Southwest Rolls Out Dynamic Award Pricing, Devalues Points

Earlier this month, Southwest Airlines revealed that it would change just about everything that makes it unique and stand out from the competition. This includes everything from charging for checked bags, to adding expiration dates to flight credits, to introducing basic economy.

At the time, Southwest also revealed that it would change how it prices award tickets, when redeeming Rapid Rewards points. These changes appear to be live now, so let’s cover all the details.

Southwest Rapid Rewards introduces dynamic award pricing

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. Up until now, each Rapid Rewards point has gotten you roughly the same value toward a ticket (somewhere around 1.3-1.4 cents per point).

While there’s minor variability, this means that a $200 flight has generally required 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, the airline has now changed that. A couple of weeks ago, Southwest announced that Rapid Rewards is “introducing variable redemption rates across higher-demand and lower-demand flights.” While this can of course continue to evolve, we’re now starting to see this variable pricing in action.

To start, let’s discuss the logic of this. 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 have already been paying dearly when redeeming points for expensive tickets, since the points requirements reflect the cost. Still, I imagine the goal here is to take that to the extreme. So if you want to redeem points for a high fare ticket or for the last seat on a flight, points will potentially be worth significantly less than before.

So, how bad are the changes? Randomly, I searched a one-way Los Angeles (LAX) to Honolulu (HNL) ticket for right before Memorial Day Weekend, which I’d assume would be a high demand period. Cash fares range from $452 to $582 per person.

Meanwhile if redeeming Rapid Rewards points, redemption rates range from 40,000 to 52,000 points per person, plus $5.60 in taxes and fees.

In other words, you can redeem 40,000 points in lieu of paying $446 in airfare, which gets you around 1.1 cents per Rapid Rewards point. Ouch! That’s significantly less than the previous 1.3-1.4 cents of value you’d get.

I then also searched a one-way San Francisco (SFO) to Los Angeles (LAX) ticket for early November, which I’d assume would be a lower demand period. Cash fares range from $105 to $195 per person.

Meanwhile if redeeming Rapid Rewards points, redemption rates range from 6,500 to 17,000 points per person, plus $5.60 in taxes and fees.

This is where it gets really interesting, if you ask me. If you are willing to book a Wanna Get Away fare, you can actually get good value. You’re paying 6,500 points in lieu of paying $99 in airfare, which gets you a little over 1.5 cents of value per point, more value than you’d typically get before.

However, if you want to redeem for a Business Select fare, you’d pay 17,000 points in lieu of $189 in airfare, which gets you 1.1 cents of airfare.

So we’ll see how this evolves, but it seems to me like the base redemption value of Rapid Rewards points is now 1.1 cents of value per point, and then some low demand flights in the lower fare classes offer more value than that. However, even on those flights, Business Select fares continue to require more points.

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, no long haul flights, and no major partnerships for redemptions. 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 has made major changes to its Rapid Rewards award pricing. Rapid Rewards is a revenue based program, and up until recently, each point got you roughly the same amount of value toward the revenue cost of a ticket.

With these changes, Southwest Rapid Rewards points have more of a variable value. Obviously the goal is to disincentivize redemptions for seats that the airline could sell at a high cost. With these changes having been loaded, it would appear that award tickets in most situations will get you around 1.1 cents of value per point, and in some cases you’ll find significantly better value redemptions than that, but only for the lower fare types.

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