles are always >= 50,000, at least on United.
Hilton’s points are worth far below $0.01. I don’t know what they go buy, but it’s usually $0.005 at best, if not worse whenever I have searched it.
International business and first class flights are often 2x or 3x the number of miles, but usually 5x to 15x the number of dollars.
[1] https://hiltonhonors3.hilton.com/en/promotions/5th-night-fre...
[2] https://www.marriott.com/loyalty/redeem/hotels/free-nights.m...
United, however, are worth substantially more. I just redeemed 77K for a one-way business class flight from SFO to IST non-stop on Turkish, which was priced at $2000 on a half-round-trip basis ($0.025).
It's actually quite easy to get $0.015 on United when redeeming for economy class. Maybe Pandemic pricing is messing with the numbers, but this shouldn't be too challenging most of the time. They don't impose fuel surcharges which helps a lot.