Should Airline Executives Rue the Day They Created Frequent Flyer Programs?

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. So what could delta be thinking in destroying the value proposition of their once attractive program?

  2. You can print and sell your own currency and then devalue it or limit its use without legal consequence under state law. Sounds like a pretty amazing opportunity.

    The problem is they are showing no restraint, selling so many miles that they are forced to devalue in harsh ways. I think the trend of cutting down saver availability to funnel toward sub optimal redemptions is the way of the future.

  3. I love how the picture of the shady / corrupt-looking businessman is Gary, and not actually an executive at Delta scheming to devalue points in the smoke-filled back room.

  4. @Larry. “You can print and sell your own currency and then devalue it or limit its use without legal consequence under state law. Sounds like a pretty amazing opportunity.”

    Sounds like the US government.

  5. In fact, it isn’t state law at all. Under Northwest v Ginsberg state law remedies cannot be pursued against frequent flyer programs, as they’re pre-empted by the Airline Deregulation Act.

  6. These programs began when there was actual competition and the airlines were trying to gain customers from other carriers. Now, thanks to our bumbling government, there is no more real competition. So, why bother with the programs, unless they actually are profit centers?

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