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Most people think of miles as a neat way for airlines to reward their best customers, a marketing technique designed to keep passengers coming back. But what many don’t realize is that, thanks to the ever-increasing popularity of credit cards with travel rewards, frequent flyer programs have become so profitable that some airlines may be making more money selling miles than they are from selling airfare
A report from Bloomberg notes that airlines are receiving an estimated 1.5 cents to 2.5 cents for each mile they sell to banks, while the cost of fulfilling redemptions can be as low as one-third of that. That means the margin on miles is as much as 60% to 70%, with billions of miles being sold by the airlines to banks, merchants, shopping portals, dining portals and other companies.
“Airlines are earning upwards of 50 percent of [their income] from selling miles to a credit card company,” said Joseph DeNardi, a senior airline analyst with Stifel Financial Corp., in a note to clients obtained by Bloomberg. “Fundamentally, airlines are selling miles to credit card companies for much more than they will cost the airline when those miles are redeemed—and they are doing it hundreds of billions of times a year.”
Unlike the up-and-down profits and losses that can result from all the uncontrollable variables involved with the actual operation of an airline such as fuel prices, labor costs and economic downturns, loyalty programs can provide a steady revenue stream and sometimes even help save an airline in an economic downturn, as Citibank did with American Airlines by pre-purchasing $1 billion worth of miles when the airline was in financial straits in 2009. “That’s the real benefit here: It speaks to downside protection for the industry better than anything else,” DeNardi told Bloomberg.
While DeNardi is optimistic about loyalty programs and their potential, he doesn’t believe airlines should spin off their programs as Air Canada did with Aeroplan in 2008. Since an airline’s actual flight operation is integral to a frequent flyer program’s redemptions, it’s not clear that the program would retain its value as a company once separated from the airline itself.
However, DeNardi believes that airlines, who have been historically reluctant to disclose specific financial numbers related to their loyalty programs, should be more transparent with investors about the significance of frequent flyer miles to their business models. In recent months, some airline executives, including American Airlines CEO Doug Parker and Alaska Airlines CEO Brad Tilden, have indicated they might consider revealing more financial details about their programs.
Either way, don’t be too worried about the banks — they’re doing just fine. American Express says that Delta SkyMiles accounted for approximately 7 percent of its business last year and approximately 20 percent of its outstanding credit card loans as of the end of the year. Hopefully most of those folks know the importance of paying their balances in full every month.
Know before you go.
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