Airline, hotel rewards devaluations boost cash back’s appeal

In recent years, many airlines and hotels have watered down their loyalty programs.

The most common example is requiring more miles or points to book the same flight or room. Most airlines have also shifted the earning side of the equation, focusing on dollars spent rather than miles flown.

The results have been negative for most travelers. The coronavirus pandemic should accelerate these trends, and it’s one of the reasons why I prefer cash back credit cards.

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Reward devaluations are likely to get worse

Smart consumers continued to accrue miles and points via credit card spending in 2020 and 2021, even as travel demand plummeted. In fact, many travel cards made this easier by altering their rewards structures to emphasize pandemic spending habits such as groceries, streaming services, food delivery and takeout.

While most of those incentives have expired, consumers are just beginning to dip into the stockpiles of travel rewards that they accumulated. There’s also a glut of travel credits that travelers acquired via canceled trips. These, too, are sizable liabilities that linger on travel suppliers’ balance sheets.

American Airlines, United Airlines and Delta Air Lines securitized more than $16 billion in loans with their frequent flyer programs during the spring of 2020. One of United’s stated benefits in an investor presentation was that it could devalue miles as desired to limit liability. (That’s right, it said the quiet part out loud.)

Transactions further flooded the market, such as the roughly $2 billion that American Express and Chase paid Hilton and Marriott during Q2 2020. The hotel chains got some much-needed cash ahead of schedule, and the card companies got tons of points they can use to acquire and retain customers.

Airlines and hotels treat their miles and points like currencies, and they can alter their exchange rates at will. The practice isn’t new, but I fear it will get worse.

Even before COVID-19, most major airlines did away with their traditional distance-based award charts in favor of “dynamic pricing,” which means that more expensive tickets require more miles. It has made it a lot harder to find deals. Some big hotel chains such as Hilton and IHG do this, too.

Furthermore, in April 2021, Southwest Airlines began requiring about 6.5% more points to book award tickets. In early 2020, Marriott moved 22% of its properties to higher tiers and lowered just 7%.

Cash back is simpler and more stable

I don’t mean to rag on travel rewards programs. They’re often more valuable than cash back credit card rewards (as calculated on a cents per point or mile basis).

But it has already become harder to obtain maximum value with travel rewards programs. To make it work, you need to put in the work to comparison shop and identify loopholes. You need to be flexible, too (which is hard for people like me who have kids and full-time jobs). Cash back programs are much simpler, and their value is more stable.

And let’s face it, even if the pandemic magically ends tomorrow, travel points and miles will likely be worth less in the future.

Airlines and hotels have struggled mightily over the past year and a half. Even though travel is bouncing back, July TSA passenger screenings are still about 20% below 2019 levels and the recent surge in cases spurred by the Delta variant has brought a fresh wave of uncertainty back into the picture. Business travel faces a particularly dicey future given the increases in videoconferencing and remote work.

Even if travel demand were to match 2019 levels – and we don’t know when that might happen – how are airlines and hotels going to dig out of their massive holes? Probably with higher prices and by focusing on paying customers rather than free flights and nights booked with miles and points.

I think most people should focus their credit card spending on a flat 2% no-annual-fee cash rewards card such as the Wells Fargo Active Cash℠ Card or the Citi® Double Cash Card (2% cash back; technically 1% when you make a purchase and another 1% when you pay it off). If you want a little more flair, get the Fidelity Rewards Visa Signature card* and earn 2% cash back, which you can put to work in the stock market.

Obviously, some people will do better by juggling multiple cards. That’s work, too, though. Our research has found that most people prefer to use just one or two credit cards as widely as possible. The card industry has taken notice. Several recent product launches have emphasized the simple, straightforward, universal appeal of cash back. The Active Cash, the Bank of America® Unlimited Cash Rewards credit card and the Citi Custom Cash℠ Card all debuted this summer with messaging to that effect.

Bottom line

There are different strokes for different folks, of course. I’m not hating on travel cards. If you know what you’re doing, then go for them. I just think between the pandemic, more devaluations, more complexity and higher fees, cash back cards are a better fit for most people.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.

*All information about the Fidelity Rewards Visa Signature card has been collected independently by CreditCards.com and has not been reviewed by the issuer.