Miles and points for airline loyalty programs have always been seen as a fantastic perk for both the frequent flyer and aspiring traveler, who either enjoy or strive to earn the miles for free flights.
Last week, Bloomberg released an article titled “Airlines Make More Money Selling Miles Than Seats,” which describes how miles and points are a fantastic perk for the airlines as well. According to the article, the sale of these miles and points can account for more than half of their total earnings, as was the case for American Airlines.
The biggest buyers of these miles and points are banks who issue airline rewards co-branded credit cards. For example, the Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard® is offered in a partnership between CitiBank and American Airlines that has lasted nearly 3 decades.
Banks obviously see an advantage in purchasing these miles in order to attract customers who are loyal to a particular airline. The banks hope to develop a banking relationship by offering potential clients enticing mileage signup bonuses and money-saving benefits, while the customer gets to fly their preferred airline using perks from a co-branded credit card.
Most of these co-branded credit cards come with an annual fee, which banks can see as a guaranteed revenue stream for loyal customers with higher-than-average income. Banks are also hoping you’ll use your co-branded airline card as much as possible to generate merchant fees, which earn the bank money with each swipe you make.
In its securities filings, American Express disclosed that its largest airline co-brand portfolio, Delta Skymiles, accounted for nearly 7% of its worldwide billed business in 2016 and 20% of its cardmember loans as of December 31, 2016.
That’s big business for the banks. But it’s also big business for the airline: Delta Air Lines Inc. said it expects its American Express partnership will yield $4 billion in revenue per year by 2021.
According to the article, banks spend an estimated 1.5 cents to 2.5 cents per mile/point to buy from the airlines. With the number of miles and points banks have been offering for having and using these co-branded credit cards, it becomes apparent how lucrative this business is for the airlines’ earnings!
The airlines are still responsible for all the miles and points they sell, and they must fulfill their commitments by providing either free flights or products/services through their other partners when the customer chooses to redeem their miles and points.
Obviously, if your miles or points expire or are never redeemed, then the airlines are making 100% profit from these sales. When you do choose to redeem them, the article states that the airlines are making an estimated 3 times the amount they originally sold those miles and points for. If all these estimated numbers are correct, then it costs airlines between .5 and .83 cents for every mile you redeem.
With all the “devaluations” that we’ve seen recently from the airline loyalty programs, these numbers may seem shocking. But since devaluations have mostly impacted longer routes, specific partners, or certain classes of service, it appears that the airlines are simply making what’s more expensive to them, more expensive to the consumer. So you can expect to continue seeing an increase in the number of miles needed for those higher-priced redemptions.
Using highly negotiated contracts, banks are buying these miles and points by the billions from airlines with few details about the actual cost and value of these deals. Even airline CEOs think more transparency is needed to reflect the actual value of the airline when looking into the business of their loyalty programs.
Investors could see the profits made from the sale of miles and points as a huge cash cow, but airlines don’t want to disclose how much they are actually making from these sales to keep it a secret from their competitors. But we can see why airline CEOs want more transparency in this lucrative business: some, like Doug Parker of American Airlines, get paid completely in company stock.
The banks are probably the most well-versed in the going rate for miles and points from the airlines, since they often work with multiple loyalty programs and are the largest buyer of miles and points. But they also do not disclose this information.
Consumers can quickly learn how much the airline will sell miles and points for directly; it’s usually a much higher cost that what the banks pay. But there are times when airlines run promotions to earn up to double the number of purchased miles, which can get you pretty close to the going “bank rate.”
Overall, the economics of airline loyalty programs and the value we place on miles and points is a very interesting thing to evaluate. From the airline to the bank and of course the consumer, we all set a different value for our miles and points because they function differently for each party.
We think it’s important to always strive for the maximum value you can get out of your points/miles. For example, you’d want to understand points and miles valuations before booking that round-trip domestic ticket for 25,000 miles when you could purchase it for $150 cash instead.
Personally, we think this big business in the sale of points and miles is a win-win for everyone, with the airlines making a significant portion of their earnings, the banks gaining more customers by offering tons of miles for their co-branded credit cards, and the consumers earning lots of points with their favorite airline programs.