How Airline Frequent Flyer Programs Make Money

Singapore Airlines KrisFlyer Frequent Flyer Program

Airline frequent flyer programs were first launched in 1979 by Texas International Airlines, which in 1982 merged with Continental Airlines, which in turn purchased and merged with United Airlines. In 1981, lzmnyq American Airlines with it’s AAdvantage program became the second airline to start frequent flyer loyalty programs. Almost all the major airlines around the world, including the discount airlines, now have frequent flyer programs.

Frequent flyer programs were first introduced to foster brand loyalty among customers of the airlines, most importantly among high-yielding business travelers. Generally, frequent flyer incentives were based on miles or sectors flown.

For the most part, airlines are fixed-cost operations. The incremental cost of flying an additional passenger is relatively low if a flight is not full. Therefore, airlines allow customers to redeem their accumulated miles based on redemption charts decided by the revenue management departments at the airlines. Of course, there are blackout periods (customers cannot redeem their seats) during those times of the year when yields are likely to be higher and thus airlines could draw more revenue for higher demand seats from fare-paying passengers.

American Airlines AAdvantage Frequent Flyer Program

With the evolution of airline loyalty programs, airlines introduced the concept of elite tiers. American Airlines was also the first to introduce elite tiers as part of its AAdvantage program. For many elite travelers, access to lounges, priority check-in, fast track security lanes, and other benefits create enough incentives to entice them to stick with their favored airline. Thus, airlines increase the switching costs of using another airline for their customers.

Frequent Flyer Points: Cash Generation Machine

Over time, the bean counters at the airlines realized that the unsettled liability to provide award travel when customers might redeem in the future constitutes a very marginal cost compared to the commercial value of the earned frequent flyer miles for the customers. Airlines started selling miles to business partners and members of thier respective frequent flyer programs at prices significantly higher than their cost. These partners, typically car rental companies, cruise lines, and hotels, could then offer airline miles to incentivize their own customers. Under a co-branded airline credit card scheme, a member can earn miles not only directly with the airline, but also for purchasing the services or products of these business partners.

Co-branded airline credit cards that reward frequent flyer points for purchases

The most prominent of the business partners are credit card companies and banks. Airlines sell these miles to partners such as credit card companies who they offer them to customers to incentivize credit card signups and usage. Again, the AAdvantage program created the first co-branded credit card as a partnership between American Airlines and Citibank in 1987.

The business of frequent flyer programs has generated significant revenues for airlines through advance purchase of miles by business partners. Delta Airlines estimated that SkyMiles, its frequent flyer program, would rake in $1.6 billion in ancillary revenues in 2011.

Frequent flyer programs became such a lucrative business venture that some airlines spun off their frequent flyer programs to generate revenue. Air Canada’s Aeroplan is now a coalition loyalty program owned by Aimia. Aeroplan has evolved into loyalty marketing program with retail partners such as Esso, Home Hardware, Rona, Birks, Sobeys, Thrifty Foods, Nestle Canada and others. India’s Jet Airways recently announced that it is spinning off its JetPrivilege loyalty program.

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