Airlines will be able to lean on their loyalty programs both for short term cash, and to put butts back into airline seats as soon as fear subsides.
They have a history of turning to their loyalty programs as cash cows – either spinning off the business or pre-selling 9- and 10-figure dollar amounts worth of miles to their co-brand credit card issuing banks. They can sell miles at a discount now to passengers who will redeem them later. And there’s never been a more effective marketing vehicle than the frequent flyer program for influencing consumer behavior, just as soon as behavior can be influenced again.
If Large Airlines File Chapter 11, Miles Are Safe
Large loyalty programs have too tremendous value. They are a profit center not a cost center. One of the first things an airline does in bankruptcy is reaffirm their mileage liability because doing so is crucial to continuing (1) the revenue streams of those programs, so that customers are willing to continue to earn miles and (2) to attract loyal customers to fly and save the airline.
When United entered bankruptcy filings showed that Mileage Plus (there used to be a space between the words) was the only profitable part of their business, and loyalty programs have become far more profitable over the last two decades.
Airlines Can Sell Miles – Or Sell Their Frequent Flyer Program
Brian Sumers covers some of the times that airlines have gone to their loyalty programs for liquidity.
- Air Canada spun off Aeroplan for cash (and after nearly 15 years re-acquired the program)
- United and Delta each pre-sold miles to their credit card issuing bank partners, the former for about $500 million and the latter twice totaling about $1 billion.
American did it too with Citibank. Banks gained access to large quantities of miles with a bulk purchasing discount, which they used to reward customers for opening new cards and to incentivize spending. We didn’t really have category bonuses or earning more than one mile per dollar on most card products before this, and we didn’t have 100,000 mile bonuses either.
Avoid Double Counting
Before they started asking the federal government for a bailout large airlines were touting their 11 figure ‘unencumbered assets’ – planes they own, gates, slots, spare parts, real estate and more. Those assets are likely worth a lot less today than the last time they were marked to market.
In order to access cash from co-brand partner banks they’re going to have to pledge some of these assets too, because banks have to know that if they don’t get a chance to award the miles they aren’t out the money. In the past when airlines pre-sold miles the deals were structured as loans, with collateral like gates and slots pledged.
American, for its part, still owed money to Citibank when it emerged from bankruptcy merging with US Airways. With the airline profitable, they paid off the loan (ending the requirement to sell miles cheaper).
Not A Panacea For Small Airline Programs
Small airline loyalty programs go away, even programs that have spun off as separate businesses. There are multiple mechanisms by which this happens.
- The air berlin model. topbonus was a separate business from the airline, but without the airline continuing to operate the loyalty program went out of business. To prop up the airline topbonus had been extending credit for the miles being awarded to passengers, not getting paid, and when the airline was gone all topbonus had was bad debt.
- The zombie program model. When LatinPass lost its airline partners it became GlobalPass, they had to buy airline tickets for redemption (costs go up, devaluation ensues) and earning miles was basically through a shopping portal. They had no way to offer outsized value. Without partners they hung on for awhile as a zombie program. That’s how I view Jet Privilege after the demise of Jet Airways. Loyalty was a separate company but how does that company offer value to consumers?
- The airline goes out of business. As long as the loyalty program has much value the airline won’t go out of business, however smaller carriers without a big customer may go under – or sell the data and perhaps even accounts of customers as part of their liquidation. More large airlines have had mileage programs survive than fail, and the failures of large loyalty programs are in the past when the programs didn’t have the revenue streams they do today.
Airlines Should Sell Miles Now, Too
Prices will have to be lower than before, but that airlines may be better able to sell miles right now than actual flight itineraries. Miles are necessarily something to spend in the future, while it’s hard to know exactly what itineraries to book even at a low price.
Trustworthy mileage programs that respect their customers and give substantial advance notice of changes are better positioned to generate cash than fly by night programs that lack transparency, but less trustworthy programs just have to discount miles more.
The margins on mileage sales are usually quite large, at ‘standard sale’ prices of around 1.8 cents gross margins are frequently around 80%. There’s room to sell for less, and remember from the airline’s perspective miles will be redeemed later and they get cash now.
A dozen years ago airlines would run fare sales to generate cash that they’d spend right away. Mileage sales are an underexploited tool.
Get Those Promotions Ready
Customers are going to want to keep their status, and struggling airlines are best-positioned to reward high frequency customers. There are more empty seats and even more empty first class seats, making upgrades easier to get (with fewer passengers competing for them) in recent times.
There’s an opportunity to incentivize members with elite qualifying promotions, with big bonuses for going above and beyond status, and with new benefits. There’s also an opportunity to offer big miles for travel now. That usually leads to devaluations later but as long as customers earn big miles and burn them in the same period everyone comes out well (the airlines are hoping that redemptions come later, and for many customers they will).
Back in 2004 United ran a quadruple miles offer when they meant to offer triple miles. That brought back the mileage run. It’s time to dust off the old playbooks that were far more generous than what we’ve seen recently, with airlines valuing miles a lot less than current cash and getting people back in the air.