Have you ever owned a Starbucks card? The one where you earn points or stars and you get a free drink after you purchase like 12 drinks if I'm right? Not the one that comes out every Christmas but yeah that counts too. It's a loyalty card and why do we have it? To save money, of course.
We offer our loyalty and consistent patronage to a business in exchange of discounts, better perks, better prices, special offers and in this case with the Starbucks card, a free drink.
These make us feel like we are a valued customer and are incentivized to spend more with the company making it a vicious cycle! Okay its not a vicious cycle but it is a continuing cycle, and the airline industry does the same.
Airline loyalty programs started in the early 1950s but only really started to get big when American Airlines first introduced theirs as a promotional gimmick. Since then trillions and trillions of points have been earned worldwide.
Obviously having loyal customers fly with the airline is great for revenue. But what you probably didn't know is that the frequent flyer programs are tremendous money makers.
The way it works is airlines sell miles to program partners like banks, car rentals, hotels and so on. Banks are the biggest buyers of miles as they issue miles to the cardholder as a reward for spending on their credit cards. These banks purchase miles from airlines at the billions depending on the deal.
In recent years most airlines miles are earned through credit card spends and not the traditional way of actually flying with the airline.
During the pandemic
With the Coronavirus crippling airlines and the entire travel industry, Airlines have been desperate for cash. Philippine Airlines recently said it was losing $300M of revenue per month since the virus has hit the country.
So airlines have been selling A LOT of miles to banks at huge discounts and the banks aren't passing off on the opportunity despite the demand for travel still being low in the near future. Airlines also sell miles to other partners but nothing compared to what the banks are buying. We're talking about millions of miles being sold at a discount to these banks maybe even billions depending on the airline and the bank's deal.
Just how big are the revenues are from these loyalty programs? Depending on the airline, The revenue from frequent flyer programs accounts to around 10% to as high as 25% making loyalty a significant contributor to these airlines' bottom lines.
Bottom line
When you really think deep about it, loyalty programs are extremely amazing for airlines. Since the frequent flyer program is a business itself and is ultimately selling you a promise, which is "free flights in the future", in exchange for your business now. Isn't that a tad bit mind blowing to say the least? I mean it costs the airline almost nothing for it too.
With the abundance of miles in the market in the near future we have yet to see how airlines will play it out as airlines have been devaluing their miles in recent years and we've been needing more and more miles to redeem free flights. Fingers crossed that we don't see any huge devaluation from our favorite airlines.
The important thing to understand is that frequent flyer programs have become profitable for themselves, independently from the actual airline operations. The more knowledgeable we are of how the system works the better we can maximize our travels and travel more.
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