The pandemic has clarified one issue we long-suspected but now have numbers to back-up: airlines are in the loyalty business to make money and those frequent flyer programs are the reason why airlines performed so well financially prior to the pandemic. The reliance on loyalty creates a dilemma for airlines: will squeezing more profit through cutbacks and “enhancements” actually increase profit or ultimately diminish it?
Airlines Make Money Through Loyalty Programs, Lose Money Flying
Chew on this: in 2019, the American Airlines AAdvantage program generated $5.9 billion in cash collections with a margin of 53%.
As noted in the Wall Street Journal, Stifel analyst Joseph DeNardi projects that the equity in AAdvantage is $31.27 billion while the equity of the core airline business is -$19.45 billion.
Sure, the pandemic has exacerbated the issue, but even before it American Airlines lost money flying. And a lot of it…
Delta and United also leveraged their frequent flyer programs. These programs also count for the bulk of their profits and DeNardi also projects that United Airlines loses money flying.
The Implications For Airlines
My financial analysis stops here. Instead, I want to discuss the implications for loyalty and issue a warning to folks like Rick Elieson at American Airlines, Karen Zachary at Delta, and Luc Bondar at United.
Airlines need loyalty programs to survive. But it’s more than that: they need consumer interest in those loyalty programs. That means they need to offer value in order to cajole customers to be loyal. And when they do, customers pay more. Certainly, I can personally testify that I often pay more for airlines I want to fly.
We’ve seen nasty devaluations over the last year at Delta and United. Many of my readers have responded by cutting up their airline co-branded credit cards. I have too. Let’s not kid ourselves: we’re not the only ones.
Being an airline free agent has its advantages, but historically there has been such a tremendous two-way benefit to loyalty. Customers still want that. I certainly still want that.
And so, particularly as we enter the beginning of the end of the pandemic, airlines face a choice: continue to tighten the screws which push away discretionary passengers or offer the sort of value that rewards those willing to go out of their way to fly your carrier.
I’m talking about many things. Onboard service should return to pre-pandemic levels, a reason I paid a huge premium to recently fly JetBlue (and would do it again). Loyalty program devaluations should not punish those who redeem for premium cabins by removing sweet spots that were mutually beneficial and thereby mutually profitable.
A continued erosion of value in the frequent flyer program will inevitably lead to more customers simply cutting up their co-branded credit cards. When that happens, the gravy train ends.
It’s really that simple.
As airline loyalty programs devalue, discerning customers will simply pivot to cash-back credit cards or cards with flexible transfer partners. It’s already happening, but it’s not too late for an innovating airline to offer more value in a way that will attract new customers. Coupled with honesty and transparency, I view that as a recipe for financial success.
I find the numbers shocking, but not just because I never figured airlines relied so heavily on loyalty programs to drive profits. I also find the numbers shocking because I view many of the customer-unfriendly devaluations we have seen over the last year as biting the hand that feeds it.
That only works for so long.