Frequent flyer programs have become a cornerstone of the airline industry, transforming the way airlines engage with their customers and boost profits. These loyalty initiatives first introduced in the 1980s, have evolved into sophisticated marketing tools that provide airlines with a competitive advantage in a crowded market. Today, these programs not only reward loyal customers but also serve as powerful engines for revenue growth, customer retention, and data-driven decision-making.

Frequent flyer programs utilize some of the most sophisticated loyalty program strategies to date, with its impact on airline profitability being both multifaceted and significant. This article explores five key ways these loyalty programs directly contribute to an airline’s bottom line. From enhancing customer lifetime value to optimizing revenue management strategies, frequent flyer programs generate financial benefits and strategic advantages that make such programs indispensable to modern airlines. This includes enabling airlines to leverage customer data to refine their marketing and yield management strategies to drive long-term growth in the highly-challenging landscape of air travel.

The Evolution of Airline Loyalty Programs

The journey of airline loyalty programs has been marked by significant transformations since their inception. These programs have evolved from simple mileage-based systems to sophisticated revenue-generating tools reshaping the airline industry’s approach to customer retention and profitability.

Early mileage-based systems

The concept of frequent flyer programs emerged in the late 1970s and early 1980s. Texas International Airlines is credited with creating the first mileage-based frequent flyer program in 1979^[1]. However, it was American Airlines that pioneered the modern loyalty program with the launch of AAdvantage on May 1, 1981^[2]. United Airlines quickly followed suit, unveiling its Mileage Plus program less than a week later ^[1].

These early programs were primarily distance-based, rewarding customers based on the miles flown. The simplicity of this model appealed to travelers, who could easily understand and track their progress towards free flights.

Transition to revenue-based models

As the airline industry evolved, so did loyalty programs. In recent years, many airlines have shifted towards revenue-based models. This transition aligns loyalty rewards more closely with customer spending rather than distance traveled ^[2]. JetBlue were one of the early pioneers of this change, revamping its TrueBlue program to award points based on dollars spent on airfare in 2009 ^{[3] .}

This shift reflects the airlines’ recognition that a customer’s value is better indicated by their spending rather than the distance they travel. Revenue-based programs have gained popularity due to their perceived fairness and simplicity for flyers to understand ^[4].

Expansion of earn opportunities

Modern loyalty programs have significantly expanded the ways members can earn points. Airlines have formed partnerships with various industries, allowing customers to accumulate miles through everyday activities unrelated to air travel ^[1]. For instance, the AAdvantage program from American Airlines has partnerships with over 1,000 retailers, enabling members to earn miles through shopping ^[5].

Co-branded credit cards have become a crucial component of these expanded earning opportunities. In 1987, American Airlines partnered with Citibank to offer a branded credit card, setting a new industry standard ^[2]. Today, these partnerships generate billions of dollars for airlines, with banks paying substantial amounts to maintain these relationships ^[6].

Modern multi-tiered programs

Contemporary loyalty programs have evolved into complex, multi-tiered systems offering a range of benefits beyond free flights. These programs now include perks such as priority boarding, lounge access, and upgrade opportunities. The introduction of elite status levels has created a hierarchy within loyalty programs, encouraging continued aspirational customer engagement and spending.

Five ways frequent flyer programs boost airline profits

Increased load factors

Frequent flyer programs have become a cornerstone of airline profitability, significantly impacting load factors. These programs incentivize customers to choose a particular airline, even when other options might offer more direct routes or lower prices ^[2]. By encouraging loyalty, airlines can fill seats that might otherwise go empty, especially during off-peak times. This optimization of capacity utilization directly contributes to increased revenue and profitability.

Cash injection into the airline

Loyalty programs enable members to earn points or miles by flying, but also via third-party partner transactions. This includes banks (via credit card spend), retailers, travel companies, insurance providers and more. When points or miles are earned, the frequent flyer program invoices the partner for the cost of the points. The revenue collected is set aside to cover the cost of the reward when the member makes a redemption. A modern frequent flyer program will provide a range of options for members to choose, however the majority (90 percent plus) of points or miles will be redeemed within the airline (or partner airlines). This represents a significant injection of revenue into the airline funded by frequent flyer partnerships. It is particularly valuable during economic downturns, where members can use point or miles to subsidize their travel expenses, ensuring they continue to travel and support the airlines revenue management.

Loyalty lock-in effect

Frequent flyer programs establish a special relationship between consumers and airlines, increasing the influence of switching costs on customer retention ^[8]. This lock-in effect (or calculative commitment) makes it more challenging for customers to switch to competitors, as they have invested time and effort in accumulating miles or points.

The programs acts as an additional mechanism to retain customers, particularly in competitive industries with interchangeable suppliers like the airline sector ^[8].

Yield optimization

Airlines leverage frequent flyer programs to optimize yield through strategic pricing and redemption policies. By controlling the value and availability of reward seats, airlines can maximize revenue from both paid and award tickets.

For example, airlines can exchange miles for seats that would have otherwise gone empty or sold at highly discounted fares, effectively increasing the yield on those seats ^[7].

Additionally, the ability to dynamically price award redemptions allows airlines to adjust to market conditions and demand fluctuations.

Data collection & utilization

Frequent flyer programs provide airlines with invaluable data on customer behavior and preferences. This data allows airlines to create individual traveler profiles and offer personalized experiences including one-to-one pricing and customized ancillary services ^[9].

The close cooperation with non-airline businesses further enhances this data collection, providing insights into customers’ spending habits beyond air travel. Airlines can use this information to optimize route networks, tailor marketing efforts, and improve overall customer experience, ultimately driving profitability through more targeted and efficient operations.

Financial benefits

Higher profit margins

Frequent flyer programs have become a cornerstone of airline profitability, often generating substantial profits that rival or even surpass those derived from their operating networks ^[2]. For instance, British Airways’ loyalty program contributes £1 million a day in profits to its parent company, IAG ^[2]. This financial success stems from the unique business model of loyalty programs, where airlines create points out of thin air and sell them for real money to banks with co-branded credit cards ^[10].

Higher customer lifetime value

Loyalty programs significantly impact Customer Lifetime Value (CLV), a crucial marketing metric representing the total amount a customer spends on a brand’s products or services throughout their relationship ^[11] Research shows that a 7% increase in brand loyalty can lead to an 85% rise in CLV ^[11]. Moreover, customers with an emotional connection to a brand have a 306% higher CLV, with 71% recommending the brand to others ^[11].

Better yield

Airlines leverage frequent flyer programs to optimize yield through strategic pricing and redemption policies. By controlling the value and availability of reward seats, airlines can maximize revenue from both paid and award tickets ^[7]. This approach allows airlines to exchange miles for seats that would have otherwise gone empty or sold at highly discounted fares, effectively increasing the yield on those seats ^[7].

Access to low-cost capital

During the COVID-19 pandemic, airlines utilized their loyalty programs as collateral for low-cost capital. For example, United Airlines issued $5 billion in debt against its MileagePlus program in 2020 ^[12]. This strategy helped airlines lower their interest rates and stay afloat during a period of significant travel decline ^[13].

Bankable asset

Loyalty programs have become valuable assets for airlines, often surpassing the market capitalization of the airlines themselves. For instance, United’s MileagePlus program was valued at $22 billion, while the company’s market cap was only $10.6 billion ^[10]. Similarly, American Airlines’ AAdvantage program was valued between $18 billion and $30 billion, significantly exceeding the airline’s market value of less than $7 billion ^[14].

Conclusion

Frequent flyer programs have become a game-changer for airlines, boosting profits and reshaping customer relationships. These programs have evolved into sophisticated tools that go beyond just rewarding loyal customers. They now serve as powerful engines for revenue growth, customer retention, and data-driven decision-making. The financial benefits are substantial, with some loyalty programs even surpassing the market value of the airlines themselves.

The impact of these programs on airline profitability is far-reaching and multifaceted. From increasing load factors and providing cash injections to creating a loyalty lock-in effect and optimizing yield, frequent flyer programs have a significant influence on airlines’ bottom lines. What’s more, the vast amount of data collected through these programs allows airlines to tailor their services and marketing efforts, leading to improved customer experiences and, ultimately, higher profits. As the airline industry continues to evolve, loyalty programs will undoubtedly play a crucial role in shaping its future.

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References

[1] – https://aeroxplorer.com/articles/the-evolution-of-airline-status-and-frequent-flyer-programs.php
[2] – https://www.oag.com/blog/redefining-loyalty-next-frontier-traveler-relationships
[3] – https://thepointsguy.com/guide/evolution-frequent-flyer-programs/
[4] – https://w3.accelya.com/news-views/insights/blog/why-airlines-are-shifting-towards-revenue-based-loyalty-programs/
[5] – https://www.travelperk.com/blog/airline-loyalty-programs-comparison/
[6] – https://airlinegeeks.com/2021/12/17/here-s-why-airline-loyalty-programs-are-profit-machines/
[7] – https://travel.stackexchange.com/questions/186518/how-do-airlines-make-money-or-get-some-other-kind-of-advantage-when-i-book-a-fli
[8] – https://macrotheme.com/yahoo_site_admin/assets/docs/6MR55We.356133230.pdf
[9] – https://sibresearch.org/uploads/3/4/0/9/34097180/riber_8-2_04_s18-022_38-51.pdf
[10] – https://www.theatlantic.com/ideas/archive/2023/09/airlines-banks-mileage-programs/675374/
[11] – https://www.moengage.com/blog/increasing-customer-lifetime-value-with-loyalty-programs/
[12] – https://www.platformaeronaut.com/p/airline-loyalty-program-economics
[13] – https://www.safegraph.com/blog/why-airline-loyalty-programs-are-really-just-fintech-companies
[14] – https://www.pymnts.com/news/loyalty-and-rewards-news/2020/united-states-airlines-use-loyalty-programs-as-debt-collateral/