Airline Loyalty Programs Earn More Than Devoted Customers

Airlines promote their frequent-flier programs as a gateway to perks, but it's a two-way street. In fact, some carriers earn more from partnerships related to their loyalty programs than from cash sales. That's even taking into account absorbing the cost of reward travel booked using accrued points or miles. For the record, it wasn't always this way. During the global pandemic, when airlines were reeling from the financial effects of a suddenly stagnant travel market, United Airlines came up with a strategy some airline industry pundits credit with saving the carrier. It all began in 2020 when the airline decided to float the idea of using the future value of its airline loyalty program, United MileagePlus, as collateral to secure much-needed funding. The strategy brought in a whopping $6.8 billion. Delta Air Lines used the same strategy to secure $9 billion, and, in 2021, American Airlines brought in $10 billion backed, in part, by anticipated cash flow associated with its AAdvantage program.

On the flip side, the pandemic-related drop in travel spending coincided with an upswing in the use of co-branded credit cards. In other words, the same people who would, in normal times, be earning miles for flying were, instead, earning points for spending. It's a pattern Luc Bondar, COO and president of United MileagePlus, said lenders could trust to generate a predictable cash flow despite the downturn in travel spending. "We have this great proof point where the aviation sector has been dramatically suppressed for acute periods of time, and the loyalty program, while feeling it, has failed far less and has been able to ride above the fray," Bondar told the Harvard Business Review in 2021. The result? Loyalty programs have become a veritable cash cow, with valuations often exceeding the value of their affiliated carrier.

Still, it's unlikely the value of airlines' loyalty programs would survive as stand-alone income sources. While loyalists will painstakingly plot the best strategies to earn miles, the bulk of loyalty program-generated income is tied to co-branded credit cards. That's probably why every major U.S. carrier offers at least one co-branded credit. United Airlines offers four through Chase. Delta Air Lines partners with American Express. American Airlines works with both Barclays and Citibank. 

Here's what to consider before signing up for an airline credit card. This is how it works: Airlines and their credit card partners split the sometimes hefty card annual membership fees. For example, Delta SkyMiles Reserve cardmembers pay $650 for a membership that includes airport lounge access. That's not a bad return on the annual fees alone. In 2024, the combined membership fees collected for co-branded cards associated with United Airlines, Delta Air Lines, and American Airlines totaled $348 million. What's more, cardmembers tend to pony up the annual fee to maintain access to perks even if they are traveling less frequently. Then, there's the credit score hit that comes along with canceling a card.

What do the airlines' financial service partners get out of the deal? Discounted mileage credits they award to their most loyal customers. Airlines sell miles in bulk to financial institutions. Airlines get funding, and the co-brand partners get a valued perk for potential and existing customers. According to research cited by KelloggInsight, a publication affiliated with the Kellogg School of Management, consumers tend to choose cards — and accept hefty annual fees — based on the perks associated with the card. That means prospective customers who also happen to be frequent fliers are more apt to choose the co-branded card that rewards loyalty with miles. 

And the beat goes on as airlines then collect a percentage every time the cardholder makes a purchase using their co-branded card. What's more, we haven't even touched on airlines' loyalty partnerships with everything from rideshare companies (like Delta Air Lines' new partnership with Uber) and car rental agencies to hotel brands and retail outlets. The income multiplies as loyalty program members use co-branded cards to make a purchase from an airline partner. But in this scenario, every time a purchase is made using a co-branded credit card, the partner airline gets its cash — to the tune of $15.2 billion in 2023.

It's such a successful scheme that the cost of inviting loyal customers to earn and redeem free flights is almost inconsequential. It's difficult to track specific numbers, but based on available information, airline industry watchers posit that, taking into account the income generated by fees and purchases collected through co-branding agreements, a ticket reserved using redeemed miles will probably generate more income than a fully paid ticket on the same flight.

Is there a downside? Yes, but for the moment, it affects loyalty program members and potential co-brand partners more than the airlines' bottom line. According to Forbes, the newly realized value of airline loyalty programs has given airlines the upper hand, allowing airlines to establish stricter standards for mileage redemption and creating competition among potential partners to establish co-brand agreements. Turns out that United Airlines' 2020 scheme to secure funding unexpectedly morphed into one of the most profitable sectors of the airline industry.