Points-as-currency take off as air travel’s largely grounded

It could take years for the air travel industry to recover from the pandemic, but some of the airlines' responses could fuel other payment streams.

Engage People, a Toronto-based technology firm that supports online redemption for loyalty points, reports 75% of consumers are more likely to spend loyalty rewards points to make a purchase over other payment methods, and 62% would rather have the ability to use travel points on the spot, similar to a credit or debit card, rather than receiving a gift card or cashback.

The airline rewards market for the past few years has been slowly migrating toward diversifying incentives by letting consumers redeem directly with merchants. Before the pandemic hit, JPMorgan Chase, Citi and Discover made deals with PayPal to support turning points into currency, while Engage made a similar deal with Priceline.

A few months into that deal, Engage notes a preference for using airline points to make unrelated purchases. This is partly out of a lack of choice — there’s not as much opportunity to use the points for travel.

Kiyoshi Ota/Bloomberg

“Viewing points as a valuable form of currency — and offering loyalty program members the ability to pay with points as easily as they’d pay with debit or credit during the online check-out process — gives consumers an added layer of flexibility to spend their points however they want or need to,” said Len Covello, CTO of Engage People.

During the pandemic, when redemption for travel plummeted 90% compared to pre-pandemic levels, Covello said shoppers purchased fitness, entertainment and household items with their points to occupy their time during various stay-at-home orders.

“The demand for this type of flexibility has been thrust to the forefront during the pandemic, at a time when consumers are looking for alternatives to spending on credit,” Covello said.

It could take up to three years before air travel returns to pre-pandemic levels, according to the trade group Airlines for America, which adds the disparities in testing and travel protocols in different parts of the world are complicating recovery. Globally, departures are 45% below 2019, with domestic U.S. departures 42% lower and international departures off 74%. Revenue for bookings 330 days into the future are 86% below September 2019.

The travel dip has also caused other payment problems, as the third parties that businesses and consumers often use to book travel often use the funds as float to fund other parts of their own businesses, creating rebate problems. This complication creates an added incentive for people to avoid using booking future travel or rolling over plans, instead using reward programs for other purchases.

For Amex, which relies heavily on travel, the slump has hit its earnings to the tune of an 85% drop in the second quarter. But Amex reports transferring rewards points to flexible spending is enabling the company to pick up payments volume in other spending categories.

Amex reports a 134% increase in rewards points used at online retailers such as Amazon and Staples for home essentials as business travel gave way to remote work.

“Most recently we found that our card members were using points to spend more on essential products and purchases,” Rachel Stocks, executive vice president of global premium products and benefits for American Express, said in an email. The most popular items purchased with points on the site included keyboards, iPad styluses, air fryers, Dyson hair products, vacuums and reusable water bottles.

The overall increase in online payments has also fueled the use of travel points as currency, said Trevor Rich, a partner at Lovell Minnick, a Los Angeles-based fintech venture firm that has Engage in its portfolio.

As people become less willing to shop in physical stores in favor of e-commerce, there’s more opportunity to spend travel points quickly online.

"If someone wants to use hotel points to go online shopping at a big-box retailer or buy a new piece of tech, they can do that directly on a website as opposed to having to convert the points in some indirect, cumbersome manner,” Rich said.