Miles-high club
How loyalty programmes are keeping America’s airlines aloft
Many carriers now make their money from credit-card deals
A Delta Airlines plane lands at Los Angeles International Airport./ Photograph: Getty ImagesYou might expect America’s most valuable airline to earn its keep flying passengers.
But you would be mistaken.
In the second quarter of the year Delta Air Lines notched up an operating profit of $2.1bn, comfortably ahead of its domestic rivals.
Buried in the financial statements, however, was a more revealing figure.
Had it relied solely on revenue from passengers, it would have operated at a loss.
Delta is hardly unique in this regard.
Last year American, Southwest and United—America’s other big airlines—also lost money from flying passengers, even as the four jointly made around $14bn in operating profits (see chart).
To be sure, airlines earn revenue from other sources such as cargo.
But what keeps them aloft is a vast loyalty business that binds together consumers, airlines and credit-card issuers.
In recent years frequent-flyer programmes in America have grown ever larger and more lucrative.
How much bigger can they get?
The model is simple: airlines sell miles to card issuers; cardholders earn miles by spending; and those miles are eventually redeemed for travel.
Each party benefits.
Banks and other financial firms gain loyal customers, travellers enjoy flights and perks, and airlines secure a steady stream of profits.
In the quarter from April to June American Express, a credit-card giant, wrote a cheque to Delta for roughly $2.1bn—equivalent to the airline’s total operating profit.
Citigroup, a bank, paid American about $1.4bn and JPMorgan Chase, another lender, handed some $800m to United.
Such transfers, in turn, allow airlines to lower their fares.
When American launched the first mass-market frequent-flyer programme in 1981, the aim was to reward repeat business travellers with free flights and upgrades.
The subsequent involvement of card issuers turned these schemes not just into significant sources of revenue, but also useful tools of corporate finance.
Aviation is volatile, subject to fluctuations in fuel prices, business cycles and the demand for premium travel.
At the same time, airlines must make long-term capital investments in aircraft and infrastructure.
Selling miles to issuers helps manage the mismatch; carriers receive cash upfront and deliver the service later.
Because they control the rules of redemption, they can steer passengers towards off-peak flights and unsold seats.
These days the frequent-flyer schemes of America’s big airlines command valuations in the tens of billions of dollars, sometimes exceeding the equity value of the company itself.
During the pandemic, when airlines faced a collapse in travel and a liquidity crunch, they did not pledge aircraft to raise funds; they borrowed against the future cashflows of these programmes.
The growth of these schemes has been fuelled over the past decade by a proliferation of credit cards dangling ever more lavish travel perks.
Delta and American Express now offer no fewer than seven co-branded cards.
Entry-level versions earn SkyMiles—Delta’s loyalty currency—for every dollar spent; premium tiers come with lounge access, free checked bags and complimentary upgrades.
Delta says that roughly 1% of America’s GDP is spent through its co-branded cards.
Even ones that are not co-branded, such as Chase’s Sapphire Reserve and American Express’s Platinum cards, are closely tied to air travel.
They grant access to exclusive lounges, now fixtures in major American airports, and allow cardholders to convert points into airline miles with a range of carriers.
These cards have been remunerative for financial firms, too.
Annual fees are one source of revenue.
Chase recently announced that its Sapphire Reserve will cost $795 a year, up by 45% from the year before, and American Express is expected to hike the charge for its Platinum card, currently $695 a year, in the autumn.
But the real money comes from the interchange fees collected on transactions.
When a consumer uses a credit card to spend $100 at a retailer, for example, roughly $2 flows to the issuer.
A little under $1.50 is returned to the customer in rewards or rebates.
Total interchange fees amounted to $187bn in America last year, and help explain why the loyalty business has not reached the same altitude elsewhere; in Britain, for instance, they are capped at a rate of 0.3% for credit-card transactions.
How much bigger will America’s loyalty nexus get?
Over the past eight years both Delta and American have more than doubled the revenue they earn from selling miles to card issuers.
United has seen growth of around 70%.
Many airlines now award loyalty status based on how much customers spend, rather than how often they fly.
Today a customer can reach American’s top loyalty tier without ever having stepped on one of its planes.
New partnerships are expanding the loyalty networks.
Delta has teamed up with Uber to award miles for rides; United lists a growing roster of retail partners offering bonus points for spending with them.
Yet the system is also showing signs of strain.
Lounges are overcrowded.
Card fees keep climbing.
And changes to how loyalty is rewarded have ruffled some flyers’ feathers.
Then there are the regulatory threats.
In June a consortium of carriers successfully lobbied against an amendment to the GENIUS Act, America’s new law on stablecoins, that would have capped interchange fees.
But the proposal may re-emerge soon enough.
Airline bosses will need to keep a close eye on the engine that now keeps their companies flying.
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