The frequent flyer programs were created to lure passengers who travel often to stick with a certain airlines by providing them points and status credits. So airlines get returning passengers, which is good for the business and the passengers get to use the points collected by travelling on in-flight purchases, flight upgrades and free flights. With the introduction of frequent flyer programs in credit cards, stores and supermarkets, those passengers are now able collect more points even quicker. This made, collecting points, even more attractive for the frequent fliers.
This is well and good for them but is it worth for someone who is a non-frequent flier, who in average takes two local flights a year and one long haul for a nice vacation, and earns points on your credit card purchases mostly Visa/MasterCard. The banks and the airlines think so but is it really?.
The two popular and widely offered frequent flyer programs via credit cards in Australia are Qantas and Velocity. Qantas Rewards are offered by banks such as ANZ, HSBC, NAB, CBA, Westpac, Bankwest and St.George Bank. It is also much easier to accumulate Qantas points as they are affiliated with supermarkets and stores. Virgin Velocity Rewards is new and upcoming, at the moment St. Geroge Bank, NAB and CBA offer credit cards with that program. As they are not big enough to compete with Qantas, they have their own credit card to promote points accumulation, Virgin Money.
I am going to be comparing them to see their worth with regards to free local return ticket and international flight upgrade.
Baseline quoted on 23 May 14 through their respective website
Return flight from SYD to MEL, 22/Aug – 24/Aug
Virgin
Full fee cost: $178 ticket + $60 taxes + $7.70 booking fee = $245.70
Points redemption cost: 19800 points (no booking fee, for amount below $50)
Qantas
Full fee cost: $290 ticket and tax + $7 booking fee = $297.00
Points redemption cost: 25000 points (+$7 booking fee)
Velocity Points
How much is your points worth when you are redeeming?
For the Virgin ticket above, your accumulated 80 points is worth $1 (19800/245.70).
How much is your points worth when you are accumulating?
For a dollar spent on credit card purchase, you receive 0.5 points with NAB, CBA and 1.25 points with Virgin Money.
What does that mean?
With NAB and CBA, it will cost you $160 ( 80 / 0.5) worth of purchases to accumulate 80 points, which is only worth $1 when you redeem it. So, you made them $160 worth of business and they are giving you $1 dollar in return. That is 0.625% discount.
In other words, you need to spend $39,312 ( (100 * 245.7) / 0.625 ) in credit card purchases to get a $245.70 worth of free ticket. If you were to spend $2500 a month on credit card purchases, it will take 16 months ( 39312 / 2500 ) to get 1 free ticket from SYD to MEL.
With Virgin Money, it will cost you $64 (80 / 1.25) worth of purchases to accumulate 80 points. That is 1.56% discount ( (1 / 64) * 100 ) . In other words, you need to spend $15,750 ( (100 * 245.7) / 1.56 ) to earn a free ticket. If you are spending 2.5k monthly on credit card purchases, with Virgin Money, it will take 7 months to get a free ticket.
Credit Card Annual Fees
Averagely you pay $243 on annual fee for Platinum Qantas credit cards. If you take that into account, then in good case scenario with Virgin Money, you spend $16,039 to get a free ticket in 7 months.
Qantas Points
How much is your points worth when you are redeeming?
For the Qantas ticket above, your accumulated 86 points is worth $1 ( 25000 / 290).
How much is your points worth when you are accumulating?
For a dollar spent on credit card purchase, you receive 0.5 with NAB, ANZ, St George Bank.
0.75 points per dollar can accumulated with Bankwest and St Geroge bank credit cards.
CBA offer a credit card that can accumulate 1 point per dollar spent.
What does that mean?
With NAB, ANZ and St George Bank, it will cost you $172 ( 86 / 0.5 ) worth of purchases to accumulate 86 points, which is only worth $1 when you redeem it. So, you made them $172 worth of business and they are giving you $1 dollar in return. That is 0.58% discount ( (1 / 172) * 100 ).
In other words, you need to spend $49,913 ( ( 100 * 290) / 0.58% ) in credit card purchases to get a $290 worth of free ticket. If you were to spend $2500 a month on credit card purchases, it will take 20 months ( 49913 / 2500 ) to get 1 free ticket from SYD to MEL.
With Bankwest and St George Bank, it will cost you $115 ( 86 / 0.5 ) worth of purchases to accumulate 86 points, which is only worth $1 when you redeem it. So, you made them $115 worth of business and they are giving you $1 dollar in return. That is 0.87% discount ( ( 1 / 115 ) * 100 ).
In other words, you need to spend $33,333 ( ( 100 * 290 ) / 0.87 ) in credit card purchases to get a $290 worth of free ticket. If you were to spend $2500 a month on credit card purchases, it will take 14 months ( 33333 / 2500 ) to get 1 free ticket from SYD to MEL.
With CBA, as it is 1 point per dollar spent, it will cost you $86 worth of purchases to accumulate 86 points, which is only worth $1 when you redeem it. So, you made them $86 worth of business and they are giving you $1 dollar in return. That is 1.163% discount ( ( 1 / 86 ) * 100 ) .
In other words, you need to spend $24,935 ( ( 100 * 290 ) / 1.163 ) in credit card purchases to get a $290 worth of free ticket. If you were to spend $2500 a month on credit card purchases, it will take 10 months ( 24935 / 2500 ) to get 1 free ticket from SYD to MEL.
Credit Card Annual Fees
Averagely you pay $267 on annual fee for Platinum Qantas credit cards. If you take that into account, then in good case scenario with CBA, you spend $25, 225 to get a free ticket in 10 months.
Cost of upgrade from Economy to Business
SYD – SINGAPORE, Virgin 24,900 points, Qantas 25,000 points
SINGAPRE – LONDON, Virgin 45,000 points, Qantas 35,000 points
SINGAPORE – FRANKFURT, Virgin 45,000 points, Qantas 35,000 points
What do airlines get from this?
That $1 discount you are getting can only be spent on their or their partner’s products, with conditions and restrictions, that works in their favour. They actually didn’t loose that $1. They turned that $1 into many more dollars.
If you buy with their partners, they get referral bonus, so they earn money because they brought you to their partners for $1.
If you spend it on their own products,
- you exploring their other divisions and saving them money from making costly advertisements,
- you think you are getting a good deal but actually they are trying to get you to not shop around.
The restrictions as to when you can buy free tickets with the points is limited to certain dates and times that they haven’t blacked out because they are usually busy dates. So when they believe the flight might not be full, they are happy to give that to you.
Conclusion of comparison
It is clear, value for money comes from Virgin Velocity points. For free ticket as well as upgrade to Business. The reason is the value of their points is higher, with Virgin Money.
In our case with Virgin, if you were to spend $3000 monthly on purchases, you tend to gain 2 free tickets from SYD to MEL per year. That saves you $490 a year. When u subtract the annual fee of $289, you saved yourself $201 by collecting points without going out of your way. That sounds like a good deal.
However, I believe it is worth it if,
- your monthly purchases are not geared for generating points,
- you are using your credit card for your day to day expenses,
- you can get more than the annual credit card fee back in terms of free ticket.
Regardless of potentially getting one or two free ticket a year, I think this is a scam and not worth the effort.
Rajeev's Curiosity 