Something we’ve heard from a few expert investors on airlines, all the value is in their loyalty programs. And that isn’t just a throwaway comment. Analysis by the Financial Times in 2020 found that Wall Street lenders valued the major airlines’ loyalty programs more highly than the airlines themselves. For example, United’s market cap at the time was $10.6 billion. However, lenders valued United’s MileagePlus loyalty program at $22 billion.
This article from The Atlantic explains why. It details the shifts over the past few decades that have turned the airline loyalty program into such a valuable part of the overall business. And in doing so, changed the way these airlines operate.
| These three shifts fundamentally transformed the airline industry. They turned frequent-flier systems into the sprawling points systems they are today. And they turned airlines into something more like financial institutions that happen to fly planes on the side. |
Traditionally, airline loyalty programs issued points for miles travelled. The more you flew the more points you received. However, in 2007 executives at Virgin America realised that miles flown wasn’t a good proxy for the profitability of a customer. In a world of different fare classes, money spent was a better proxy. So they were the first to switch their loyalty program from miles travelled to money spent. And since then, most of the industry has followed.
Today, many airlines look like banks. They just want you to spend with them. Take Australia’s Qantas as an example – credit cards, home loans, wine subscriptions. Their offering goes well beyond airfares and travel. The more your spend, the more points you’ll receive. Where Qantas don’t offer it themselves, they partner. Mobile plans with Optus, share trading with Superhero, internet plans with Kogan. Airlines aren’t restricted to airfares anymore. They just want your spending. And if you spend enough they’ll reward you with a free flight.
This shift has made loyalty programs giant businesses in their own right. Take America’s Delta Airlines. The airline’s credit card has such usage that American consumers now charge nearly 1% of American GDP to Delta’s American Express credit cards.
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