Can Frequent Flyer Miles Save Airlines?
WHY YOU SHOULD CARE
Because your award miles are probably safe … and could save the airlines, too.
By Nick Fouriezos
You’re probably worried that your frequent flyer miles will expire if flying remains out of the question for long, thanks to the pandemic and travel restrictions. But if there’s one part of their business practice airlines will try and protect, it’s their miles program.
While these programs are marketed as customer loyalty initiatives, they’re major money spinners for airlines, which sell these programs to banks that pay big for your frequent flyer miles. Airlines typically earn between 1.25 to 1.5 cents per mile. Small change? Far from it.
Frequent flyer miles programs earned America’s seven largest airlines nearly $4 billion in revenue in the first half of 2018.
That’s according to research by Joseph DeNardi, an airline industry analyst at investment banking firm Stifel. Those types of numbers are what have led experts to say that some airlines make upwards of 50 percent of their revenue from the branded credit card in your pocket. In other words, loyalty programs make airlines more money than actually flying people from place to place. “These programs represent the lion’s share of the profits,” says Evert de Boer, a managing partner at On Point Loyalty who has advised more than 25 airlines on their frequent flyer programs.
And with few people in the air, those programs are even more crucial for carriers at a time the aviation industry is expected to see losses of more than $300 billion in 2020, according to the International Air Transport Association. That’s because airlines can go back to the banks and pre-sell billions of miles for hard cash to stay afloat. “In that sense financially, the programs could play a very important role in their survival,” de Boer says. “They are a lifeline.” Since these will be straight deals, they also won’t come with many of the conditions airlines have had to accept for the $25 billion industry bailout from the federal government. A part of the bailout will be as loans, and the Treasury will receive warrants to buy stocks in the airlines.
Undoubtedly, airlines will have to sell points to the banks at a steep discount, given their poor negotiating position. But it isn’t without precedent. In 2004, Delta received $600 million in advance payment from American Express for its miles, while United Airlines got a similar $600 million cash influx for points from Chase. “There is a possibility for banks to dramatically help airlines by upping the relationship they’ve had in the past,” says Bryce Conway, founder of 10xTravel.com, which advises consumers on how to maximize credit card and flight awards programs.
There is a huge satellite industry around promoting these airline affiliated credit cards — websites earn a commission for each signup — from midsize companies like Conway’s to The Points Guy, which last year banked an eye-popping $50 million in profits, according to a Business Insider profile in March. However, many of those companies have also been grounded as banks put their affiliate bonus programs on hold. “The first thing the banks did is pause all their affiliate programs. Over 90 percent of our affiliate links don’t even work, so our entire industry is effectively furloughed,” Conway says.
What makes the calculus for banks different this time is that they are suffering, too … which may make them loath to front cash, particularly without knowing for sure which airlines will survive the cataclysmic convergence of mass unemployment, recessionary stock drops and intense travel restrictions. After all, they could buy up miles only to watch them become worthless if a blue-chip airline suddenly collapses. “The problem we have is banks are also in a bit of a pickle right now,” Conway says. “They’re trying to dramatically cut down on their books.”
Still, that won’t change the good news for passengers — that airlines will be desperately working to show banks that their frequent flyer programs remain robust. Almost every airline has cut charges for loyalty programs or extended qualifying dates and reduced requirements to reach elite status, acknowledging that most of their premier passengers are grounded by the global shutdown. Southwest has extended its popular Companion Pass program by months for some customers, and others, such as Delta and United, are selling miles directly to consumers at deeply discounted rates (note that even on sale, it is almost never a good financial play to spend cash for points). “We have also seen quite a bit more award availability on virtually all airlines,” Conway says.
Loyalty programs will likely play a huge role in shaping the new future of the airline industry too, de Boer says. With consumer confidence shaken, the first flyers to return to the skies will most likely be those most engaged customers … and so the short term success of airlines will almost surely rely on how well they can keep their loyalty. Also, in the more uncertain, post-pandemic world, de Boer expects that ticket buyers will think twice about non-refundable tickets, having seen how easily their plans can be disrupted by forces outside their control.
Because most loyalty programs already offer more flexibility than your typical ticket, they will probably become a model for incorporating flexibility across the industry. “These award programs are well positioned to help the airlines come out of the trough,” de Boer says.