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You’d be forgiven to think that an airline’s loyalty program was just a marketing strategy to capture your repeat business. And it used to be, until one day, these programs became more valuable than the airlines themselves.

Frequent flyer programs (FFPs) began in 1979, when Texas International Airlines introduced a simple miles accumulation model for loyal passengers to be rewarded. The program instantly attracted attention across the industry – major airlines including American Airlines ($AAL), Delta Airlines ($DAL), United Airlines ($UAL) and British Airways all followed suit within two years. While Texas International no longer operates, its marketing model birthed a new beast for the airline industry. 

FFPs have evolved so much that American Airlines’ AAdvantage and United Airlines’ MileagePlus were valued at US$24b and US$22b respectively in 2020 – much more than the airlines’ market caps of US$6.5b and US$10b at the time. 

How this happened is simple. Frequent flyer programs have become a freestanding revenue-making segment for airlines that now caters to more than just airline passengers. 

Thanks to the strong allure of travel, airlines have found a way to profit from a business-to-business (B2B) model. Via the “coalition monetisation model”, other companies purchase frequent flyer points from the airline to offer to their customers. The business model can generate revenue in different ways too, such as when the customer earns points, redeems points, when points expire, or even when deferred revenue accrues interest.

An example of the business model at work is where a bank launches a new credit card product that gives customers frequent flyer points for every purchase. Behind the scenes, airlines bill the banks at a set rate for every point issued to the banks’ customers. When a customer redeems points, on the other hand, airlines can set their own “exchange rate” – earning more by lowering the value of points, fulfilling reward seats only for low-demand flights or offering third-party goods and services at a high points-to-value rate (the main reason we deal with 'points' now rather than 'miles'). 

While FFPs have several more potential revenue streams than just the coalition model, this is where programs make the most money. United’s MileagePlus received 71% of revenue from third-party partners in 2019 for example, while Delta Airlines estimates its partnership with American Express ($AXP) to bring in approximately US$7b annually by this year. 

Most airlines don’t publish the exact numbers generated by FFPs, however Qantas Airways ($QAN) does shed some light. Impressively, out of its four segments (Qantas Domestic, Qantas International, Jetstar, Qantas Loyalty), only Qantas Loyalty made a profit last year.

Are you in on the mileage points game, or do you think it's rigged?


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