Airline loyalty programs
today are ubiquitous. They are advertised almost everywhere in airports, online, on social media, and even on flights themselves, with many airlines offering passengers special signup bonuses for their mid-flight decision to apply for a credit card. Carriers will even go so far as to have flight attendants recite sales pitches at 35,000 feet, hoping that they might be able to earn a commission should a passenger sign up as a result.
At the end of the day, airline loyalty programs are about offering passengers free flights. Their primary, stated objective is to allow passengers to enhance their experience through free rewards, such as using miles to book a flight, using them to upgrade between classes of service or even using them to book free hotel rooms and cruises. As one might expect, a loyalty program is designed to ensure that passengers remain loyal to an airline, as flying with them enough times will allow them to book a free flight or some other reward.
Photo:Â Kevin Hackert | Shutterstock
Nonetheless, there is way more to the airline loyalty game than simply offering them free flights and ensuring that they remain loyal. During the pandemic, when all of America’s largest airlines required a massive capital infusion from the federal government to avoid bankruptcy amid record-low passenger demand, the public was able to get a deeper look at airline financials for the first time. This revealed that airlines not only use their loyalty programs to keep passengers from flying with a competitor but also use them as cash machines.
MileagePlus
As the loyalty program of one of the world’s biggest airlines, United MileagePlus is also one of the world’s biggest frequent flyer schemes. Today, there are more than 100 million members of the program.
- Countries
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United States
- Established Date
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1981-05-00
Airline loyalty programs are currently valued higher than the airlines themselves
United Airlines is typically the case study used for this kind of analysis. According to Harvard Business Review, United Airlines valued its loyalty program, MileagePlus Holdings, at around $22 billion, a staggering figure when one considers that the airline itself only has a market capitalization of $10 billion. United considers it as a whole to be worth negative $12 billion, as the value of the airline’s loyalty program exceeds the value of all the current shares in the company itself.
Photo:Â Minh K Tran | Shutterstock
While the same holds for American Airlines’ AAdvantage program and Delta’s SkyMiles program, United Airlines is often the first carrier to be brought up when analyses of loyalty program success come up. Therefore, the clear question that remains is how an airline loyalty program, which is essentially designed to give away free perks, can somehow become such an unbelievable cash machine. In this article, we will take a deeper look at how major airline loyalty programs in the United States today can generate so much revenue.
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These programs can be airlines’ most valuable financial assets.
Points are extremely valuable to consumers, and they will go to great lengths to acquire them
While airlines are careful to guard any information related to the exact portion of their customers who book flights with points instead of directly paying for their flights, it is safe to say that a significant portion of passengers on any given flight are paying entirely with miles or are paying with some combination of miles and cash. The ability to book a free ticket is extremely valuable to budget-conscious consumers, and they will go to great lengths to optimize their travel journey to ensure that they can do so with regularity.
Photo: Delta Air Lines
As a result, the airline credit card business has grown ubiquitous, and every major airline in the United States today has at least one cobranded credit card available through its loyalty program and a banking partner. All three major legacy airlines offer entire lines of credit cards through banking partners, which are some of the most valuable cobranded partnerships made with credit card companies in the country.
SkyMiles
- Countries
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United States
- Established Date
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1981-00-00
United Airlines, for example, offers four different personal credit cards through its banking partner, Chase Bank, each of which offers passengers several benefits in exchange for an annual fee (except the United MileagePlus Gateway card which comes along with no such fee). Delta Air Lines has a similar credit card scheme that it offers via its banking partner American Express, a partnership that accounts for a major portion of the financial institution’s business. American Airlines also offers co-branded credit cards through two separate partnerships with Barclays and Citibank.
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This brings us to our first major source of revenue generated by airline loyalty programs: annual fees on cobranded credit cards. Airlines share revenue generated by the annual fees that cardholders pay with their financial partners, and this accounts for a major portion of airline revenue, especially when one considers that each carrier has millions of cobranded cards in circulation. While passengers are often offered many benefits in exchange for their annual fee, many will never use all of them and airlines will be able to pocket a profit off of this additional revenue.
Photo: LukeandKarla.Travel | Shutterstock
Furthermore, high-end premium credit cards in America today are becoming more popular than ever. Cards like the Delta SkyMiles Reserve Card and the United Club Card offer passengers lounge access but come along with annual fees that can range up to $650. With more and more passengers interested in entering these lounges each year, credit card signups are through the roof, bringing more and more money to airlines every year. Eliminating a credit card often comes with losing significant flight benefits and harms one’s credit, meaning that customers are more than likely to keep these cards open as they become a recurring source of revenue for the carriers.
Partnerships are far more valuable than they might initially seem
The second most important source of airline loyalty program revenue comes directly from partnerships themselves, but consumers are not those directly giving airlines money. The arrangement is relatively straightforward, and airlines hold almost all the power over their partners, with a few limited exceptions. Let’s take United’s cobranded partnership with Chase Bank as an example.
United Airlines will agree to sell miles in bulk for a price to Chase, and the amount that each mile will be valued at is a closely guarded secret. Once Chase has paid for these miles, they will distribute them to cardholders as a reward for purchases on cobranded credit cards like the MileagePlus Explorer card. As a result, these credit cards will make money for United every time a card member makes a purchase.
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These kinds of partnerships extend far beyond credit cards, as airlines will sell miles to all sorts of other kinds of businesses through this kind of arrangement. Delta Air Lines, for example, partners with rideshare company Lyft, offering SkyMiles members a mile for every dollar that they spend on rides, and two for every dollar spent on airport rides. All three major airlines maintain extensive partnerships with car rental companies, hotel chains, and retailers to offer passengers convenient and easy access to earning miles.
AAdvantage
The American Airlines AAdvantage frequent flyer program was launched by the United States carrier on May 1st, 1981. It was the second loyalty program to be launched by an airline worldwide, and today it is the oldest still in existence.
- Countries
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United States
- Established Date
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May 1, 1981
At the end of the day, an airline ticket paid for by a passenger with miles will likely generate more revenue for an airline than if they had purchased the ticket directly with cash, through the amount that they made by selling those miles off to cobranded partners in the first place. According to Forbes, this system gives airlines a lot of power, as their partners are desperate for a major airline partnership and passengers are vulnerable to airlines rapidly switching around the thresholds for how many miles are needed to earn a free flight.
So what’s the bottom line?
While airline loyalty programs were initially designed to incentivize customer loyalty, they have evolved over the last two decades into massive revenue-generating assets. Airline programs have grown so large and so expensive that they impact almost every part of a customer’s life, meaning that they can generate profits from a passenger who seldom even flies.
Photo:Â Wirestock Creators | Shutterstock
This has allowed carriers to drastically expand who their core customers are, and it has enabled them to demand more and more from passengers looking to book tickets with miles. Furthermore, it has placed increased competitive pressure on companies looking for an airline partnership, driving the prices of such arrangements higher and higher due to increased demand. All of these factors have helped make airline loyalty programs some of the most profitable businesses in the industry today.