How Air Miles Make Airlines Money and How They Can Be A Lifeline 0

loyalty schemes

We all love to save our points and travel for less, but have you ever stopped to think about why airlines are so keen to run loyalty schemes? What’s in it for them?

Frequent flier programmes
How do airline loyalty programmes make money for the carriers?

Back in the early days of air miles, it was all about genuine customer loyalty. There wasn’t so much competition in the aviation industry, yet it was super important to ensure that every passenger chose to fly with them again.

Miles were earned based on the distance you flew. For every four or five flights you took, you could take another for free.

Today’s loyalty programmes look somewhat different. It’s not about who you fly with, as most airlines are in large partnerships, so it’s possible to redeem points on a variety of services. Now, points are no longer about how far you fly either. They’re about how much you spend.

We’ve already established that airlines really don’t care about customer service, because it has no bearing on their bottom line. Flights in the US are typically 85% full all the time, regardless of customer experience, so airlines have less impetus to retain our business. So, why do loyalty schemes still exist?

How airline loyalty programmes make airlines money

If you’ve ever wondered how airmiles make airlines money, be under no illusion that they make a lot. In some cases loyalty programmes are actually worth more to carriers than selling tickets.

Some of the most lucrative award programmes are worth literally hundreds of millions to their owner airlines. American Airlines scheme was calculated to be worth around $1.15bn in ‘marketing revenue’. That’s airline speak for the amount the they generate from selling miles, over and above the cost of someone redeeming them.

american airlines
The AAdvantage scheme is valued at more than a billion dollars!

Other big schemes include United Airlines at $962m, Delta with $805m and Southwest, whose scheme is worth an estimated $563m. And those are just the US brands. We saw just how valuable such schemes can be when Air Canada re-acquired Aeroplan for a staggering $450m earlier this year.

The secret weapon

The real secret weapon in the airlines arsenal here is the fact that many frequent fliers rarely or never redeem their miles. The airlines have been paid for those miles, often in the region of 1.4 cents per mile, which totals more than they could sell that seat for on any route.

Not only have they been paid more than the seat is worth, they also have a  strong chance that they will never actually have a bottom in that seat at all.

Could a loyalty programme save struggling Jet Airways?

Beleaguered Indian airline, Jet Airways, has had a pretty tough time of it lately. Posting enormous losses of Rs1,036 crore and Rs1,323 crore in the first two quarters of the year, the airline has been in dire straits financially for some time now.

jet airways
Struggling Jet Airways looked set to fold

As well as struggling due to rising jet fuel prices and the depreciation of the Indian rupee against the dollar, Jet Airways have had a few hiccups of their own making too. Twice this year the airline has failed to make salary payments on time. It’s been dragged into the dock for tax evasion too and, most recently, has come under the watchful eye of India’s civil aviation regulator for safety lapses.

If the airlines was to prevent itself going the way of Primera Air, Jet Airways was desperate for a cash injection. India’s banks stonewalled the carrier, having enough problems of their own to deal with. For a while there it looked like the end of the road for Jet. We predicted it had just 60 days to cut costs or find more investment, otherwise it would sink.

A saving grace

Boeing stepped in with a bailout for the carrier, but it all looked like too little too late for Jet. That was, until a financial angel appeared in in the shape of its frequent flyer scheme.

By monetising the scheme, known as Jet Privilege, the carrier raised Rs258 crore. That’s around £26.5m / $35m; an incredible amount of money to a loss making carrier. It seems to have provided the lifeline Jet Airways needs to stay afloat.

Jet Privilege worth more than Jet Airways
At the time of the sale, the loyalty scheme was actually valued at more than the airline itself

A spokesperson for the airline said, “Jet Privilege concluded a prepaid ticket purchase agreement for USD 35 million with Jet Airways, under normal course of business.”

What this means is, Jet sold miles to the loyalty scheme. Miles which are more valuable to Jet than actual fares. Miles which may not ever be redeemed.

Jet Privilege has millions of members and is majority owned by Etihad Airways at 50.1%. Essentially Etihad just paid $35m to keep the struggling airline in business.

The loyalty scheme regularly buys tickets from Jet to offer to members for their award redemption. The spokesperson insisted that this was no different to how business usually progresses between the two entities. However, it was pretty good timing on their part.

Jet Privilege
Jet Privilege looks to have saved Jet Airways by the skin of their teeth.

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