U.S. Senators have asked regulators to look into airline frequent flyer programs and determine whether they are fair to consumers. Airline loyalty programs are designed to offer frequent flyers an exclusive experience while keeping airlines profitable. Sometimes, balancing the needs of top-tier members with value for all loyalty program participants can deliver mixed results.
But are airlines unfairly gaming the system that keeps them profitable?
That’s what Senator Dick Durbin of Illinois and Senator Roger Marshall of Kansas want to know. Both have asked the Transportation Department and Consumer Financial Protection Bureau to investigate consumer complaints on airlines’ frequent flyer and loyalty programs.
Flying Makes Airlines Less Profit Than Starbucks
Airlines developed loyalty programs because they don’t earn much from flying people from point A to point B. The International Air Transport Association expects the combined net profits of airlines to reach $9.8 billion in 2023, which is an average 1.2% net profit margin. That is a marked improvement reflecting travel recovery from the COVID-19 pandemic and more than double IATA’s previous forecast, made at the end of last year, of $4.7 billion in net profits.
But it is still significantly less than the $19.9 billion profit Apple
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According to IATA, on average, airlines barely make enough per passenger to cover a cup of coffee.
“Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs,” IATA’s Director General, Wilie Walsh, said during the IATA Annual General Meeting this summer. “After deep COVID-19 losses, even a net profit margin of 1.2% is something to celebrate! But with airlines just making $2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines.”
Loyalty Tops Airline Ancillaries
To survive, airlines make up the difference with ancillary sales. These include a la carte services like priority seating, baggage fees, and food and beverages sold on board, as well as their loyalty programs. According to a recent CarTrawler and IdeaWorksCompany projection, airline ancillary revenue will increase to $117.9 billion worldwide in 2023. That’s a significant increase over the $102.8 billion for 2022 and beats the pre-pandemic record of $109.5 billion in 2019.
The biggest ancillary gains from airlines come from their loyalty programs. Frequent flyer programs, whether counted as points or miles, generate multiple income streams. Airlines earn revenue when credit card companies buy points or miles to issue branded cardholders. Airlines also earn revenue by selling loyalty points to other partners, like hotels, car rental companies, lifestyle brands, and retailers. According to loyalty program analysts IdeaWorksCompany, the “15 top performing airlines disclosed a year-over-year frequent flyer program revenue gain of $8.3 billion for 2022.”
American Airlines Takes The Lead on Loyalty
The top performers among loyalty programs worldwide are all U.S. carriers, with American Airlines in the lead. AAdvantage was the world’s second airline loyalty program, introduced in 1981, building on the concept first developed by Texas International Airlines. American Airlines made $5.8 billion in frequent flyer revenue in 2022, an average of $29.10 per passenger.
Delta, Southwest, United, and Alaska follow in the 2022 loyalty revenue rankings all leading by a wide margin over their global competitors.
Points And Miles Aren’t Currency
Since they can be exchanged for goods and services, points and miles might be perceived as a form of currency. But they aren’t a genuine currency because they can’t be traded for goods or services outside the loyalty program. They’re still valuable, but their value varies in keeping with the rewards available. This is true of all loyalty rewards, not just airline programs—everything from the old green stamps to punch or stamp cards at restaurants to digital credits and points for other transactions.
Loyalty programs are based on the principle that consumers will spend more and return to the brand if they get something extra. The value of that “extra” is determined by consumer perception. The cost to the company of granting the “extra” varies depending on current market costs. Earning a free cup of coffee from Starbucks differs in perceived consumer value from earning a flight on Delta Air Lines. Likewise, the costs to Starbucks and Delta of offering those rewards differ significantly.
Because even the most frequent flyers don’t fly every day, airlines entice customers to earn rewards by some means other than flying. If points are easy to earn, only requiring small transactions, they appeal to a broader group of consumers. The quest to earn points towards a travel reward builds a positive brand association for the airline, even if consumers spend their money on something unrelated. In those cases, airline revenue from points and miles comes from partners in the transaction, such as branded credit cards, retailers, and other airline brand loyalty partnerships.
Making The Points And Miles Systems Valuable
How much a point or mile is worth varies from program to program and can change as airlines revalue their programs, adjusting for costs and demand. For airlines, one of the challenges of designing and maintaining rewards programs is to ensure that the rewards keep up with their high operating costs and low margins. The secret for airlines, as with all companies, is to build the perceived value of their rewards while reducing their costs to ensure a profit. Rewards must be enticing and exclusive to be perceived as valuable.
The privileged premium tiers aspect of airline rewards programs motivate more frequent flyers to use the airline exclusively. Airlines reward that exclusivity with dedicated services, priority treatment, access to luxury lounges, and premium seats.
Many frequent travelers are competitive in the miles and points game and wear their tiers as a badge of honor. But if too many people achieve the same status, the value of that status dwindles. Airlines make adjustments accordingly.
United Airlines Retains The Value Of Exclusivity
United Airlines’ loyalty program, MileagePlus, ranked fourth in the world in 2022, with $4.6 billion in revenue and an average of $31.64 per passenger. The airline enrolled more members during the third quarter of this year, setting a new record. The number of new MileagePlus members has almost doubled compared to five years ago. United Airlines reported the highest number of miles redeemed for award travel in the program’s history during the third quarter of this year. And consumer spending across United Airlines-branded credit cards in the U.S. enjoyed double-digit growth. But MileagePlus benefits from its exclusivity in premium tiers and awards redemption.
“We’ve carefully managed our premier population in recent years to maintain a robust and valuable set of benefits for each premier member,” said Andrew Nocella, United Airlines Executive Vice President and Chief Commercial Officer, during the 2023 third-quarter earnings call. “We very much believe in never causing a situation where everyone has a premier status, which results in no one receiving an adequate level of premier benefits. Our United strategy to offer premier members access to more premium seats than each of our competitors is enhancing the value of our frequent flyer loyalty program.”
Delta Air Lines Angers Program Members
Delta Air Lines also profits from its SkyMiles loyalty program. In 2022, Delta ranked second in the world, after American Airlines, with $5.5 billion in loyalty program revenue, at an average of $32.10 per passenger. And the airline expects to top that figure this year.
“Total loyalty revenue was up 17% over prior year with continued strength in our American Express
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However, the airline recently issued and had to revise some changes to its SkyMiles program after a realignment of membership tiers caused an uproar of the kind the Senators are investigating.
Like United, Delta aimed to ensure that the inherent value of the most attractive perks of loyalty is not diluted. The airline has invested heavily to refresh its lounges, for example, and they are less delightful when overcrowded.
Still, even Delta’s CEO, Ed Bastian, acknowledged that they may have gone too far.
“We had too many changes rolled out at the same time, and we needed to go back and reassess the planned rollout for the new qualification levels,” Bastian said during the Q3 earnings call. “Most everyone also agrees that something has to be done because everyone sees that the premium number of customers that we continue to build are in excess of the premium assets that we have to offer.” The airline, he said, was “figuring out how to better rationalize and make certain that the service levels for our premium customers are where they need to be.”
Shortly after, Delta announced a revision of tiers to strike a balance between the popularity of the SkyMiles program and the benefits of privilege for premium tier members.
Loyalty programs are as valuable to airlines as they are to program members. All airlines want to keep that loyalty growing.
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