Credit Card Point and Frequent Flyer Mile Arbitrage

Arbitrage is the process of buying something at a low price and, immediately afterward, selling that thing for a higher price. Of course, the concept can be much more complicated as this wikipedia article shows. Today I read an article in the New York Times about Brian Kelly and his company The Points Guy. (Despite the singular, he has as many as 100 employees.) The basic idea of the company is to provide advice to people who want to earn more in cash back on credit card purchases and to find ways to maximize their airline miles. It can be a daunting task to learn all the ways to earn these rewards, and airlines and banks change the terms and conditions often. So, The Points Guy is a way of increasing rewards with a minimal time commitment. (The company makes money by having a partnership with bankrate, so do be careful to be an informed consumer before making any financial decisions that might be described there.).

I found the whole article fascinating. Here is one section to give an idea of what it is about:

    LatinPass was an inflection point in loyalty-program history, marking a moment when airlines began to give more thought to the delicate math required to maintain a strong points currency. By 2005, the global pool of frequent-flier miles was accruing 10 times as fast as the open seats that made the whole system possible. That year, The Economist estimated the value of these unredeemed miles as more than the value of all the $1 bills in circulation. Consumers had embraced the frequent-flier program, but now airlines found themselves facing pressures to give away seats that would otherwise be sold. In time, more and more programs would begin selling points to banks. By turning their loyalty programs into income streams, the airlines could afford to give away more free seats. In fact, according to Evert de Boer, managing partner of an airline loyalty consulting firm, seats purchased with airline points can generate more revenue than seats purchased with cash.
    Today the business of selling points is more stable and more reliably profitable than the business of actually flying people places. “Over time, airline performance is very volatile,” de Boer says. “Something happens — say, the price of oil goes up, or a competitor comes in, dumping capacity — and it constantly goes up and down, up and down, up and down ... ” Points, by contrast, are relatively calm. Recently, in the midst of the pandemic, American Airlines used the program as collateral to secure a $7.5 billion CARES Act loan. Delta did the same with SkyMiles to get $9 billon from private lenders. As in other parts of the American economy, airlines are finding ways to become financial-service providers. “There have been transactions in the past where the loyalty program was acquired or sold at a total value exceeding that of the airline,” de Boer says. “It’s the tail wagging the dog.”