America’s Golden Eggs: Why are giant U.S. airlines so profitable now? Don’t overlook the importance of FFPs

Aug 1How did they do it? How did U.S. airlines— especially legacy airlines— transform themselves, over the course of a decade, from financial laughingstocks of the global airline industry into paragons of profitability?

Certainly, the “Three Cs,” as they are often called in these pages—consolidation, capacity discipline and charging extra for products and services that were once included (i.e., ancillaries)— explain much of the transformation. But don’t forget something else—something that, this very morning, has undergone its biggest transformation yet at the airline that invented it.

No exaggeration here: loyalty programs (or frequent flier programs, or FFPs) explain as much of the profitability outperformance of U.S. carriers as any other factor, even as American Airlines, which 35 years ago handed out the world’s first frequent flier mile, today becomes the last of the U.S. Big Three to stop really awarding miles at all. (They’re still called “miles,” but now, as at Delta and United and every other U.S. airline except Alaska, they’re really points based on how much customers spend rather than how far they fly.)

Sound improbable? Well, consider that each year, Delta likely sells around $3b worth of SkyMiles to its partners, who in turn award those miles to their own customers. This includes American Express, most prominently, but also hotel chains, other airlines and countless nontravel retailers—the lure of miles can even incentivize someone to order a case of wine. FFPs have costs, of course, including that of providing award seats that someone else might have purchased, or that the customer redeeming the award might have purchased if not for the FFP. Still, the sale of miles is high-quality revenue that the airline earns without even carrying passengers. Indeed, Delta—like American and United—realized years ago that an infrequent but loyal flier can be a lucrative customer.

Delta’s beleaguered European partner Air France/KLM, on the other hand, probably sells more like $1b in miles to partners. (Airlines don’t regularly publish these figures, but they can be estimated from other statements made throughout the years about the size of their programs, dollar amounts of increased revenues from new co-branded credit card deals and so forth.) Lufthansa as a company, for example, is about the same size as United, but its FFP has only about a third as many members as United’s pro-…

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