I’ve said it before, and will keep reminding everyone until the world stops saying ‘frequent flyer programs are going to end’ and ‘airlines need to cut costs by chopping from their frequent flyer programs.’
It’s important to understand the frequent flyer programs are the most profitable part of airlines.
Airlines aren’t just about transportation. In some cases they aren’t even primarily about transportation.
Their loyalty programs in particular were huge innovations. And I’ve written in the past about how United Airliens continued to fly through bankruptcy, that it needed to stay in operation, so support the underlying credit card business(!). That’s why the issuer of the co-branded United Visa provided its debtor-in-possession financing, and also provided its exit financing, not to mention prepurchased blocks of miles to provide additional liquidity.
I’ve given examples of this last notion — the prepurchase of large chunks of miles — with Delta in the past. One more than one occasion American Express has ponied up as much as half a billion dollars at a time to prepurchase miles. They’re determined to keep Delta going and liquid, and are confident enough to put real money on the line.
Alaska Air’s profitability is in large measure driven by Bank of America’s purchase of miles, the volume of which tends to be tens times as great as the airline’s annual profit or loss.
And US Airways’ acquisiton by America West was made possible in large measure by funding from Juniper Bank — which in turn acquired the right to issue a US Airways Mastercard.
Meanwhile, Air Canada’s Aeroplan managed to spin off its frequent flyer program as a separately traded entity, raising much cash. And it has further managed to obtain ongoing fnancing from this separate company.
So it should come as no surprise that American — in announcing $2.9 billion in new liquidity — generated a full $1 billion of that from the advance sale of miles to Citibank, which issues American Airlines co-branded credit cards.
Airlines sell their miles. They have a model where they offer seats that in large measure might otherwise go empty so the programs purchase those seats from the airlines at a discount. They spend less on redemptions than the revenue they raise per mile. They make a profit. And they’re totally in control of their cost structures and inventory.
As long as they don’t mess with the consumer perception of value in their programs, they’re a perpetual money making machine. And the engine that drives their businesses.
That’s why I constantly remind proprietors of these loyalty programs not to kill the golden goose. It’s often tempting to try to ‘reduce costs’ by either limiting the availability of awards or raising the price of those awards. But the long-run effect is to turn off consumers to the programs, undermining their profitability.
Of course, some dimunition in value is inevitable. These are proprietary currencies with no central bank. And as they print more ‘money’ without corresponding increases in the total award seats available, the price of those seats will rise or else severe shortages will occur. Basic monetarism.
Which is why you should always redeem your miles now, they’ll never be worth as much in the future as they are today. But keep earning miles, just burn them in roughly the same period or under the same award chart as they were earned…