How Airlines Quietly Became Banks
Wendover Productions・15 minutes read
Airlines faced financial challenges during the pandemic and turned to loans; United Airlines valued its loyalty program at $21.9 billion, with Delta and American Airlines valuing theirs at $26 billion and $31.5 billion, respectively, showing that airlines' loyalty programs were more valuable than the airlines themselves. Frequent flyer programs serve as significant revenue sources for airlines, with American Airlines alone earning $4.2 billion from its program, prompting airlines to heavily promote co-branded credit cards and loyalty programs to incentivize customer loyalty and generate revenue.
Insights
- Airlines heavily rely on their loyalty programs, such as MileagePlus, as valuable assets to secure loans and generate revenue, with American Airlines earning billions solely from its program.
- Frequent flyer programs, a product of airline deregulation in 1978, have become lucrative sources of income, with airlines wielding significant control over their own currency, influencing partners to pay high prices for points and ensuring minimal losses due to their nearly foolproof design.
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Recent questions
How did airlines adapt during the pandemic financially?
Airlines faced financial challenges during the pandemic, leading them to seek loans; United sought a $5 billion loan and offered its subsidiary, MileagePlus Holdings LLC, as collateral. This shows that airlines had to resort to borrowing money to stay afloat during the difficult times brought on by the pandemic.
What is the value of loyalty programs for airlines?
The value of airlines' loyalty programs exceeded their market caps, indicating that, according to Wall Street, airlines themselves were essentially worthless. This highlights the significance of loyalty programs as valuable assets for airlines, even surpassing the value of the airlines themselves in some cases.
How do airlines generate revenue from loyalty programs?
Frequent flyer programs have evolved into significant revenue sources for airlines, with American Airlines earning $4.2 billion from its program alone. This demonstrates that airlines are able to generate substantial revenue by leveraging their loyalty programs and incentivizing customer loyalty.
What led to the creation of frequent flyer programs?
Frequent flyer programs were made possible by the deregulation of the American airline industry in 1978, with American Airlines pioneering the concept in 1981. This historical context explains the origins of frequent flyer programs and how they became integral to the airline industry.
How do airlines prevent exploitation in loyalty programs?
Airlines shifted to revenue-based loyalty programs, rewarding points based on dollars spent rather than miles flown, to prevent exploitation. This strategic shift in loyalty program structures helped airlines mitigate potential abuses and ensure the sustainability of their programs.
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Summary
00:00
Airlines' Loyalty Programs: Valuable Revenue Sources
- Airlines faced financial challenges during the pandemic, leading them to seek loans; United sought a $5 billion loan and offered its subsidiary, MileagePlus Holdings LLC, as collateral.
- United Airlines valued its loyalty program, MileagePlus, at $21.9 billion, while Delta and American Airlines valued their programs at $26 billion and $31.5 billion, respectively.
- The value of airlines' loyalty programs exceeded their market caps, indicating that, according to Wall Street, airlines themselves were essentially worthless.
- Frequent flyer programs have evolved into significant revenue sources for airlines, with American Airlines earning $4.2 billion from its program alone.
- Airlines heavily promote co-branded credit cards and frequent flyer programs to incentivize customer loyalty and generate revenue.
- Frequent flyer programs were made possible by the deregulation of the American airline industry in 1978, with American Airlines pioneering the concept in 1981.
- Airlines monetize their loyalty programs by selling points to partners like Hertz, with each point potentially earning the airline revenue.
- Airlines shifted to revenue-based loyalty programs, rewarding points based on dollars spent rather than miles flown, to prevent exploitation.
- Dynamic award charts now correlate point redemption rates with cash fares, closing loopholes that allowed for arbitrage between miles and cash.
- Airlines wield significant power in determining the value of their points, influencing credit card companies and marketing partners to pay higher prices for points.
15:11
Airlines' Currency Control and Profitable Programs
- Airlines have significant control over their own currency, allowing them to create more of it for selling purposes, as they are the sole entity able to convert it to cash, giving them immense power. Frequent flyer programs are highly profitable for airlines as they are designed to be nearly foolproof, ensuring minimal losses.
