The penultimate paragraph of a New York Times article this morning contains the following:

Many [airline executives] rue the day in 1981 when American Airlines introduced its frequent-flier program and resent the consumer entitlement that resulted, even if airlines did take for granted the loyalty that the programs fostered for so long.

It’s often said that airline executives would eliminate frequent flyer programs if they could. The simplest form of the argument is:

• They’re expensive
  
• Everyone has one, so they don’t create an advantage

Of course, that’s a huge mistake and they’d do well to remember the reasons that the programs exist in the first place, and the benefits they provide not just to consumers but to airlines themselves.

• Better, more targeted, less expensive marketing compared to what came before. Programs allowed one-to-one marketing directly to an airline’s customers, rather than merely advertising broadly in magazines and on television.

• Billion dollar businesses in their own right. It’s difficult to dismiss any business that’s been created which has billions of dollars on standalone revenue. Delta’s co-brand American Express deal alone is $2 billion.

• Airlines were kept afloat through tough times with cash infusions to their loyalty programs. Frequent flyer programs were able to pre-sell half a billion dollars worth of miles (and in some cases more) to their bank partners, providing them with the kind of liquidity that helped them continue to operate during the worst of the recession. United received debtor-in-possession financing and bankruptcy exit financing from its card partner — literally continuing to fly as a result of its mileage program, which was the only profitable part of the company when it filed Chapter 11.

• Even little Aeromexico has a program worth $1 billion. As it prepares for its IPO, that $1 billion valuation looks fairly standard for a carrier of its size and is similar to the valuation reflected by outside investments in the Avianca LifeMiles program.

Whether or not an IPO makes sense — I tend to think that a program isn’t worth more as a publicly traded entity than it is wholly owned by its associated airline, and thus find it likely that the value of the program is fully reflected in the share price of the overall company — it’s undeniable that these are valuable businesses which benefit their parent airlines.

If Aeromexico’s program is worth a billion dollars, then United’s and American’s could easily be worth ten times that. But even if they’re worth only five times as much, that’s still ~ 20% the current market cap of each company.