Southwest Devaluing Rapid Rewards Points With New Award Pricing Model

Man oh man, it has been quite the 24 hours for Southwest Airlines. As I’ve already covered, the airline will start charging for checked bags, will add expiration dates to flight credits, and will introduce basic economy.

Now I want to cover the development that has the biggest implications for the miles & points world, which is that Southwest is making changes to how Rapid Rewards award ticket pricing works.

Southwest will vary Rapid Rewards redemption rates

Southwest Rapid Rewards is a revenue based frequent flyer program, which is to say that the number of points required for an award flight is based on how much a ticket would cost in cash. Currently, each Rapid Rewards point will get you roughly the same value toward a ticket (somewhere around 1.3 cents per point).

While there’s very minor variability, this means that a $200 flight will generally require twice as many points as a $100 flight. If you’re going to have a revenue based frequent flyer program, then arguably that’s the logical and fair way to do it.

However, there are plans to change that. Southwest has announced that Rapid Rewards will “introduce variable redemption rates across higher-demand and lower-demand flights.” We don’t know exactly when this will be implemented or how extreme the changes will be, but it’s easy enough to figure out the motivation for this change.

Airlines want award redemptions to displace as few revenue passengers as possible. Presumably the goal is to incentivize passengers to redeem points for seats that would otherwise go out empty and/or at a very low fare, while discouraging redemptions for seats that would go out full and/or at high fares. Think of it like saver award availability vs. standard award availability.

Of course Rapid Rewards members are already paying dearly when redeeming points for expensive tickets, since the points requirements reflect the cost. But I imagine that will be taken to the extreme. So if you want to redeem points for a high fare ticket or for the last seat on a flight, anticipate that your points will be worth significantly less than before.

Is Southwest killing the Rapid Rewards golden goose?

I know I say this often, but it can’t be emphasized enough. Here in the United States, airlines make very little money directly from transporting passengers. Even at the most profitable airlines, like Delta and United, the cost per air seat mile is very close to the revenue per air seat mile (and sometimes cost is higher than revenue). Instead, much of the profits come from the loyalty programs.

For full service, global carriers, loyalty programs are quite appealing to consumers, as they want elite status that scores them first class upgrades, award tickets for their summer vacation to Europe or winter break in Hawaii, and lounge access.

Historically, Southwest has punched above its weight when it comes to loyalty program revenue, for an airline that has no first class, no lounges, and no long haul flights. I’d say this primarily comes down to Southwest’s massive route network, plus it being an airline that people actually want to fly, thanks to its great service and customer friendly policies. There’s a huge halo effect to that.

With all the changes Southwest is making, including making points less valuable and eliminating all the policies that customers love, will the Rapid Rewards program suffer?

Rapid Rewards has often relied on goodwill and love of the brand for engagement, because most consumers are better off just using a cash back card, rather than a Southwest credit card. The exception is if you’re going for Companion Pass, which is a great deal. Speaking of which… I wonder when that will be “enhanced.”

Will consumers now look at the airline more critically, and consider their options?

Bottom line

Southwest is making changes to its Rapid Rewards award pricing. Rapid Rewards is a revenue based program, and currently each point gets you roughly the same amount of value toward the revenue cost of a ticket. With these changes, Southwest will have the value of points be more variable, presumably to disincentivize redemptions for seats that the airline could sell at a high cost.

We don’t know the full details yet, but given the direction Southwest is heading, I can’t imagine that this will be good…

What do you make of this change to Southwest Rapid Rewards?