How do airlines make (lots of) money with loyalty programs?

You thought loyalty programs were a burden for airlines (and hoteliers too)? Yes, that’s right. But on the other hand it is also for some of them the way to earn a lot of money.

The loyalty program: a debt with a term!

A loyalty program has a cost for an airline. Lounges, priority access etc… everything has to be paid for. The customer is not necessarily aware of it, but when he takes a priority queue in Tokyo to go through the controls more quickly in order to take his Air France flight to Paris, Air France pays for him to have access to these “fast tracks”.

But loyalty programs are also a pretty big debt for airlines. All the miles that are earned in order to buy later “free” tickets (I put quotation marks because there will be taxes to pay and because the passenger will have had to spend a lot of money to buy his so-called free ticket) are a debt that the airline has towards the customer. It was as if it owed the client money and the client would eventually claim it back. Therefore, these miles are recorded in the airline’s financial statements as such and end up weighing down the accounts in question. No need to draw you a picture: you make 1 billion profit but on the other hand you owe 1 billion free tickets to your customers, so you are just at zero.

If you are wondering why your miles have a limited validity or why the miles/tickets conversation rate (or redemption rate) keeps changing in such a way that the purchasing power of your miles decreases you have the answer: airlines are looking to improve their balance sheet and write off as much debt as possible.

The loyalty program: a cash machine

But a loyalty program can also become a real cash machine. This is the case when the airline offers its loyalty program members a so-called “co-branded” credit card, such as American Airlines and Citi, Amex and Delta, United and Visa, etc. These cards allow the customer to earn bonus miles, get free qualifying flights to improve their status etc. …. It’s impressive how many bonuses and benefits of all kinds are available to their holders.

They are not at all popular in France or even in Europe, unlike in North America where they allow many passengers to obtain benefits, status and free flights very easily. This is the reason why, with the same flight consumption, an American will have a high status and a French will exhaust himself for meager benefits: most loyalty programs are designed for this clientele who have levers to boost their loyalty program that we do not have. And as the thresholds are the same for all, we can legitimately consider ourselves disadvantaged.

But you’re going to tell me: giving away free miles without these people even flying is even worse for the airline’s finances, right? Well, not always.

Airlines don’t offer miles, they sell them

This requires an understanding of how these co-branded cards work.

Do you think that the bonus miles happily offered to cardholders are offered by the airline in an attempt to build loyalty among its program members? Not at all!

Don’t be mistaken: it is not the airline that is usually in demand for such partnerships but the financial organization that wants to attract new customers by offering them tailor-made advantages.

All bonus miles offered to cardholders in addition to those awarded by the airline are therefore purchased by the financial organization from the airline (we’ll explain soon how they fund them). And for some airlines the sale of miles to financial institutions is a real jackpot!

When American Airlines loses money on flights and makes money selling miles

A very good example is American Airlines. The airline is making money, everything is fine! Well looking at his 2018 financial statements we have quite a surprise!

In Q2 2018 the business of American Airlines selling points to its financial partners for them to redistribute to holders of the famous co-branded cards amounted to $1.4 billion! A 7% increase in revenue while the airline’s “air” revenue grew by only 4%! The loyalty program represented 12% of the airline’s sales (we are talking about miles sales!)

$1.4 billion which is pure profit, a mile costing nothing to produce!

For the record, the Air-France KLM Group’s operating income in the same 2nd quarter of 2018 was €345 million. Does the comparison inspire you?

In 2017 American Airlines earned $3.1 billion from its loyalty program, net income.

Bottom line: For a long time American Airlines lost money on its core business (transporting people) and was profitable thanks to its loyalty program. The SEC, the U.S. stock market regulator, did not say something else when commenting on the airline’s results: “Without the AAdvantage[le programme de fidélité de la compagnie] program, American Airlines would not have reported profitable results“.

Good news for the airline: it seems that in Q2 2019 it would have made money for the first time in a long time by flying passengers.

We have taken the case of American Airlines but it is valid for most US airlines. Delta Airlines earned $3 billion in 2017 thanks to its loyalty program and hopes to reach $4 billion by 2021.

And in Europe? The co-branded credit card is no more part of the passenger culture than the loyalty program. What’s more, such practices are almost impossible to fund for European financial organizations and we will soon explain why. I don’t know how much Air France gets out of its partnership with Flying Blue and Amex, but we must be light years away, simply because the market does not have the same potential.

So now you know how the co-branded credit card business works and how some airlines make huge revenues from it.

Disappointed that you don’t live in a country where such cards would give you far greater benefits than you have in France? We’ll also soon explain why you should be very happy not to enjoy it.

Photo : Airline credit card de robertindiana via Shutterstock